S&P 500 Earnings Growth Concentrates as AI Spending Faces Test

The S&P 500 is entering the third-quarter earnings season with strong profit-growth expectations, but concentrated gains, rising costs and heavy artificial intelligence spending are making results harder to sustain.

The index’s earnings are expected to rise 27% from a year earlier. About 85% of companies reporting early results exceeded earnings expectations, compared with a historical average of 71%.

Yet positive surprises are producing smaller market gains. Companies that beat both earnings and revenue estimates outperformed the S&P 500 by only 0.7 percentage point the following day, compared with a historical average of 1.4 percentage points. Companies missing both measures underperformed the index by an average of 3.3 percentage points.

The pattern shows that positive surprises have produced smaller gains while misses continue to draw larger penalties.

Growth Is Concentrated

The 10 largest contributors are expected to account for 68% of total S&P 500 earnings growth, up from 47% in the first quarter and 48% in the second.

Micron Technology is expected to contribute 19% of index earnings growth, while Nvidia is expected to contribute 15%. Together, the two companies represent 34% of projected growth. Meta is expected to contribute 7%, Alphabet 6% and Broadcom 5%.

The median S&P 500 company is expected to post 9% earnings-per-share growth, down from 14% in the second quarter. Profit-margin estimates for the median company have been cut by 11 basis points since the start of the quarter, with every sector except information technology facing a reduction.

The S&P 500 is about 2% below its record high, while the median stock remains 17% below its peak. The divergence underscores how much index-level results depend on a small group of companies.

Costs and AI Spending Pressure Margins

Raw-material cost mentions on S&P 500 earnings calls have reached their highest level since mid-2022. U.S. retail gasoline prices rose about 30% year over year during the third quarter, increasing pressure on retailers, transportation companies and industrial-goods manufacturers.

Chris Nardone, an analyst covering consumer discretionary companies, said sustained high oil prices would create a continuing margin risk as retailers balance passing on costs with preserving customers’ perception of value.

Labor costs remain the larger influence on overall index margins. Labor accounts for about 40% of U.S. corporate operating costs, compared with less than 5% for energy. Cooling wage inflation is providing a buffer, but continued energy inflation could pressure fourth-quarter and 2027 results if higher energy costs are passed through to consumers.

AI investment is creating a second test for earnings quality. Capital spending by Microsoft, Amazon, Alphabet, Meta and Oracle, the large cloud-computing providers, is expected to grow by more than 90% in 2026. Those forecasts have increased 70% over the past year.

The group’s capital spending has also exceeded 100% of operating cash flow, widening the gap between free cash flow and net income. Tal Liani, a software analyst, said the focus this quarter is whether software companies can turn customer adoption of AI into revenue growth. Demand remains above supply and pricing trends remain favorable, Liani said.

Koji Ikeda warned that the market will increasingly distinguish between companies generating revenue from AI and those relying mainly on the narrative.

Earnings Quality Faces a Second Look

S&P 500 earnings per share rose 50% year over year in the second quarter, but earnings-per-share growth fell to 32% after excluding investment revaluation gains at Amazon and Google.

Those investment revaluation gains can also reverse when valuations decline, making the composition of earnings important. Free cash flow relative to net income has fallen into a historically low range as large technology companies increase capital spending.

The outlook for 2027 adds another pressure point. Consensus calls for S&P 500 earnings to grow 16%, while a more cautious forecast calls for 12%. The consensus also assumes that every sector except energy will avoid an operating-margin contraction.

Information technology, particularly semiconductors, is expected to provide about 80% of 2027 earnings growth. The communication-services sector, meanwhile, faces year-over-year earnings declines because of a high comparison base.

The reporting season will show whether strong index-level growth can broaden beyond a small group of technology companies as investors assess costs, AI revenue and the durability of 2027 profit assumptions.