The "Dual Bubble" Threat Lurking Between IBM's Crash and Bank Records

IBM’s worst single-day crash in its 115-year history juxtaposed against record-breaking profits from US banks serves as a stark crucible for Steve Hanke’s "dual bubble" theory. Markets are dancing on the edge of a precipice between an asset bubble fueled by AI exuberance and a far more dangerous "earnings bubble."

Not Valuation, But an Earnings Bubble

For two years, investors debated whether AI stocks are too expensive, but Hanke suggests this is the wrong question. There are actually two bubbles in markets: a classic valuation bubble and, more critically, an earnings bubble.

■IBM missed revenue consensus by 3.7%, causing a 25% single-day crash that erased roughly $40 billion in market value.

■JPMorgan posted record quarterly net income of $21.2 billion, while Goldman Sachs saw an 84% jump in earnings to $6.4 billion.

■This divergence questions whether the growth in tech companies is sustainable relative to the excess liquidity and capacity created by the banking system.

Overlooked Warning Signs

IBM CEO Arvind Krishna’s unusually candid letter, admitting "we faltered" without excuses, validates the New York Times' "canary in the coal mine" analogy. Peter Berezin of BCA Research argues that today’s AI trade is "primarily an earnings bubble rather than a valuation bubble."

■Inflated earnings make valuations look deceptively reasonable, masking the bubble's presence.

■Analysts typically cut profit estimates only after stocks have fallen, rendering early warning systems ineffective.

■Giants like BofA and UBS only trimmed targets after the stock had already plummeted 25%.

The Credit Mechanism and Market Reality

According to Hanke, the surprise for markets is not the Fed creating money, but private banks doing so. JPMorgan CEO Jamie Dimon’s remarks of being "close to as good as it gets" paint a complex picture where credit is still flowing freely.

■Inflationary pressures and bank profits inflate asset prices and the earnings justifying them simultaneously.

■This creates a "mugging by reality" scenario that persists until the system snaps.

■While the S&P 500 trades near 22x forward earnings—below the classic bubble threshold—the sustainability of those earnings is in doubt.

Markets are approaching this situation with a macroeconomic disconnect between record profits in the banking sector and fragile growth narratives in tech. For the European Central Bank (ECB) and global policymakers, the real risk lies in the potential for a correction triggered by the implosion of this "earnings bubble," driven by excess liquidity from US banks and overcapacity in AI investments. An "earnings bubble" burst like IBM’s could serve as a leading indicator for European tech and industrial equities.