U.S. Earnings Growth May Reflect Modest Uptick Amid AI Spending Scrutiny
NEW YORK, Oct 9 (Reuters) – Anticipations for U.S. corporate earnings growth in the third quarter appear tempered compared to earlier projections, influenced in part by the impending ramifications of new tariffs.
Investors are now keenly observing whether significant investments in artificial intelligence (AI) will yield substantial returns.
Despite many U.S. firms managing to exceed earnings forecasts following the sweeping tariffs President Donald Trump proposed in April, the complete ramifications of these trade policies remain nebulous.
The prevailing enthusiasm surrounding emergent AI technologies has propelled Wall Street indices to unprecedented heights this year. Thus, investors are likely to prioritize expenditures related to AI over the potential threats posed by tariffs and other economic uncertainties.
According to the latest forecast from LSEG, analysts anticipate that S&P 500 companies will witness an earnings increase of 8.8% in the third quarter of 2024. In contrast, the past two quarters of 2025 have recorded a year-over-year growth exceeding 13% each.
The unofficial earnings reporting season is set to commence next week, heralded by results from major U.S. banking institutions.
Both the S&P 500 (.SPX) and Nasdaq (.IXIC) achieved historic closing highs on Wednesday, significantly buoyed by AI-centric mega-cap stocks that have dominated the market this year.
Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial in Troy, Michigan, remarked that earnings from the illustrious “Magnificent 7” contingent of mega-cap stocks and AI front-runners could be “exceptionally strong.”
However, he noted, “Investors may exhibit skepticism towards some commentary regarding capital expenditures, as there is growing concern about the financial outlay and the eventual returns on these investments.”
Valuations across the board have ascended to levels deemed excessive by certain investors, with the S&P 500 presently trading at approximately 23 times its projected earnings, significantly surpassing its decade-long average of 18.7, as per LSEG Datastream data.
The lofty valuations prevalent in mega-cap technology and growth sectors present particular risks amid lingering concerns regarding AI investment and spending.
Companies persist in ramping up investments in AI and finalizing AI-related agreements, a notable instance being AMD’s (AMD.O) announcement of a multi-year contract to provide chips to OpenAI earlier this week.
Investors are particularly eager for quarterly results to furnish guidance, as the U.S. government shutdown that commenced on October 1 has stalled the release of official economic data.
This informational gap complicates assessments of the economic landscape and the potential trajectory of Federal Reserve interest rate adjustments. Notably, the U.S. central bank enacted its first rate cut since December last month, attributable to weaknesses in the labor market.
Nonetheless, robust economic indicators released over the previous quarter suggest that third-quarter earnings and sales growth for the S&P 500 may outstrip consensus projections, according to Goldman Sachs’ Chief U.S. Equity Strategist, David Kostin, and his analytical team.
Goldman strategists conveyed in a recent communication that they foresee firms maintaining profit margins, notwithstanding tariffs likely serving as a more substantial impediment to profits in the third quarter compared to the previous quarter, with customs duties escalating 33% over the period, reaching $93 billion.
Sales for S&P 500 component entities are projected to have grown by 5.7% compared to the same quarter last year, according to LSEG. This follows a sales increase of 6.4% in the second quarter and 5% in the first quarter.
A rebound within investment banking is expected to augment the third-quarter earnings of the six largest U.S. banks. In the second quarter, S&P 500 earnings surged by 13.8%, a marked improvement from initial analyst estimates of just 5.8% reported in early July, according to LSEG data.
Oliver Pursche, Senior Vice President and Advisor for Wealthspire Advisors in Westport, Connecticut, reflected, “Thus far, neither tariffs nor consumer economic uncertainty has adversely affected earnings growth.”
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