AI-Driven Earnings Boost Expectations for S&P 500, Despite Valuations

Wall Street expects S&P 500 Q3 earnings to rise 8%, marking the 9th straight quarter of profit gains. Tech companies are guiding earnings higher, led by software and semiconductor firms. The S&P 500 is trading at 25 times expected earnings, but Goldman Sachs analysts say the market isn't in a bubble yet. UBS analysts expect global AI capital expenditures to grow 67% YoY in 2025, and strategists keep lifting S&P 500 price targets.

Wall Street is gearing up for the S&P 500 Q3 earnings season, with analysts expecting a robust 8% year-over-year earnings growth, marking the ninth consecutive quarter of profit gains These Are the 3 Hottest Sectors for Q3 Earnings Growth^[1]. This positive outlook is driven by strong performances across various sectors, with technology companies leading the charge, particularly in software and semiconductor firms.

The Technology Select Sector SPDR Fund (NYSE:XLK) is expected to see the most significant earnings growth, with consensus estimates pointing to a 21% increase These Are the 3 Hottest Sectors for Q3 Earnings Growth^[1]. Key drivers include NVIDIA (NASDAQ:NVDA), which has seen a significant uptick in earnings estimates, and major tech giants like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Broadcom (NASDAQ:AVGO), and Oracle (NYSE:ORCL). These companies represent a substantial portion of the Information Technology Sector and the broader S&P 500.

Despite the positive outlook, investors should remain cautious. The market has seen a substantial rally, with the XLK index increasing by more than 55% since the last major correction. This advanced rally could lead to potential profit-taking and consolidation, regardless of the strength of Q3 earnings These Are the 3 Hottest Sectors for Q3 Earnings Growth^[1].

The Utilities Select Sector SPDR Fund (NYSE:XLU) is also poised for strong earnings growth, with a consensus figure of +18% expected for the sector These Are the 3 Hottest Sectors for Q3 Earnings Growth^[1]. This growth is driven by increased power consumption due to AI and electric vehicle (EV) demand, as well as investments in modernization and infrastructure by utilities companies.

The Financial Select Sector SPDR Fund (NYSE:XLF) is forecasted to grow by 11.5% in Q3, driven by higher interest rates and consumer resilience These Are the 3 Hottest Sectors for Q3 Earnings Growth^[1]. Leading stocks in this sector include Berkshire Hathaway (NYSE:BRKa) and JPMorgan (NYSE:JPM), both of which are leveraging AI for growth.

Goldman Sachs analysts maintain a neutral rating on the S&P 500, suggesting that the market is not in a bubble yet Globant (NYSE:GLOB) Given New $90.00 Price Target at The Goldman Sachs Group^[3]. Meanwhile, UBS analysts expect global AI capital expenditures to grow by 67% year-over-year in 2025, further underscoring the sector's potential Globant (NYSE:GLOB) Given New $90.00 Price Target at The Goldman Sachs Group^[3].

In summary, the S&P 500 Q3 earnings season is expected to be robust, with the tech sector leading the way. However, investors should remain vigilant due to the advanced nature of the rally and the potential for profit-taking.