American companies are about to welcome another strong earnings season. Investments in artificial intelligence infrastructure continue to expand at a rapid pace. Goldman Sachs expects that the earnings of S&P 500 components will increase by about 27% year-on-year in the third quarter, with revenue growth of about 12%. If this is indeed achieved, it will mark the third consecutive quarter of corporate earnings growth exceeding 25%.
The chief strategist for US equities at Societe Generale, Manish Kabra, stated that apart from the economic recovery period after the financial crisis, there has never been a time in US stock history where earnings growth exceeded 25% for three consecutive quarters.
Strong profits also helped the U.S. stock market temporarily absorb the pressure brought about by rising interest rates. The yield on 10-year U.S. Treasury bonds recently exceeded 5%, and long-term financing costs rose to their highest level in over two decades, but the S&P 500 and Nasdaq indices still set new closing records on Tuesday.
The core driving force behind the continued expansion of corporate profits still comes from the construction of AI.
Goldman Sachs expects that the capital expenditure of hyperscale cloud computing companies will increase by approximately 116% year-on-year in the third quarter, a further acceleration from the 87% growth rate in the second quarter. Data centers, AI servers, high-end chips, storage, power, cooling systems, and industrial equipment thus form a huge demand chain.
Federated Hermes, the Chief Investment Officer of stocks, described that AI's capital expenditures are bringing about the strongest growth in corporate earnings and profit margins of his career.
This impact has also spread from technology companies to other industries. FactSet expects that all 11 sectors of the S&P 500 will achieve year-on-year profit growth in the third quarter; 72 S&P 500 companies have already issued positive profit forecasts, reaching a historical high, while the number of companies issuing negative forecasts has dropped to its lowest level in five years.
The energy sector also performed outstandingly. Conflicts in the Middle East drove up the price of medium-quality crude oil in West Texas by about 30% in the third quarter. FactSet predicts that profits of energy companies listed in the United States will increase by about 114% year-on-year in the third quarter, higher than the forecast of 79% at the end of June. Refining companies such as Marathon Petroleum and Valero Energy are expected to be the main beneficiaries.
Despite profit expansion beginning to cover more industries, profit growth in the U.S. stock market remains highly concentrated.
Goldman Sachs estimates that just NVIDIA ( NVDA.O ) and Micron Technology ( MU.O ) alone could contribute more than one-third of the entire earnings growth for the S&P 500 in the third quarter.
Meta ( META.O ), Alphabet ( GOOGL.O ), Broadcom ( AVGO.O ) and other large technology companies related to AI also continue to play a major role in growth. Micron's previously announced performance has already indicated the strong demand for AI data centers, with a rapid increase in demand for high-bandwidth memory and server chips.
This is also the most prominent structural contradiction in the current U.S. stock market.
On one hand, the capital expenditures of large technology companies continue to translate into revenue for chip, equipment, power, and industrial enterprises, allowing U.S. corporate profits to maintain rapid growth; on the other hand, an increasingly larger portion of profits is concentrated in a few AI companies, which further increases the index's dependence on this cycle of capital spending.
The breadth of the U.S. stock market has dropped to one of the lowest levels since the internet bubble era. Large technology companies such as Meta, Alphabet, and NVIDIA may be customers of other AI companies, as well as suppliers or investors at the same time, leading to an increasing degree of financial interconnectedness throughout the entire industrial chain.
For investors, the most important figure in this round of financial reporting season may no longer just be the profit itself, but rather how much money large technology companies plan to spend in the next phase.
AllianceBernstein, the stock supervisor, stated that the market first needs to observe whether the ultra-large-scale cloud computing companies will continue to raise their capital expenditure plans, as this determines the revenue growth of the entire AI industry chain in the coming quarters.
The current high interest rates have also increased the importance of this issue. In September, the Federal Reserve raised interest rates for the first time in three years, leading to a significant increase in the yield of long-term U.S. government bonds. The financing pressures on the financial, real estate, utilities, small and medium-sized enterprise, and residential sectors are all on the rise.
If the capital expenditure of AI continues to grow at a triple-digit rate, this investment can still offset a considerable portion of the economic pressure brought about by high interest rates.
Economist Tiffany Wilding pointed out that once the growth rate of AI investment declines significantly, the resilience of the U.S. economy will rely more on whether the improvement in AI productivity can be realized in a timely manner to fill the gap left by the slowdown in capital expenditure.
Therefore, the upcoming third-quarter financial reporting season may once again produce very strong profit figures. However, what the market is truly testing is another aspect: how long can the AI capital expenditure cycle, which drives profit growth, rising stock prices, and even some expansion of U.S. economic investment, continue at its current pace?
