Key points:

  • Investors are paying close attention to companies investing in AI, particularly in the technology and communication sectors.
  • Significant profit growth is expected from tech companies, especially those involved in the development and application of artificial intelligence.
  • Labor market instability and changes in the Federal Reserve’s monetary policy are also influencing investor expectations.

Investors will be closely watching the results of the earnings season, looking for confirmation of the profitability of AI investments, particularly among companies in the S&P 500 index. Despite analysts’ forecasts for slower profit growth compared to the previous quarter, the technology and communication services sectors are expected to show the most significant year-over-year growth.

Preliminary data suggests that the earnings of S&P 500 companies increased by 5.3% compared to the same period last year, which is slightly lower than the second quarter’s growth rate of 13.2%.

How will the third-quarter earnings season start?

The new reporting period effectively kicks off this week with the financial results of giants like JPMorgan Chase and Wells Fargo, scheduled for release on Friday. Companies actively integrating AI technologies have shown impressive results since last year, and optimism about AI’s future has become one of the key drivers of stock market growth.

The S&P 500 index has reached an all-time high, gaining around 21% this year, with the technology and communication services sectors showing the most dynamic growth. Forecasts indicate that the combined earnings of technology companies will grow by 15.4% year-over-year, while communication services companies are expected to see a 12.3% increase in profits.

Meta Platforms shares have shown substantial growth following an optimistic sales forecast for the third quarter, reflecting the company’s increasing efficiency in AI investments and the recovery of demand for digital advertising.

Investor expectations for tech companies

Investors are hopeful that the earnings season results will justify the current high stock valuations, especially given the record levels of the S&P 500 index. According to LSEG Datastream data, the index’s current price-to-earnings ratio is 22.3, significantly above the long-term average of 15.7. Solita Marcelli of UBS Global Wealth Management notes that third-quarter results could be a key catalyst for market growth, as investors closely monitor the fundamentals of tech and AI-focused companies.

Particular interest is in the semiconductor sector, which UBS predicts will show significant revenue growth, reaching $168 billion by the end of the year. Overall, tech and AI companies are expected to exceed profit expectations for the third quarter and raise their forecasts.

Meanwhile, most other sectors of the S&P 500 are expected to see a decline in profits compared to the previous quarter. Recent labor market softening and the Federal Reserve’s interest rate cuts have raised concerns among investors about the state of the economy. However, the employment data for September has somewhat calmed the market.

At the same time, strategists warn that investors will closely monitor company comments on the impact of recent oil price increases on their businesses. Earnings in the energy sector are expected to significantly decline in the third quarter.