S&P 500 Profit Growth Seen Slowing Sharply in 2027

The outlook for America’s biggest listed companies is turning from exceptional growth to a test of durability. S&P 500 earnings are projected to increase 35% in 2026, the strongest annual pace since 2021, before growth slows to 15% in 2027, according to reporting by 24/7 Wall St., which cited LSEG IBES estimates reported by Reuters.

That projected slowdown would not represent a collapse in profits. Barclays strategists note that 15% growth would still exceed the index’s median annual increase of 10% over the past 35 years. The concern is that companies and investors are moving from unusually favorable comparisons to a more demanding period, while share prices remain dependent on a relatively small group of businesses.

The shift is already visible in the market. The S&P 500’s forward price-to-earnings ratio has fallen to 19 from 22 in January. Shares tied to artificial-intelligence infrastructure have also been repriced: their forward earnings multiple dropped from 32 in April to 22. Even with that compression, the SPDR S&P 500 ETF Trust is up 12.86% this year because earnings have expanded faster than valuations have contracted.

A powerful profit cycle

The profit gains extend beyond the index. Commerce Department figures cited by 24/7 Wall St. show that total US corporate profits reached an annualized $4.7 trillion in the second quarter, 20.8% above the level a year earlier. Manufacturing profits climbed to $1.05 trillion, compared with $812 billion only one quarter earlier.

A significant portion of that manufacturing strength has come from companies supplying the infrastructure needed for data centers. Chip producers, server makers and providers of power equipment have benefited as technology companies expand their computing capacity. The expansion has created a strong earnings environment for businesses positioned around artificial-intelligence investment.

The scale of spending planned by the largest cloud-computing companies illustrates both the opportunity and the risk. Five hyperscalers are expected to spend slightly more than $800 billion this year and $1.1 trillion in 2027. Although the latter figure would be higher in absolute terms, the annual growth rate would fall from almost 100% to 37%.

That moderation matters for suppliers. A smaller increase in data-center budgets could translate into slower sales growth for chipmakers and companies providing cooling, networking and electrical equipment. The sector does not necessarily need spending to decline to feel the effect; a reduction in its rate of increase could be enough.

Interest rates add pressure

Financing conditions provide another challenge. The Federal Reserve increased interest rates by 25 basis points in September, while Chair Kevin Warsh indicated that efforts to contain inflation would continue. Higher borrowing costs can make companies more cautious about using debt to fund large artificial-intelligence projects.

The same conditions may weigh on consumers. Household spending grew at a 3.8% rate in the second quarter, but more expensive credit can reduce the willingness of households to spend and of businesses to invest. That creates a potential restraint on the broader economy just as corporate earnings face harder comparisons.

Morgan Stanley chief US equity strategist Mike Wilson described the environment as a mid-cycle transition, according to the article. More than 40% of Russell 3000 companies have dropped at least 20% since June, even though the index remains close to record highs. The divergence suggests that the headline performance of the broader market conceals weakness among many individual stocks.

For retirement savers, that concentration can be important. Investors in 401(k) plans may see strong overall index returns while relying increasingly on a limited number of companies to support those results. If the leading firms fail to deliver the expected earnings growth, the effect could spread beyond the businesses directly involved in artificial-intelligence infrastructure.

The next major test

Third-quarter earnings reports, due to begin in the coming weeks, are expected to provide the next evidence about the market’s direction. Investors will pay particular attention to the 2027 capital-spending plans of the hyperscalers.

If those companies confirm budgets near $1.1 trillion, the 15% earnings-growth forecast may remain credible and the recent adjustment in valuations could prove sufficient. A budget reduction by even one major spender would create a more immediate problem for chip and equipment suppliers, whose revenues are closely linked to data-center construction.

Michael Arone of State Street Investment Management said the central issue is the size of the slowdown. That question now sits at the heart of the market’s outlook. Corporate profits are coming off a remarkably strong period, but maintaining investor confidence will require companies to show that the artificial-intelligence investment cycle can keep producing returns after its growth rate moderates.