Analysis-US companies' profit growth seen softer, spotlight on AI spending

Core Viewpoint - U.S. companies are expected to report milder earnings growth in Q3 2024, influenced by potential tariff impacts and a focus on the effectiveness of AI-related spending [1][2]. Group 1: Earnings Growth Expectations - Analysts forecast S&P 500 companies to achieve an 8.8% increase in earnings for Q3 2024, a decline from over 13% growth in the first two quarters of 2025 [2]. - The reporting period for earnings will commence next week with major U.S. banks releasing their results [3]. Group 2: AI Investment and Market Sentiment - There is significant investor interest in AI-related capital expenditures, with expectations that earnings from leading AI companies, referred to as the "Magnificent 7," will be strong [3][5]. - Companies are increasing investments in AI, exemplified by AMD's multi-year agreement to supply chips to OpenAI [5]. Group 3: Market Valuations and Investor Sentiment - Current valuations for the S&P 500 are approximately 23 times forward earnings estimates, exceeding the 10-year average of 18.7, raising concerns about potential overvaluation [4]. - Investors are becoming more cautious regarding capital expenditures, questioning the return on investment from AI spending [4]. Group 4: Economic Context and Federal Reserve Actions - The U.S. government shutdown has delayed official economic reports, complicating the assessment of economic conditions and Federal Reserve interest rate strategies [6]. - The Federal Reserve recently cut rates for the first time since December, reflecting concerns over labor market weakness [6].