AI in Focus: Stocks on the Rise Despite Slowing Profit Growth

With the ongoing earnings season, investors are eagerly focusing on the results of S&P 500 companies and their alignment with Artificial Intelligence (AI). Analysts forecast that overall earnings growth will slow down: S&P 500 earnings are expected to rise by 5.3% compared to the previous year—a notable decrease from the 13.2% growth in the second quarter, according to a report by the news agency Reuters. Particularly, the technology and communication services sectors are the stars of the year, with expected earnings increases of 15.4% and 12.3% respectively. Thanks to the dominant role of AI companies in earnings reports, the S&P 500 has surged significantly this year, with an increase of about 21% since the start of the year, driven primarily by strong performance in the technology and communications sectors. Howard Chan, CEO of Kurv Investment Management, highlights that analysts are keenly examining how successfully major companies can monetize their AI initiatives. Companies like Meta have been able to significantly improve their stock prices by forecasting strong revenue growth, suggesting that their digital advertising revenues are effectively funding their AI investments. On the other hand, the high expenditures by companies like Google on AI technologies raise questions about their integration into existing business models. Solita Marcelli of UBS Global Wealth Management expressed optimism regarding the upcoming third-quarter results, which could spur further gains, especially since the semiconductor sector remains a focal point for AI investments. An interesting case in the realm of AI trend stocks is KLA Corporation. The company, specializing in process control and profitability solutions for the semiconductor industry, is well-positioned to benefit from the U.S. CHIPS Act. The legislation aims to strengthen domestic semiconductor production, aligning perfectly with KLA Corporation's offerings in wafer inspection systems for advanced manufacturing technologies. In the final quarter of the fiscal year 2024, the company recorded AI-related revenue of $614 million, representing a sequential increase of 4% and an annual growth of 14%. CEO Richard Wallace emphasized the company's strong long-term growth drivers during the earnings call and anticipates a recovery in the memory markets in 2025, driven by developments in AI, high-bandwidth memory, and improvements in the general demand and supply balance.