US equities may still have upside potential despite elevated valuations, according to HSBC’s Willem Sels, who argues that the earnings and productivity benefits from artificial intelligence are not yet fully priced in. In a recent Bloomberg Television interview, Sels, global chief investment officer at HSBC Private Bank and Premier Wealth, said investor skepticism about the durability of corporate earnings growth—especially in tech and semiconductors—has already been reflected in market prices.
The S&P 500 currently trades at roughly 19 times forward earnings, compared with about 15 times for Europe’s Stoxx 600. While that premium might seem stretched, Sels contends it is increasingly justified by stronger earnings growth and the scale of AI investment. He noted that the valuation gap between US and European equities has narrowed, suggesting the market has already adjusted for some of the skepticism.
AI earnings could support further gains
Sels highlighted a widening divergence between companies that have adopted AI and those that haven’t. Businesses using AI are already reporting stronger revenue, earnings, and margin growth, particularly in the US. As companies move from experimentation to broader deployment, investors may still be underestimating the technology’s economic impact.
Semiconductor stocks are a prime example. Sels said investors are discounting some companies because they question whether 2027 earnings forecasts are achievable. He expects that skepticism to fade as companies provide more visibility through order books, customer demand, and guidance.
The argument comes as US corporate earnings continue to beat expectations. S&P 500 earnings per share surged 50.7% in the second quarter from a year earlier, accelerating sharply from 19% growth in the first quarter. Even excluding mark-to-market investment gains, earnings rose 25%. Forward earnings also climbed to a record $401.75 a share last week, indicating that corporate fundamentals remain resilient despite geopolitical tensions, elevated energy prices, and monetary policy uncertainty.
That strength has helped support the broader market. The S&P 500’s forward price-to-earnings multiple has fallen about 12% since the start of the year, even as the index has gained roughly 13%.
Bond yields remain the biggest threat
The main risk to the bullish outlook is not equity valuations but a sharp rise in bond yields. Sels identified a 10-year US Treasury yield of around 5% as a level that could trigger significant stock market volatility. Higher yields make bonds more attractive relative to equities and increase borrowing costs for companies.
“The bond market has been back in the driving seat for stock investors recently,” as rising oil prices, inflation concerns, fiscal pressures, and expectations for tighter monetary policy have pushed Treasury yields higher. JPMorgan’s Grace Peters has also described a 5% 10-year yield as psychologically important, while Barclays’ Emmanuel Cau warned that such a move could heighten concerns about equity valuations.
The risk is particularly relevant as companies increase borrowing to finance AI infrastructure, data centers, and other capital-intensive projects. Higher financing costs could eventually weigh on corporate earnings and investment.
Still, Sels remains broadly bullish on equities, arguing that businesses and economies have repeatedly proven more resilient than investors expected. The strength of the earnings backdrop has also encouraged prominent market bulls to stay optimistic. Veteran economist Ed Yardeni has indicated he may need to raise his already bullish 8,400 year-end target for the S&P 500.
For Sels, the combination of improving earnings, AI-related productivity gains, and resilient businesses provides a powerful tailwind for stocks. The key question is whether earnings growth can continue to outpace concerns over valuations and bond yields. So far, the data suggests it can, but with Treasury yields climbing toward levels investors consider dangerous, the bond market could determine whether the next leg higher in US stocks is sustained.
This article is for informational purposes only and does not constitute financial advice.
