Rising AI demand set to drive US earnings

After a strong performance from US equities in the third quarter, we’re turning our attention to the key drivers for the months ahead.

There’s been a lot of discussion about the huge investments that the big tech companies are making in data centres for Artificial Intelligence. Some analysts estimate capital spending by so-called hyperscalers could reach $1.2 trillion by 2029.

This has raised questions about what sort of return on investment we could expect to see. There’s a possibility that these businesses could over-invest, building capacity that may take longer to fill than they expect. This has been a feature of previous technology shifts – notably the booms in railroad investment in the 19th century and the rapid build-out in telecom fibre in the late 1990s. 

But building that capacity takes time and it’s tough to assess what the demand picture will look like two or three years from now. So investors will be looking for signals that demand for data, notably for Artificial Intelligence, is proving as robust as many have hoped. The stronger the demand, the more likely it is that these businesses will see a decent return on all the investments that they’re making. 

And that brings us to the third quarter earnings season getting underway in the US. In one sense, you could argue that we shouldn’t pay too much attention to quarterly results, particularly in the context of a new technology that could transform the next few decades. On the other hand, with expectations already high and capex plans underway, investors will already be looking for signs that the optimism around AI is really going to translate into profit growth sooner rather than later, particularly in the US. 

The good news is that US corporates, driven by the tech space, have continued to perform well. We saw a very solid earnings season in the second quarter of the year and that’s been reflected in earnings expectations for 2025. The chart below shows expectations for this year earnings growth for the US and Europe over time. 

We can see that earnings expectations in Europe have fallen sharply in recent months. Analysts now expect no earnings growth in 2025 for European stocks.

In contrast, analysts are still expecting double-digit earnings growth for US companies. In the tech sector specifically, the most recent revenue release from TSMC, the Taiwanese chip manufacturer, showed a robust growth for the period July-September, and pointed to continued strong demand in the sector.

For now, investors seem as focused on the US job market and the ongoing government shutdown as they are on expectations for Artificial Intelligence. Still, it’s a reminder that, despite all the talk of long-term investment and the secular trend in Artificial Intelligence, investors will be looking at quarterly earnings for signs that all those investments will prove to be money well-spent.

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