Investors will be looking for evidence as earnings season progresses that S&P 500 companies’ investments in artificial intelligence are starting to pay off, although analysts expect lower earnings growth than in the previous quarter.
S&P 500 earnings are expected to have risen 5.3% compared to the same quarter last year, after rising 13.2% in the second quarter. However, according to LSEG data on Friday, the technology and communications services sectors will show the strongest year-on-year growth.
The earnings period unofficially begins this week with Friday’s reports from major financial companies like JPMorgan Chase and Wells Fargo.
Companies involved in AI have dominated earnings since last year, and optimism about AI plans has helped the market rise sharply. The S&P 500 is at a record high, having gained about 21% year to date, with the technology and communications services sectors gaining the most since December 31.
“Many analysts will be paying attention to whether and how many of these larger companies can monetize the model they are training, and we have seen that those who have done so have been rewarded quite well,” said Howard Chan, chief executive officer from Kurv Investment Management in San Francisco.
Overall technology sector profits are expected to have risen 15.4% from the year-ago quarter, while communications services profits were up 12.3%, based on LSEG data.
Shares of Meta Platforms jumped on August 1, a day after the company gave positive third-quarter revenue guidance that suggested digital advertising spending on its social media platforms would drive up costs for its AI can cover investments.
“Companies like Microsoft and Google are spending a lot of money, but it’s not entirely clear how that relates to their existing businesses,” Chan said.
Investors may also hope that earnings can justify higher share prices. With the S&P 500 hitting a record high, the index is now trading at 22.3 times estimated 12-month earnings, well above its long-term average of 15.7, according to LSEG Datastream.
Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote in a note Wednesday that third-quarter results could be a catalyst for gains as investors focus on technology and AI fundamentals.
“We continue to favor semiconductors and megacaps for AI exposure,” she wrote, noting that she expects technology and AI companies to beat their results for the quarter ending September and also raise their forecasts.
UBS expects the AI semiconductor industry’s total revenues to rise sharply, reaching $168 billion by the end of this year, the note said.
Earnings growth in most S&P 500 sectors is expected to be lower compared to the previous quarter.
Investors had worried that the economy might have become too weak. The Federal Reserve began a cycle of monetary easing last month with an unusually large 50 basis point cut in interest rates, the first cut in borrowing costs since 2020, as there were signs of a weakening labor market.
These fears have subsided somewhat with last week’s monthly US labor market data. They showed that U.S. jobs rose the most in six months in September and the unemployment rate fell to 4.1%.
Still, companies’ comments about consumer health will be closely watched. “Lower interest rates are more helpful for consumers than for businesses… So Fed policy is more likely to benefit consumer-focused companies,” said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.
At the same time, some strategists say investors want to know from companies what the recent rise in oil prices could mean for their businesses. Oil prices have risen as tensions have escalated in the Middle East.
Energy sector profits are expected to have fallen 19.7% year-on-year in the third quarter, according to LSEG data.
