A Handful of AI Giants Are Powering the Market’s Earnings Surge

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0:34Welcome to Tech News Briefing. It's Wednesday, October 28th. I'm Julie Chang for The Wall Street Journal. It's earnings season and Wall Street is feeling optimistic. According to facts that S &P 500 third quarter earnings are expected to rise 30 % year over year. But there's a catch. The boom is being driven by just a handful of AI giants. Just 10 companies account for roughly two-thirds of corporate profit growth, according to a Dow Jones market data analysis. But how long can they keep it up? WSJ reporter Hannah Aaron-Lang joins us now to break down this concentration in corporate earnings and what it could mean for the market going forward.

1:18Hannah, which companies are we talking about here? So the two big ones to be aware of are Micron and NVIDIA. So, of course, two very big names in the chip-making space. Those two companies alone account for about a third of the earnings growth we're looking at. There's a lot of other prevalent tech names in there as well. So Broadcom, SanDisk, EchoStars1, Meta, for example. And then there's actually also a few oil and gas companies. So you can attribute that to the sort of higher oil prices that we've seen. So it's a mix of some of those AI stars and then those oil and gas names that have been sort of unique beneficiaries of the geopolitical tensions in the Middle East.

1:58And what does this extreme concentration mean for the health of the broader S &P 500? Does it distort how healthy the rest of the index actually is? Yeah. So when I took a look at this profit growth data, I thought, you know, what if we look kind of beyond NVIDIA and Micron and take out these 10 companies with the biggest profit increases? What does this look like for the other 490? And if you take out those 10 all-stars, the earnings growth for the S &P 500 for the third quarter drops from 30 percent to about 10 percent, which is a decent earnings growth number. So it's not at all the case that we are looking at a bad quarter for earnings growth for the rest of the market.

2:37It might just not be as stunning a quarter for profit growth as that headline number would maybe suggest. So what risks are posed by such concentrated earnings growth? So the impression I got from the professional investors that I spoke with is that this is not at all sort of like a critical threat to the stock rally. It's true that for some time folks on Wall Street have been watching for and maybe getting a little bit more anxious to see the benefits of AI taking shape beyond the tech sector, which this example of concentrated earnings growth doesn't necessarily paint that picture. I think the real risk here is that a lot of the money managers that I've spoken with have cited this 30 % profit growth number as one crucial, logical reason why stock prices can kind of keep moving higher.

3:24And I think when you look a little more closely, this is actually just one more way in which the stock market has come to depend heavily on this massive singular bet on AI, right? The idea that the productivity gains and money-making ability of artificial intelligence will be well worth the hundreds of billions of dollars being spent on it right now. We have seen that as soon as Wall Street starts to question that belief, even just a little bit, it can lead to pretty violent shifts in the market. So the risk posed by concentrated earnings growth is essentially the same risk underpinning the entire market or the broader AI investing boom right now, that the technology ultimately won't be able to deliver on the massive sums of money that U.S.

4:07companies are currently pouring into it. One investor put it this way, the fear is that we're going to end up converting all these data centers into pickleball facilities. How vulnerable are the remaining S &P 500 companies if earnings growth fails to broaden out? In other words, if profit doesn't start spreading to other sectors, how risky is that for the typical company on Wall Street? I don't think there's like a critical risk posed to the average company in the S &P right now. It's just that they're not benefiting from these eye-popping numbers that we're seeing at some of the biggest AI players.

4:40I do think that professional investors are getting a little more anxious to see the benefits of AI take shape at these other companies, whether that's in health care or real estate or at banks, for example. And ideally, you know, investors want to see that happen kind of soon, right? That would be the next stage of this bull market. So it's not necessarily that other companies in the S &P 500 are struggling right now. They're just not necessarily seeing the benefits that the tech companies have from the AI boom. Are you worried about market concentration? If you're a listener on Spotify, leave us a comment with your thoughts.

5:14Still ahead, why top investors aren't hitting the panic button over big tech's massive AI spending? That's after the break.

5:37you trust also trust Claude. See what's next at claude.ai.

5:46Welcome back. So we've talked about how we're seeing a few companies drive big growth in the S &P 500 right now, but some investors are not worried about that concentration at all. Why is that? Yeah, I mean, a lot of it has to do with if you strip out those 10 superstars, profit growth for the S &P 500 year over year is still 10%. It's not that Micron and NVIDIA and some of these other top earning stocks are patching over a bad quarter for earnings and making it look good. It's that they're taking a solid quarter and making it look really incredible. One of the big drivers for earnings at Micron and NVIDIA is this memory shortage, right?

6:30So that's driving very large and temporary increases in profits. And again, that's something that investors say is reflected in the share prices of those stocks. Micron and NVIDIA, they have such stunning year over year growth in profits. It's like 1 ,078%, 90 % in the case of NVIDIA. One reason why investors aren't all that concerned with the concentration of the earnings growth is that most people on the Street seem to understand that the drivers of those massive increases are temporary in nature, and that's reflected in the movement of the price relative to the earnings forecast. So I think that gives analysts a lot of peace of mind.

7:13And they have said to me, hey, if you look at valuations, which is sort of how investors are pricing stocks relative to their earnings, valuations have actually come down for the S &P 500 over the course of the year. So that means that Wall Street isn't overreacting to this earnings growth. In fact, you know, they're being kind of reasonable about it. And investors aren't necessarily piling in on these stocks or chasing this rally in a kind of FOMO driven way. And so what I heard from my interviews is investors are acting relatively rational in the face of these, you know, really extraordinary earnings numbers.

7:49And that gives them peace of mind as well. You know, this conversation about the concentration of growth, I'm sure reminds some listeners about the dot-com boom and bust. So are we looking at another version of the dot-com bubble, or is this time different? Yeah, I think that's the trillion-dollar question, right, and one that a lot of people in the world of tech and finance are trying to answer right now. I will say that one key difference that came up in the course of reporting this piece is when you look back at those sort of first crop of internet-focused companies that we typically associate with the dot-com boom, they just weren't making money like this.

8:29The earnings just kind of weren't there. And I've had investors point that out to me. You know, we're talking about a different set of market leaders that could ultimately lead to a different outcome. Okay. So if you're a regular investor holding an index fund right now, should you be changing your game plan? Yeah, so I will make the disclaimer that I am not a financial advisor. I would not claim to know where the markets could go from here. But I will say that this concentration risk that we're talking about in relation to earnings growth, in relation to just how the market is made up, that conversation has been present for pretty much the entire time that we have been in this AI-driven bull market.

9:12And at any point throughout the course of that, if you turned bearish and bet against these tech stocks, you would have missed out on some pretty generational returns. So I think even the skeptics on Wall Street are keeping that in mind. That was WSGA reporter Hannah Aaron Lang. And that's it for Tech News Briefing. If you're a listener on Spotify, be sure to leave us a comment. Today's show was produced by me, Julie Chang, with supervising producer Katie Ferguson. We'll be back tomorrow with a new episode. Thanks for listening.

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