AI Capex Boom Masks Slowing S&P 500 Earnings Momentum

Goldman Sachs warns that the artificial intelligence capital expenditure boom, which accounted for nearly half of S&P 500 earnings growth this year, is unlikely to sustain its momentum into the coming fiscal year. According to the bank's chief US equity strategist, the tailwind from AI infrastructure spending will begin to fade even if total capex continues to rise, creating a significant headwind for broader market performance.

The firm’s base case suggests that S&P 500 earnings growth will slow considerably over the next two years. This deceleration is driven less by a potential AI bubble burst and more by structural shifts in semiconductor economics and the unwinding of non-operating income streams that have recently inflated corporate bottom lines.

Chip margins face cooling pressure

Semiconductor manufacturers have been primary beneficiaries of the AI buildout since late 2022, benefiting from high demand and constrained supply. However, analysts expect the rate of margin expansion to slow next year. While supply tightness may persist through 2027, the aggressive price increases that supported record profit margins are expected to moderate, exposing the S&P 500 to vulnerability from lower chip prices.

In scenarios where slowing infrastructure investment, increased supply, or technological shifts reduce semiconductor prices, S&P 500 earnings per share growth is projected to disappoint. This cooling of chip margins threatens to compromise the momentum that has powered the AI trade, reducing the direct contribution of hardware profits to overall index performance.

Private equity gains fade

A second critical factor in the earnings slowdown is the decline in non-operating income from private investments. Large technology firms have recently reported significant paper gains from these holdings, which have been booked as income but do not necessarily represent generated cash. Goldman Sachs expects this contribution to shrink substantially in the upcoming period.

The complete removal of this 'other income' category would create an eight-percentage-point drag on S&P 500 earnings growth in 2027 relative to 2026, all else being equal. This accounting shift means that even if core operating revenues remain stable, the bottom-line growth metrics will appear weaker as these transient gains disappear.

Strategic stance on infrastructure

Despite the warning on broader earnings growth, the bank maintains a bullish stance on specific AI infrastructure stocks. Earlier this year, strategists advised investors to double down on data center and hardware plays, citing the continued necessity of physical infrastructure for AI deployment. However, the latest notes indicate that while the sector remains a growth driver, its ability to single-handedly lift the entire S&P 500 is diminishing.

The divergence between continued capex spending and slowing earnings growth highlights a complex market environment. Investors must now account for the fact that the primary engine of recent outperformance is facing diminishing returns, both from hardware pricing dynamics and the loss of one-time financial gains, as reported in analysis by GN markets/earnings (en-US).