Wall Street has rested much of its optimism about the stock market on a surge in corporate earnings. The catch is that the profit growth is being driven by a handful of AI giants.
Analysts expect companies in the S&P 500 to report a 30% jump in third-quarter earnings from a year ago, according to FactSet, boosting investor confidence that the good times can keep rolling so long as businesses keep printing money. But just two companies—Nvidia and Micron—account for 34% of that growth, according to a Dow Jones Market Data analysis.
And only 10 companies—including Broadcom and Meta Platforms—account for roughly two-thirds of the profit growth. Others include oil-and-gas giants that benefited from higher energy prices caused by the conflict in Iran.
It is another way the U.S. stock market has come to depend on a handful of companies tied to the artificial-intelligence trade—and the fervid race to build the infrastructure that supports the technology, as costly as it may become.
The risk posed by that concentrated earnings growth, analysts said, is the same one underpinning the broader AI investing boom: that the technology ultimately won’t deliver on the massive sums of money being poured into it.
In other words, the fear is that “we’re going to end up converting all these data centers into pickleball facilities,” said longtime stock analyst Ed Yardeni.
Those worries resurfaced this past week, when Meta’s plans for a cash-raising spree helped trigger one of the Nasdaq’s worst selloffs this year.
Many investors aren’t too concerned with extraordinary profit growth being driven by a small group of companies. For one, earnings across the market are still growing, albeit at a slower pace. Even without the top 10 stocks juicing growth, the rest of the S&P 500 is expected to deliver a 10% jump in profit from a year ago—a respectable showing, especially for a bull market that has now stretched into its fourth year, said Chris Grisanti, chief market strategist at MAI Capital Management.
The companies with the fastest growth are “the best on an all-star team right now,” he said, “but the rest of the team is carrying its weight.”
Another reason to be optimistic: investors are already factoring in that the supersize profit increases won’t last forever.
Even as earnings estimates surged this year, share prices—for the market and the firms driving the growth—have moved relatively little in comparison. That means equities look cheaper than they did at the start of the year.
“The market is being uncharacteristically wise,” Grisanti said. “We’re not in anything like euphoria.”
Still, Grisanti said his team is among those preparing for an earnings slowdown, shifting from “picks and shovels” plays to take a larger position in power providers. As the data-center build-out progresses, the thinking is that demand for electricity will keep growing even as memory-chip supply constraints ease.
For Nvidia and Micron, profits have been fueled by extraordinary demand for memory and other AI chips that has given suppliers extraordinary pricing power. The numbers are eye-popping: last month, Micron reported that its quarterly profit had multiplied more than 10-fold from the year prior, or 1,078%. Analysts expect a 90% leap for Nvidia, according to FactSet.
Money managers have for months pointed to climbing corporate profits as a crucial reason why stocks could blow past a list of anxieties that included rising interest rates, conflict in the Middle East and a bond market set on edge.
But the momentum in artificial-intelligence stocks isn’t just about the profits companies are generating now, it is also about the projection that mammoth demand for AI tools will translate into big profits well into the future. Whenever that excitement dims even a little bit—over concerns about availability of capital or completion of data centers—investors pull back.
Analysts said it is likely those doubts will keep surfacing periodically on Wall Street, with this past week serving as an example. The cycle has earned many comparisons with the dot-com boom of the late ‘90s, another tech-driven bull market with a famously unhappy ending.
Larry Adam, chief investment officer at Raymond James, thinks there is one key difference with the comparison: dot-com companies weren’t making money like this.
“This is not back to 2000,” he said. “In many ways, I think the market has been pretty rational.”
Write to Hannah Erin Lang at hannaherin.lang@wsj.com