We’re heading into earnings season again in Corporate America, and S&P 500 earnings are forecast to climb 27% in the third quarter, and for the first time since 2021, every single sector is expected to grow its profits.
For two years sceptics have argued the AI boom is a narrow bet on a handful of technology companies. These numbers point to an investment wave now feeding profits right across corporate America.
Hyperscaler capital expenditure is expected to have more than doubled from a year ago, accelerating from 87% growth in the second quarter. Every dollar of it becomes revenue for chipmakers, construction firms, electricity producers, cable makers, cooling specialists, engineering groups and the industrial suppliers behind them.
Profit growth in every sector at once is the clearest evidence yet that AI spending has become an economy-wide growth engine.
The most persistent doubt about AI has been whether businesses will actually pay for it.
Cloud revenue across the biggest providers is forecast to accelerate to 55% growth, driven by companies renting computing power to run AI tools. The customers for this new capacity are already arriving, and they’re paying.
The 10-year Treasury recently closed above 5.3%, its highest level in 24 years, and the Federal Reserve raised rates in September for the first time since 2023.
Yields at these levels partly reflect an economy growing fast enough to justify them, and earnings growth of 27% gives equities a formidable cushion.
Rates jumped sharply in 2022 and the S&P 500 fell around 19%, but corporate profits barely grew that year.
Today the profit engine is running at full throttle. When earnings rise faster than share prices, stocks become cheaper on the measure that matters most, even as indices set new records.
A forecast of 27% also sets a demanding bar. Expectations this lofty leave little room for disappointment, and companies that merely match estimates can still see their shares punished.
A government bond paying above 5% gives investors a credible alternative to equities, which caps how much they’ll pay for future earnings.
Analysts project around $300 billion of investment-grade bonds for AI data centres this year, so a growing share of the expansion now runs on borrowed money just as borrowing has become dearer. Debt has to be serviced whether AI revenues arrive on schedule or not.
One of the largest spenders says around $25 billion of its capital budget this year reflects higher component prices alone, and the scramble for chips, power and land is feeding inflation the Fed can’t ignore.
If price pressures persist, rates could stay higher for longer than equity markets currently assume.
Much of that inflation, however, is the cost of construction. Once the infrastructure is running, companies using AI to automate processes, accelerate research and serve more customers with the same workforce produce more for less, and that productivity eventually cools prices.
Electrification, the personal computer and the internet each began with an investment surge that looked excessive at the time. America’s productivity growth accelerated sharply from the mid-1990s, after years of heavy spending on computers and networks finally fed through into how businesses operated.
Whether today’s colossal outlays convert into productivity gains across ordinary businesses remains unproven at scale, and those gains can take years longer to arrive than investors hope.
A small group of giants also makes up a towering share of the S&P 500, so a stumble by any one of them would ripple through every index fund.
This earnings season will separate businesses with genuine AI revenue from those relying on the label, and selectivity matters more than ever in a market moving this fast.
The AI boom has grown into the main driver of American corporate profits, with much of the payoff still ahead.
Whether markets keep rewarding it will depend on that payoff arriving before the bond market runs out of patience.
Nigel Green is deVere CEO and Founder
Also published on Medium.
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