Artificial intelligence is set to be the undisputed star of another earnings season. Looking further ahead, other actors will need to step up.

Artificial intelligence is set to be the undisputed star of another earnings season. Looking further ahead, other actors will need to step up.

On Friday, Wall Street investment banks including JPMorgan Chase, Citi and Wells Fargo are expected to start reporting second-quarter results with weak results. According to FactSet, the median analyst forecast indicated that U.S. lenders’ earnings per share were down 10 percent from a year ago.

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On Friday, Wall Street investment banks including JPMorgan Chase, Citi and Wells Fargo are expected to start reporting second-quarter results with weak results. According to FactSet, the median analyst forecast indicated that U.S. lenders’ earnings per share were down 10 percent from a year ago.

But things should improve from there: the S&P 500 overall is expected to record a positive figure of 8.8%. This would make it the best quarter for revenue growth since the January-March period of 2022, confirming that companies have left behind a period when inflation eroded profit margins.

In fact, the actual number is probably even higher, which accounts for the tendency for executives to under-guide to beat expectations. Forecasts were cut slightly lower than usual as second-quarter growth progressed, which, historically, has been associated with improved profitability.

In the now-familiar fashion, though, this may not feel like a bumper earnings season, as good news will come from only a few places. AI frenzy has disrupted the market.

In the second quarter, S&P 500 firms that should benefit directly from the technology are expected to increase their net income by 24 percent compared to the same period in 2023. including Meta Platforms, Alphabet, Amazon.com, Micron and Microsoft, as well as AI-chip darling Nvidia. The non-AI side of the index predicts earnings growth of just 1.5%.

This drives home an important point: Tech stocks aren’t just riding a wave of speculation. They’re amassing real wealth from all the investment that’s going into creative AI.

Among the underdogs, banks benefited greatly from higher interest rates, and margins were always going to shrink from here. Other financial firms, such as insurers and asset managers, appear to have fared much better in the second quarter.

The benefits are undeniably wide-ranging. In previous quarters, the profits of AI-related companies grew even faster, while the rest of the segment declined. Only one of the 11 sectors in the S&P 500 — materials, which includes the likes of steel producer Nucor — experienced a decline in earnings in the April-June period, while three sectors experienced declines in sales. first trimester.

Expected to continue catch-up, “old economy” stocks delivered a 12% year-over-year increase in net income in the fourth quarter — about as much as AI beneficiaries, where growth is expected to cool. It has been predicted. Investors should also take some comfort from valuations, with the S&P 500’s non-AI side’s lower price-to-earnings ratio than it did in late March, pointing to fertile ground for stock picking.

The caveat is that this recovery trend is fragile. More than half of the companies in the index are expected to report lower profits in the second quarter than a year ago, with the real estate sector the hardest hit. Among industrial firms, aviation remains a dark spot as the Boeing crisis and more expensive labor and materials hit low-cost carriers such as Southwest Airlines.

The macroeconomic outlook is benign but becoming somewhat uncertain. Recent jobs reports point to a slowdown in the U.S. labor market, and consumers appear to be more cautious in their post-pandemic purchases. The Federal Reserve could respond by cutting rates, but it’s unclear how much that would help stocks given today’s highs. However, higher borrowing costs have not weighed heavily on them this year.

AI may be all that investors need to stay positive this earnings season. After that, though, a solo act can start to get frustrating.

Write to Jon Sindreu at [email protected].

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