As the reporting season unfolds, investors are keen to find signs that investment in artificial intelligence is starting to yield results among S&P 500 firms, even as analysts project a slowdown in profit growth compared to the previous quarter.
Earnings for the S&P 500 are anticipated to rise by 5.3% year-over-year, a decline from the 13.2% gain seen in the second quarter, with technology and communication services sectors expected to show the highest growth year-over-year, according to LSEG data as of Friday.
The unofficial kick-off of the earnings season occurs this week, featuring reports from major financial institutions like JPMorgan Chase and Wells Fargo set to be released on Friday.
Companies involved in AI have taken the lead in earnings since last year, with positive sentiment regarding AI strategies contributing to significant market gains. The S&P 500 is currently at all-time highs, having risen approximately 21% this year, with tech and communication services sectors driving the gains since December 31.
“Analysts will begin to evaluate how, and if, many of these larger corporations can monetize their training models, and those that have succeeded in this regard have received considerable rewards,” stated Howard Chan, CEO of Kurv Investment Management in San Francisco.
Aggregate earnings in the technology sector are projected to have increased by 15.4% compared to the previous year, while communication services earnings are expected to rise by 12.3%, based on LSEG data.
Shares of Meta Platforms surged on August 1, following an optimistic sales forecast for the third quarter, indicating that digital advertising expenditure on its social media platforms could offset the costs of its AI investments.
“Companies such as Microsoft and Google are investing significantly, but it’s somewhat less understood how this will integrate with their existing operations,” Chan remarked.
Investors may also hope that earnings can validate higher stock valuations. With the S&P 500 reaching record levels, the index is now trading at 22.3 times projected earnings for the next 12 months, considerably higher than its historical average of 15.7, according to LSEG Datastream.
Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, noted in a Wednesday communication that third-quarter outcomes may act as a catalyst for growth as investors concentrate on technological fundamentals and AI.
“We remain optimistic about the semiconductor sector and large-cap stocks for AI exposure,” she noted, mentioning expectations for tech and AI firms to outperform in the quarter that ended in September and to also revise their forecasts upwards.
UBS anticipates a sharp increase in overall revenue within the AI semiconductor industry, predicting it will reach $168 billion by year-end, according to the report.
Earnings growth across most S&P 500 sectors is expected to be lower than in the previous quarter.
Concerns had arisen among investors about a potential economic slowdown. Last month, the Federal Reserve initiated a monetary easing cycle by reducing its benchmark interest rate by an unusually significant 50 basis points, marking the first decrease in borrowing costs since 2020, as indicators suggested a weakening labor market.
However, worries were somewhat alleviated by last week’s monthly U.S. job report, which indicated that job growth in September was the strongest in six months, with the unemployment rate dropping to 4.1%.
Nonetheless, remarks from companies regarding consumer health will be closely monitored. “Lower front-end rates benefit consumers more than companies… Thus, the Fed’s policy is something that consumer-focused companies could gain from,” commented Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.
Simultaneously, some strategists mentioned that investors might be eager to hear from companies about the impact of the recent spike in oil prices on businesses. Oil prices have surged amid escalating tensions in the Middle East.
Earnings in the energy sector are projected to have dropped by 19.7% in the third quarter compared to a year earlier, according to LSEG data.
