After strong earnings, AI investment fatigue and midterm election risks cloud next year's US stock earnings outlook

The third-quarter US earnings season is drawing to a close. Although results have been broadly strong, analysts are cutting their profit forecasts for the S&P 500 next year. Concerns over artificial intelligence (AI) spending and the fallout from the US midterm elections are casting a shadow over the earnings outlook. Data show that S&P 500 earnings forecasts have been revised down for four consecutive weeks, and the market now expects profit growth of 20% in 2027, below this year's expected 30% growth rate. The downgrade comes even as every S&P 500 sector beat pre-season earnings-per-share (EPS) expectations. Companies accounting for more than 80% of the index's market capitalization have now reported, with EPS growth of 33%, slightly above the second quarter's 32%, driven mainly by energy and technology giants. Bank of America Corp strategists Savita Subramanian and Victoria Roloff wrote in a report: "The overall guidance trend is encouraging, but a 'blue wave' (a sweeping Democratic victory in the midterm elections) increases the risk of delays in AI spending, and AI has been the strongest DRIVE of S&P 500 EPS growth over the past three years." Questions over the future direction of AI regulation and data center policy have intensified market concerns about runaway AI computing spending and triggered a selloff in technology stocks. Ripple effects of AI capex cuts BofA analyst Vivek Arya said that if policy changes lead to capex cuts starting next year, analysts could further lower EPS expectations in the first quarter. BofA research shows that a 20% cut in AI capital expenditure could reduce S&P 500 EPS by as much as 8%. Citi analyst Atif Malik said that approval delays, local opposition to data center construction, and growing market caution toward new cloud service companies that provide AI computing power could slow the pace of new project development. UBS Group AG strategist Keith Parker's team wrote that a slowdown in data center construction would hit AI companies themselves, as well as equipment manufacturers and suppliers of power, land and labor. This "weakens the tailwind strength of the broadening trade." Consumer sector faces inflation and rate test Beyond the AI trade, the outlook is also unclear, especially for consumer-facing companies. BofA's Subramanian and Roloff said earnings expectations for consumer companies have been "surprisingly resilient" since the outbreak of the Iran war, but the boost from tariff refunds has largely faded, and revisions to the sector's 2027 earnings forecasts have lagged the broader market this season. They said this makes inflation and interest rates "swing factors." BI analysts Wendy Soong and Christopher Cain said that Walmart Inc. (WMT.US) and Target Corporation (TGT.US) results next week will show how consumers are coping with inflation and how the consumer staples sector is alleviating pressure. NVIDIA Corporation results become the next big test for the AI trade NVIDIA Corporation (NVDA.US), which also reports next week, will provide the next test for the AI trade. Citi's Malik said that for the chipmaker, "the key risk is not 2027 demand that appears largely locked in but order visibility for 2028 and the conversion of backlog." In addition, as the earnings test approaches, the scandal surrounding NVIDIA Corporation CEO Jensen Huang is adding extra disturbance to market sentiment. NVIDIA Corporation's board has launched an independent investigation, and the company's shares have fallen more than 9% over the past two trading days, wiping out more than US$400 billion in market value. Yorkville Ives analyst Dan Ives said that if Jensen Huang is removed as CEO, the value of NVIDIA Corporation as a company and its stock could fall by 25% to 30%. The controversy adds another layer of governance concern to technology stocks already under pressure from the AI spending outlook and midterm election uncertainty.