Key facts
- US companies are expected to show strong third-quarter earnings growth.
- AI-related companies are anticipated to drive most of this growth.
- S&P 500 earnings are projected to increase about 31% year-over-year.
- Two-thirds of the S&P 500 earnings growth is expected to come from the technology sector.
- Energy earnings are forecast to rise approximately 115% year-over-year.
- US oil prices surged roughly 30% in the third quarter.
US companies are poised to deliver another strong earnings report for the third quarter, with artificial intelligence-related companies expected to be the primary drivers of this growth, mirroring the recent stock market rally.
Analysts project S&P 500 earnings to increase by approximately 31% year-over-year for the third quarter. According to Tajinder Dhillon, LSEG's head of earnings and equity research, two-thirds of this surge will originate from the technology sector, specifically AI-focused giants like Alphabet, Amazon.com, and Meta Platforms.
This tech-driven performance has already helped the S&P 500 reach a record high this week, ahead of the official start of the earnings season next week with reports from major banks such as JPMorgan Chase and Goldman Sachs.
Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, noted that while AI is the main contributor, energy and materials sectors are also seeing gains due to geopolitical factors. He estimates that 70-80% of the overall growth could be attributed to tech and AI.
Energy earnings are forecast to surge by about 115% from the previous year, largely influenced by a roughly 30% increase in US oil prices during the third quarter, attributed to the ongoing conflict involving Iran. Samana pointed out that sectors not related to AI, such as consumer staples and real estate, are showing among the weakest earnings growth estimates.
Strategists are uncertain whether the third-quarter earnings growth will surpass the exceptional performance of the second quarter, which saw nearly 54% year-over-year growth for the S&P 500, the highest since 2021. Excluding mark-to-market gains from AI investments by Alphabet and Amazon, the growth was still a robust 35%.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, expressed investor concerns about approaching peak earnings growth for the current cycle. He highlighted that the AI trade relies heavily on continued capital expenditure, and as spending increases each quarter, the hurdles and scrutiny also grow.
Earnings for US semiconductor companies, significant beneficiaries of the AI boom, are expected to have risen about 136% in the third quarter, a slight decrease from the 158% increase in the second quarter, according to LSEG data. Nick Raich, CEO of The Earnings Scout, observed that earnings estimate revision momentum is cooling, indicating a slowdown from a previous pace of 150 miles per hour to 100 miles per hour in AI infrastructure buildout, though recent reports from companies like Micron Technology suggest continued benefits.
Micron Technology recently forecast quarterly revenue above estimates and reported increased long-term supply agreement commitments totaling $32 billion. Google also entered a significant power deal with Constellation Energy this week.
Investors will also be closely monitoring the impact of higher interest rates on corporate profits during this earnings season, as rising US bond yields, driven by inflation concerns, oil prices, and debt issues in France, could pose risks to heavily indebted companies like utilities.