While concerns about the durability of AI-driven earnings persist on Wall Street, HSBC's Willem Sels pushes back against the prevailing narrative, arguing that American stocks are not as expensive as they appear. The bank's global chief investment officer for private banking and wealth suggests current valuations fail to capture the full scale of productivity gains and profit expansion catalyzed by artificial intelligence.

Sels notes that the valuation gap between US and European markets has narrowed, indicating that investor skepticism is already baked into prices. He maintains that the so-called "AI structural investment cycle" has yet to be completely priced in by the market. Currently, the S&P 500 trades at roughly 19 times forward 12-month earnings, while the Euro Stoxx 600 sits closer to 15 times.

"US equities are not expensive," Sels said in an interview. "The market is indeed questioning the sustainability of earnings growth, but that doubt has been digested into prices because the P/E gap has narrowed." He added that chipmakers, in particular, are being discounted by investors who remain skeptical of 2027 earnings growth projections. However, he expects this hesitation to fade gradually as companies provide more concrete evidence through order books and forward guidance.

Where the optimism comes from

Sels holds a broadly positive outlook on equities. Despite repeated headlines-driven market shocks, he observes that economic and corporate performance has proven "more resilient than people expected," with both governments and businesses responding proactively to challenges rather than waiting on the sidelines. He points to compelling evidence that companies actively adopting AI—especially American firms—outperform their non-adopting peers across earnings, revenue, and margin metrics, serving as tangible proof that AI is already delivering real productivity improvements.

The primary risk on the horizon

In Sels' view, the single biggest threat to the stock market is a sharp spike in bond yields. He identifies a 10-year Treasury yield approaching 5% as a potential trigger point for volatility. While acknowledging that markets have "long been accustomed to low bond volatility," he insists that strong earnings momentum makes it difficult for equities to halt their upward trajectory.

Bond markets have once again seized control of equity investor sentiment in recent weeks. Yields have climbed amid renewed oil price and inflation concerns following heightened US-Iran tensions. Additional upward pressure stems from hawkish signals from the Federal Reserve and European Central Bank, fiscal worries, and intensified competition for capital driven by the AI spending boom. Grace Peters of JPMorgan noted last week that a 10-year yield touching 5% would carry significant psychological weight, potentially triggering a short-term knee-jerk reaction in stocks. Barclays' Emmanuel Cau echoed this view, stating that a move to 5% would markedly heighten investor anxiety about the equity outlook.

Turning to Europe, Sels believes the region is less vulnerable to energy shocks than previously feared, thanks to its diversified industry base and resilience measures deliberately constructed by both governments and corporations. He views European equities as a sound diversifier for investors heavily concentrated in the US AI trade, noting that recent rotation from technology into financial stocks has already provided a tailwind for European markets.