Analysis-Investors wary of slowdown in US corporate profit boom

NEW YORK, Oct 1 — A massive year for corporate profit growth is driving US stock market gains, but investors' hesitancy that the good times will roll on without a hitch is seeping into equity valuations.

Investors are preparing for another robust ​period of earnings as companies begin reporting third-quarter results in the coming weeks, with full-year earnings from S&P 500 companies now expected to rise a whopping 35%. That jump would mark the highest rate since 2021, which was skewed by the post-pandemic economic rebound.

Such torrid growth has lifted the S&P 500 about 12% this year, overcoming risks including rising interest ‌rates, the US Federal Reserve's hawkish turn and the Middle East conflict and related oil price spike.

But investors are starting to look beyond 2026, at prospects that companies can sustain strong profit growth.

"Investors like myself are questioning the durability of these huge numbers," said Walter ⁠Todd, chief investment officer at Greenwood Capital in South Carolina. "We've had great earnings. The bad thing ​is the (comparisons) are going to be very difficult next year for a lot of these names."

Foremost ⁠among earnings risks is any hiccup in the AI spending engine, which has spurred profits for companies building infrastructure. Other risks include AI spenders' capacity to generate sufficient investment returns and fallout from rising interest ‌rates, such as dampening corporate willingness to take on ‌debt for AI expenses and a slowing pace of consumer spending.

The sustainability of earnings growth is one threat to a bull market nearing its fourth year, said ⁠Michael Arone, chief investment strategist at State Street Investment Management.

"I do think that the rate of earnings growth will slow," Arone said. "I ⁠think the question will be: by how much? ... Right now, I'm not overly concerned, but this is something I'd be keeping an eye on."

MARKET VALUATIONS MODERATE IN 2026

In upcoming reports, companies could give early insight into next year. S&P 500 earnings are expected to rise 15% in 2027, according to LSEG IBES — slowing from this year as AI capital spending decelerates and companies face difficult comparisons. The "above trend" 2027 level would top the median annualized growth rate of 10% over the past 35 years, according to Barclays equity strategists.

Still, some "investor pushback we've heard... concerns whether earnings growth is due to peak this year," the Barclays strategists said in a recent note.

Some of that concern is likely reflected in lower market valuations, investors said, along with other risks including ‌rising interest rates. The forward price-to-earnings ratio for the S&P 500, which assigns a value to the index's expected profits, has fallen to 19.2 ​from 22 to start the year and a recent peak of 23.5 in October 2025, according to LSEG Datastream.

Some AI-linked stocks have seen sharper valuation drops. The S&P 500 tech sector's forward P/E ratio has fallen to about 21 from 26 at the start of the year.

The median AI infrastructure stock has de-rated to 22 times forward earnings estimates from 32 in April, Goldman Sachs equity strategists said in a note last week.

"Many market participants are skeptical about the durability of AI infrastructure stock earnings, and that view is at least partially reflected in market pricing," Goldman said.

AI SPENDING PLANS IN FOCUS FOR EARNINGS STRENGTH

Investors are watching AI spending. Five AI hyperscalers are expected to spend just over $800 billion this year, increasing to $1.1 trillion next year, according to Goldman. That rate is moderating, from an increase of nearly 100% this year to 37% next year, which is one factor behind the slower pace of expected earnings growth.

With AI spending, "the rate of that ​change that will determine to a large extent how the stock market does next year," said Peter Tuz, president of Chase Investment Counsel, adding that a falloff in data-center building due to regulatory or community pushback is a wild card.

Even as AI-related profits ‌have stood out, ‌earnings growth has been broad. All 11 S&P ⁠500 sectors are expected to increase earnings in 2026, according to LSEG IBES, helped by a solid economy.

However, investors are wary of the impact from higher oil prices and interest rates.

The strength of the consumer has "been a little bit better than expected," said James Ragan, co-CIO and director of investment management research at D.A. Davidson. "But there just seems to be headwinds out there. So if we get a consumer slowdown, it's going to be more difficult for a lot of companies to beat earnings next year."

To be sure, the decrease in valuations gives some investors confidence that stocks are not overly expensive, despite the S&P 500 being near ‌record levels.

The profit gains have been a positive surprise ​for Wall Street, with full-year S&P 500 earnings on track to grow at more than twice the rate expected in ‌January.

"At every turn, investors have underestimated the strength in ⁠earnings," State Street's Arone said, adding that ​the current pace of growth is unusual for the middle of an economic cycle.

"I understand that's what raises the questions about the sustainability," he said. "But you need a catalyst for this to end."

(Reporting by Lewis Krauskopf; Editing by ​Colin Barr and Nick Zieminski)

Related topics