AI-related companies to drive most third-quarter US earnings gains

The third quarter of the US earnings season is expected to see significant growth, primarily driven by companies in the technology sector and those involved in artificial intelligence (AI). According to analysts, S&P 500 earnings are anticipated to rise by 31% year-over-year for the quarter. AI-related players, including Alphabet, Amazon.com, and Meta Platforms, are anticipated to contribute two-thirds of this increase.

Energy and materials companies are also driving gains due to geopolitical factors, with US oil prices up around 30% in the third quarter as a result of the US-Israeli conflict with Iran.

While the tech and AI sectors are at the forefront of the earnings surge, consumer staples and real estate companies are expected to post the weakest growth among non-AI-related sectors. Despite this, strategists are uncertain whether third-quarter earnings growth will surpass the impressive gains seen in the previous quarter, which saw S&P 500 earnings rise nearly 54% year-over-year.

The hype around AI investments, such as those at Alphabet and Amazon.com, has led to higher hurdle rates and increased scrutiny for companies. Semiconductor companies, a key beneficiary of the AI boom, are also expected to experience significant earnings growth, up about 136% in the third quarter compared to 158% in the previous quarter.

However, earnings estimate revision momentum is starting to slow, and some investors are concerned about the potential impact of higher interest rates on corporate profits, particularly for heavy borrowers like utilities.