As the new earnings season unfolds, investors are eager to see how investments in artificial intelligence by S&P 500 companies are paying off. According to a report, analysts expect profit growth to slow down, with profits of S&P 500 companies expected to grow by 5.3% compared to the same period last year, lower than the 13.2% growth in the second quarter. Among them, the technology and communication services sectors are expected to show the strongest year-on-year growth, with technology sector profits expected to grow by 15.4% and the communication services sector by 12.3%.
Since last year, artificial intelligence-related companies have been leading the earnings season, driving a significant rise in the market. The S&P 500 index is currently at a historical high, having risen about 21% so far this year, mainly thanks to the strong performance of the technology and communication sectors.
Advertisement
Howard Chan, CEO of Kurv Investment Management, noted that analysts are keen to assess how large companies can monetize their AI initiatives, and companies that succeed in this area will reap significant rewards. For example, Meta (META.US) saw its stock price soar after giving strong sales growth expectations, indicating that its digital advertising revenue effectively funds its AI investments.
Chan added that, on the contrary, the spending on artificial intelligence technology by giants such as Google (GOOGL.US) has raised questions about its integration with existing business models.
Currently, the price-to-earnings ratio for the S&P 500 index's earnings expectations for the next 12 months is 22.3 times, exceeding the long-term average of 15.7 times. Many investors hope that this quarter's earnings will prove that higher stock valuations are justified.
Solita Marcelli from UBS Global Wealth Management expressed optimism, saying that the upcoming third-quarter earnings reports may further drive further increases, especially as the semiconductor industry remains a focus of AI investment.
Best investment target: NVIDIA
As the biggest beneficiary of the AI boom, NVIDIA's (NVDA.US) stock price has risen by more than 170% so far this year. However, in the market's view, the stock still has room for further appreciation.
In September this year, consulting firm Bain & Company stated that the potential market size for AI hardware and software will grow by 40% to 55% at least over the next three years. It is expected that the demand for NVIDIA's next-generation GPU GB200 will reach 3 million units by 2026, compared to the demand for its H100 at 1.5 million units in 2023.Morgan Stanley has rated NVIDIA as "overweight" with a target price of $150. After hosting a three-day non-deal roadshow with NVIDIA's CEO Huang Renxun, CFO Colette Kress, and other members of the management team, Morgan Stanley stated, "The meetings highlighted the scale and length of the accelerated computing runway, and every sign from management indicates that we are still in the early stages of a long-term artificial intelligence investment cycle."
A report from the bank stated that the Blackwell system NVL36/72 remains the best solution for inference interactions requiring substantial computing power. The Blackwell production ramp-up is proceeding as planned, with capacity already sold out for the next 12 months, indicating continued strength.
Bernstein analysts said that after experiencing astonishing growth, sustainability is the main issue facing NVIDIA, but "it is clearly not the time to worry now."
Melius Research analysts also gave the stock an "overweight" rating with a target price of $165, noting that the company plans to increase the production of Blackwell chips in the fourth quarter.