Investors Eye AI Payoffs as S&P 500 Profit Growth Slows
Investors are keen to see if artificial intelligence (AI) investments are starting to yield returns for S&P 500 companies. This focus arises as analysts predict slower profit growth compared to the previous quarter.
Slower Growth in S&P 500 Earnings
Despite the expected slowdown, S&P 500 earnings are projected to have risen by 5.3% year-over-year, a decline from the 13.2% growth observed in the second quarter. Technology and communication services sectors are expected to show the highest growth, according to data from LSEG.
Financial Giants Start the Earnings Season
The earnings season begins with reports from major financial firms like JPMorgan Chase and Wells Fargo on Friday. AI-related companies have dominated the market since last year, driving the S&P 500 up by approximately 21% in 2023, with technology and communication services leading these gains.
Howard Chan, CEO of Kurv Investment Management, said, “Analysts are watching how large companies can monetize their AI models. Those that have succeeded have been well rewarded.”
Strong Performance in the Technology Sector
Technology sector earnings are expected to have grown by 15.4% from a year ago. Communication services earnings are forecast to rise by 12.3%. Meta Platforms’ shares surged on August 1 after an optimistic sales forecast for the third quarter, showing that digital advertising can support its AI investments.
However, some investors remain cautious about whether companies like Microsoft and Google can effectively integrate AI into their existing business models.
AI Semiconductor Industry Shows Promise
Solita Marcelli, Chief Investment Officer for Americas at UBS Global Wealth Management, expressed optimism that tech and AI companies would exceed third-quarter expectations. “We continue to favor the semiconductor space and megacaps for AI exposure,” she said. UBS projects that AI semiconductor industry revenues could reach $168 billion by the end of this year.
High Valuations Raise Concerns Among Investors
With the S&P 500 trading at 22.3 times future 12-month earnings—well above its long-term average of 15.7—some investors question whether earnings growth can justify these high valuations.
Concerns about a weakening economy also persist. The Federal Reserve recently cut its benchmark interest rate by 50 basis points, marking its first reduction since 2020. This move aimed to counter signs of a slowing labor market. However, last week’s US jobs report, showing the highest job gains in six months, eased some of these fears.
Decline in the Energy Sector and Impact of Oil Prices
Energy sector earnings are expected to have dropped by 19.7% year-over-year in the third quarter, based on LSEG data. Investors are also eager to hear how rising oil prices, driven by Middle East tensions, could impact businesses.
Rick Meckler, partner at Cherry Lane Investments, suggested that consumer-driven companies could benefit more from the Fed’s rate cuts. “Lower front-end rates are more helpful to consumers than companies,” he explained, indicating that monetary policy might favor firms with strong consumer bases.