AI Investments Propel S&P 500 Earnings Growth Amid Future Risks

The surge in artificial intelligence (AI) investment is currently driving nearly half of the earnings per share (EPS) growth for the S&P 500, but this trend is expected to reverse in the coming years. Goldman Sachs Research reports that the S&P 500 EPS grew by 51% in the second quarter of 2023 compared to the previous year, marking a significant acceleration from the historical average of 7% over the past three decades. However, as AI's contribution to earnings growth diminishes, the focus will shift toward productivity gains to sustain profitability.

Goldman Sachs forecasts that S&P 500 EPS will reach $415 in 2027 and $460 in 2028. The firm predicts the index will rise to 8,700 over the next 12 months, up from 7,764 as of September 21, 2023. This anticipated increase is attributed to profit growth rather than an expansion of valuation multiples, which have already contracted from 23 times earnings a year ago to 19 times today, aligning with the 10-year average. Despite these figures, concerns persist regarding the sustainability of current earnings levels, particularly as the cyclically adjusted price-to-earnings (P/E) ratio remains elevated.

Goldman Sachs' chief U.S. equity strategist, Ben Snider, emphasizes that while earnings growth is expected to decelerate, it is not likely to collapse. The current earnings trajectory has outpaced historical correlations with U.S. economic growth, raising questions about potential overvaluation. The firm acknowledges that even a return to average multiples could be deemed expensive if earnings are unsustainable in the long term.

AI investment has been a significant driver of S&P 500 EPS growth, contributing nearly half of the increase in 2026. Hyperscaler companies, which include major cloud service providers, are projected to spend $800 billion on capital expenditures this year, a 94% increase from 2025. This spending is benefiting various sectors, including semiconductor manufacturers and tech hardware suppliers. However, as hyperscaler capital expenditures are expected to slow in the coming years, the positive impact on S&P 500 earnings will also diminish.

The dynamics of semiconductor pricing further complicate the outlook. Strong demand and limited supply have led to inflated prices and gross margins, with memory producers currently achieving margins around 80%, significantly above historical averages. However, this margin expansion is not expected to continue indefinitely, suggesting that the recent earnings growth in the semiconductor sector may also face headwinds.

Additionally, the appreciation of equity investments has temporarily inflated S&P 500 earnings. Large technology firms reported approximately $150 billion in unrealized gains from private companies in the second quarter of 2026, accounting for 12% of S&P 500 EPS. This contribution is expected to wane in 2027, further pressuring earnings growth.

Looking ahead, the potential for unexpected shifts in hyperscaler capital expenditures presents a wide range of possible outcomes for S&P 500 earnings. Goldman Sachs analysts estimate that a deviation of $250 billion in capex could alter earnings growth by about 6 percentage points in either direction. As the market adjusts to the fading impact of AI investments, executives must prioritize strategies that enhance productivity and innovation to sustain earnings growth amid shifting economic conditions. The ability to adapt to these changes will be crucial for maintaining competitive advantage in a landscape increasingly defined by technological advancement.