The growth in corporate profits baked into consensus forecasts hinges on capital spending by the largest cloud service providers on artificial intelligence, and that investment could slow, strategists quoted by Bloomberg warn. Excessive bets on AI have made the market vulnerable to sell-offs, and investors may need to temper their return expectations, the agency notes.
Earnings growth hinges on capital spending
“Technology-related earnings have soared simply because U.S. hyperscalers continue to invest record sums in the AI ecosystem,” Bloomberg quotes Dario Perkins, managing director at research firm TS Lombard, as saying. In 2027, Perkins expects corporate earnings growth to slow for three reasons: the positive effect of rising energy prices will fade, growth in AI spending will slow, and the U.S. economy will once again be driven by an increase in employment rather than by higher labor productivity.
If hyperscalers slow the growth of capital spending in response to the results of the U.S. midterm elections, analysts will lower their revenue and earnings forecasts for companies across the data center supply chain, warns Joachim Klement, an investment bank strategist at Panmure Liberum. He also noted that investors are “exhausted” and few new buyers are entering AI trades, Bloomberg reports.
Consensus forecast in doubt
In recent weeks, stocks have fallen relative to expected earnings amid emerging doubts about the rollout of AI, Bloomberg notes. Valuation multiples for the Philadelphia Semiconductor Index (SOX) have dropped to the lower end of their 10-year range, and the index’s premium over the S&P 500 has disappeared. At the same time, analysts’ consensus forecast calls for earnings growth of 29% in 2026, 19% in 2027, and 16% in 2028. Following the decline in valuation multiples, analysts may also lower their consensus forecast, the news agency believes.
After Democrats won the November 3 midterm elections, investors are asking how quickly data centers for AI can be built. According to Barclays calculations based on utility company data, in 2027, 80% of data center projects considered highly likely to proceed will be in states with Democratic governors, compared with less than 30% this year. Market participants fear that tighter construction permitting rules and higher costs of connecting to the power grid will push chipmaker orders into future years. These concerns put chip stocks at the center of last week’s selloff, which Bloomberg called the biggest slump in tech stocks since the pandemic.
Stocks are cheap if demand holds up
According to FactSet, the S&P 500’s forward P/E ratio (the ratio of price to expected earnings) fell to 17.7 on November 5, its lowest level in more than three years. A common view in the market is that this decline indicates there is no bubble. Andy Const, founder of Damped Spring Advisors, disagrees: the bubble is inflating not in stock prices, but in earnings forecasts, MarketWatch writes.
There are already early signs that companies may have to lower their forecasts for spending on AI infrastructure: capital expenditures on data centers by Google parent Alphabet and Amazon came in slightly below expectations last quarter, MarketWatch notes.
However, Carmignac fund manager Christopher Barrett sees no slowdown among data center builders and chipmakers. “At the same time, valuations have fallen significantly and look attractive if end demand for AI does not drop sharply,” Bloomberg quotes him as saying.ㅤ