Wall Street’s AI trade faces an exceptionally high earnings bar

what happened

Reuters columnist Jamie McGeever writes that sustaining further US equity gains through artificial intelligence will be increasingly difficult. The S&P 500 and Nasdaq reached new highs last week, yet the news flow around AI has deteriorated. Australia’s Firmus, a data-center operator backed by Nvidia, postponed its IPO, while reports suggested that OpenAI’s revenue was running below earlier expectations.

Results and guidance from major AI companies in the coming weeks could calm investors, but the hurdle is already exceptionally high. Analysts see S&P 500 earnings increasing by more than 30% year over year in the third quarter. Tajinder Dhillon, LSEG’s head of earnings and equity research, estimates that technology and AI will generate about two-thirds of that gain; some analysts put their contribution as high as 80% of total profit growth.

Firmus had been seeking $5 billion, a deal that would have ranked as Australia’s second-largest share offering ever and the world’s fourth-largest this year. Strong corporate figures have not necessarily supported stocks either. Samsung expects roughly $80 billion in third-quarter earnings, which would be a technology-company record, while TSMC posted record quarterly revenue of $46.7 billion, up 50% from a year earlier. Shares of both companies nevertheless fell.

Reuters further reports that OpenAI’s annualized September revenue was about $50 billion, $20 billion below previous indications. Columbia University professor Van Nieuwerburgh estimates that financing the AI buildout from last year through 2032 will cost $10.3 trillion, equal to an annual average of 3.63% of US GDP. Even with a 10% return, the industry would need about $3.55 trillion in yearly revenue by 2032, or more than 9% of GDP. OpenAI and Anthropic together currently generate about $100 billion, implying growth of more than 80% a year to reach that figure. A shorter useful life for IT equipment would raise the requirement.

Michael Cembalest of JPMorgan Private Bank says 41 AI-related companies have produced 75% of the S&P 500’s advance, 80% of its earnings expansion and 90% of the increase in capital spending since ChatGPT launched in November 2022. Guidance from those companies’ executives will help show how exposed the market is to a correction. McGeever asks whether the largest US investment boom could also become its largest misallocation of capital.

why it matters

The next earnings season will test whether AI-related profits can justify the market’s unusually concentrated expectations and the scale of planned investment.

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