By Caroline Valetkevitch
NEW YORK, Oct 9 (Reuters) - US companies are likely to deliver another earnings surge for the third quarter, and like the rally in the stock market, AI-related players are fueling most of those gains.
While investors are enthusiastic about the hyper earnings growth fueled by AI companies, many are also worried about how long the trend can continue, and what will happen to share prices when it ends.
Analysts on average expect S&P 500 earnings to rise about 31% year-over-year
for the third quarter, with two-thirds of that leap coming from the technology sector and AI heavyweights Alphabet, Amazon.com and Meta Platforms, according to Tajinder Dhillon, LSEG's head of earnings and equity research.
Tech share gains helped the S&P 500 reach a record high this week ahead of the earnings season, which is expected to unofficially kick off next week with results from banks including JPMorgan Chase and Goldman Sachs.
"It's all AI and, to a lesser extent, energy and materials, but that's because of geopolitics," said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute. "It wouldn't surprise me if 70-80% of the growth can be attributed to tech and AI."
Energy earnings are seen up about 115% from a year ago, with US oil prices having surged roughly 30% in the third quarter because of the ongoing US-Israeli war with Iran.
"Almost as telling is if you look at the sectors that are not related to AI at all," Samana said, pointing to consumer staples and real estate, whose year-over-year earnings growth estimates for the third quarter are among the weakest.
Still, strategists are not sure if third-quarter earnings growth can surpass the banner growth of the second quarter. The majority of companies tend to beat analysts' estimates, and that is likely to be the case again in the third-quarter season.
Year-over-year S&P 500 earnings grew in the second quarter by nearly 54%, the highest since 2021, LSEG data showed. Excluding mark-to-market gains at Alphabet and Amazon.com on AI-related investments, that growth was about 35%, still the highest since 2021.
"A concern for investors is we are kind of approaching peak earnings growth" for the current cycle, said Anthony Saglimbene, chief market strategist at Ameriprise Financial. "A lot of this AI trade is built on continued capex spending, and every quarter we go, and they continue to spend, the hurdle rates get higher and the scrutiny gets larger."
Earnings for US semiconductor companies, among the biggest beneficiaries of the AI boom, are expected to have increased about 136% in the third quarter compared with about 158% in the second quarter, Dhillon said, based on LSEG data.
"Earnings estimate revision momentum is starting to cool," said Nick Raich, CEO of the Earnings Scout, an independent research firm.
"We're still going 100 miles an hour in the AI infrastructure buildout, but three months ago we were going 150 miles an hour."
Raich said the most recent reports including from Micron Technology have been strong and suggest other companies are still "reaping the benefits."
Chipmaker Micron last month forecast quarterly revenue above estimates and said customers had increased commitments under its long-term supply agreements to $32 billion.
This week Google entered a massive power deal with Constellation Energy.
Investors are also likely to pay close attention this earnings season to how higher interest rates may be affecting corporate profits.
US bond yields have risen because of concerns about inflation, higher oil prices and debt problems in France and elsewhere.
Heavy borrowers, such as utilities, are at risk, Samana said.
(Reporting by Caroline Valetkevitch; additional reporting by Noel Randewich in San Francisco; Editing by Nia Williams)
