US Companies Face Softer Profit Growth Amid AI Focus

U.S. companies are expected to report a slowdown in earnings growth for the third quarter of 2023, primarily influenced by tariff impacts and ongoing scrutiny of artificial intelligence (AI) investments. While many corporations have previously exceeded profit expectations, the broader implications of trade policies initiated by former President Donald Trump remain uncertain.

Analysts predict that S&P 500 companies will show an earnings increase of 8.8 percent compared to the same quarter last year, according to the latest forecast from LSEG. This follows a robust growth rate of over 13 percent in the first two quarters of 2023. The earnings reporting period unofficially begins next week with results from major U.S. banks, which could set the tone for the broader market.

Investors Eye AI Spending and Profitability

The performance of large-cap technology stocks has significantly influenced market dynamics this year. On Wednesday, the S&P 500 and Nasdaq achieved record closing highs, buoyed by the “Magnificent 7” group of megacap stocks, which includes key AI players. Anthony Saglimbene, chief market strategist at Ameriprise Financial, noted that while earnings from these companies may be “very robust,” investors are becoming increasingly cautious regarding capital expenditure in AI.

He emphasized that “investors are starting to get a little more concerned about the money that’s being spent there, and the payback for that investment.” As valuations reach levels some consider excessive, with the S&P 500 trading at approximately 23 times forward earnings estimates—well above its 10-year average of 18.7—concerns about the sustainability of these investments are mounting.

Despite these concerns, companies continue to allocate significant resources towards AI, evident in AMD‘s recent announcement of a multi-year agreement to supply chips to OpenAI. The ongoing U.S. government shutdown, which began on October 1, 2023, has compounded uncertainty by delaying official economic data, hindering investors’ ability to gauge economic conditions and the potential direction of Federal Reserve interest rate policies.

Economic Indicators and Future Outlook

Despite the challenges, some analysts remain optimistic. David Kostin, chief U.S. equity strategist at Goldman Sachs, indicated that mostly positive economic data from the last quarter suggests that third-quarter earnings and sales growth for the S&P 500 could exceed consensus expectations. Goldman Sachs analysts observed that companies likely maintained profit margins even in the face of rising tariffs, which increased by 33 percent to $93 billion during the third quarter.

Sales for S&P 500 component companies are projected to grow by 5.7 percent year-over-year, a slight decrease from 6.4 percent in the second quarter. The investment banking sector is also expected to contribute to stronger earnings for the six largest U.S. banks, which could further bolster overall profit figures.

In the second quarter of 2023, S&P 500 earnings surged by 13.8 percent, surpassing early July estimates of just 5.8 percent. As Oliver Pursche, senior vice president and advisor for Wealthspire Advisors, noted, “So far neither tariffs nor economic uncertainty by the consumer have had a negative impact” on earnings growth.

As the third-quarter earnings season unfolds, investors will be keenly focused on the intersection of AI investment and overall profitability, seeking clarity amid a landscape shaped by both opportunity and risk.