Corporate earnings have surged at an extraordinary rate, but analysts and strategists increasingly warn the breakneck pace is unsustainable heading into next year.
The S&P 500 was on track to deliver second-quarter earnings growth of 47% on a yearly basis, up sharply from around 20% prior to the start of the earnings season, according to FactSet data.
That kind of growth rate is historically unusual and typically only appears during recoveries from recessions or other severe economic dislocations, making the current moment stand out.
In 2021, the broader index posted an earnings growth rate of more than 90%, but that followed the economic devastation caused by the Covid pandemic and represented a sharp snapback from depressed levels.
The AI boom has been the primary catalyst driving this latest surge, supercharging results across a broad swath of companies tied to artificial intelligence infrastructure and development.
Second-quarter results showed broad participation, with 10 out of 11 S&P 500 sectors on pace for positive year-on-year earnings movement, a sign of widespread corporate health beyond just technology.
Yet the underlying growth story remained heavily concentrated, as the median AI-related stock notched earnings per share growth of 28%, while the median non-AI-related stock saw growth of just 12%.
That gap illustrates how dependent the overall earnings narrative has become on a single theme, leaving the broader market vulnerable if AI-driven spending cools or disappoints.
Strategists at Bank of America expect consensus earnings growth to fall below 20% in the first quarter of 2027 before moderating further into the mid-teens for the full year.
While mid-teen earnings growth would be considered healthy by historical standards, markets have often struggled when growth decelerates sharply from elevated levels, creating potential headwinds for equities.
The concern is that investors pricing in continued acceleration could be caught off guard as the rate of improvement slows, even if the absolute numbers remain respectable.
When earnings per share growth is above trend but decelerating, the S&P 500’s median 12-month return is 6.7% with a hit rate of 72.3%, according to the analysis.
That compares unfavorably to a median 14% return and a hit rate of 83.3% when EPS growth is above trend and still accelerating, highlighting the risk that deceleration poses to equity performance.
Investors may need to recalibrate expectations for stock market returns in the coming year as the extraordinary tailwinds from AI spending and post-pandemic economic normalization gradually fade.
