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AI giants underpin US corporate Q3 earnings growth; S&P 500 constituent earnings expected to jump over 30% year-on-year
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According to a Reuters report on October 9, US corporate earnings in the third quarter of this year are expected to surge again. Just like the recent rally in US stocks, AI companies will contribute most of the growth. Tajinder Dhillon, head of earnings and equity research at London Stock Exchange Group (LSEG), said analysts generally expect Q3 earnings for S&P 500 constituent companies to grow about 31% year-on-year. About two-thirds of the increase comes from the technology sector, as well as AI giants such as Google parent Alphabet, Amazon and Meta. Driven by the rise in tech stocks, the S&P 500 hit a record high this week.
As banks including JPMorgan Chase and Goldman Sachs are expected to report results next week, the US Q3 earnings season will also kick off informally. LSEG data shows that Q2 earnings for S&P 500 constituent companies grew nearly 54% year-on-year, the highest level since 2021. Even excluding the market-value revaluation gains generated by Alphabet and Amazon's investments in AI, the increase still reached about 35%, also the highest since 2021. Market strategists are not sure whether Q3 earnings growth can exceed Q2's strong performance. Most companies can usually deliver results better than analysts' expectations, and Q3 is expected to be no exception.
Sameer Samana, global head of equities and real assets at Wells Fargo Investment Institute, pointed out that earnings growth is almost entirely reliant on AI. The energy and raw materials sectors also contributed, but much less, and mainly driven by geopolitical factors. If technology and AI contributed 70% to 80% of the growth, he would not be surprised at all.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, said investors worry that this earnings growth cycle is approaching its peak. The AI investment boom depends to a large extent on companies continuing to invest huge amounts of capital. As companies continue to spend every quarter, the market's requirements for performance are also getting higher and higher, and scrutiny is becoming stricter and stricter.
Citing LSEG data, Dhillon said Q3 earnings for US semiconductor companies benefiting from the AI boom are expected to grow about 136% year-on-year, lower than the roughly 158% increase in Q2. Nick Raich, CEO of independent research firm The Earnings Scout, said the momentum of earnings estimate revisions is starting to cool. AI infrastructure buildout is still advancing at high speed. If using vehicle speed as a metaphor, it is equivalent to 161 kilometers per hour, but three months ago it was still 241 kilometers per hour.
Raich believes that the strong recent financial reports of companies such as Micron Technology show that other companies are still benefiting from the AI boom. Micron last month expected quarterly revenue to exceed analysts' expectations, and said the purchase amount committed by customers in long-term supply agreements increased to $32 billion. According to an IT Home note, at the current exchange rate this is about 214.607 billion yuan.
The US Q3 earnings season is about to begin. Banks such as JPMorgan Chase and Goldman Sachs will report results next week, followed by more S&P 500 constituent companies disclosing quarterly performance. Analysts generally regard AI giants and semiconductor companies as the main drivers of earnings growth. Market strategists differ on whether Q3 can surpass Q2, while investors worry that the earnings growth cycle is nearing its peak. As companies continue to invest huge amounts of capital, market scrutiny of AI-related performance is expected to become even stricter.
