Analysts Raise S&P 500 Earnings Outlook On AI Investments, Eye Trump Tariff Risks After Election

Bank of America recently upgraded its forecast for S&P 500 earnings per share (EPS) for 2024, setting the bar high with a new estimate of $250 (+12% year-over-year), compared to the previous projection of $235 (+6% year-over-year).

This adjustment, which marks the highest top-down prediction among Wall Street investment banks for the period, is grounded in a more optimistic outlook for the U.S. economy, with GDP growth expectations for 2024 revised upward from 1.4% to 2.7%.

Hyper Scalers Drive Capex Growth, AI Raises Productivity

The tech sector — particularly “hyper scalers” like Microsoft Corp. MSFT, Amazon.com Inc. AMZN, Alphabet Inc. GOOGL, and Meta Platforms Inc. META — is anticipated to significantly contribute to this growth. These companies are expected to allocate around $180 billion on capital expenditures in 2024, showcasing a remarkable 27% increase year-over-year.

Analyst Ohsung Kwon, CFA, highlighted the pivotal role of artificial intelligence (AI) investments in this scenario, suggesting a “potential virtuous cycle forming from AI investments”

AI and domestic investments are seen as key drivers behind productivity improvements, with the semiconductor and networking sectors positioned as primary beneficiaries. However, Bank of America also cautions about the increased demand for electrification, utilities, and commodities due to higher power usage and the physical expansion of data centers.

Another significant factor supporting productivity is the trend towards re-shoring, where companies are moving towards establishing more efficient, new plants within the U.S. or Mexico. This move is expected to yield productivity gains, historically observed two years post-wage inflation as firms begin to enhance efficiency through capex investments.

Magnificent 7 See Slower Earnings Growth, Trump Tariffs

Looking ahead, earnings growth is anticipated to decelerate for the technology giants, often nicknamed the Magnificent Seven. The remaining 493 companies within the S&P 500 are expected to accelerate.

By the fourth quarter of 2024, the growth differential between the two groups is expected to converge, potentially acting as a catalyst for more diversified market growth.

Nonetheless, potential risks loom on the horizon, especially with the uncertainty surrounding the U.S. presidential election outcomes.

“Demand recovery will be the key driver of earnings in 2024-25,” according to the Bank of America note. “Although margins recovered from the lows on lower costs, further margin gains will need better demand.”

Also, potential tariffs in the event of a Donald Trump victory in the presidential election are another key risk. Should that happen, analysts estimate a 5% EPS hit from 60% tariffs on Chinese imports.

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