Big Tech’s Ability to Deliver on AI Profits Looms Over S&P 500

The fate of the S&P 500 is increasingly resting on whether a handful of the biggest technology companies can parlay artificial intelligence investments into even higher profits.

Seven firms including Microsoft Corp. and Nvidia Corp. have driven about three-quarters of the index’s gain this year, in a rally stoked by an investor obsession with AI’s potential to disrupt vast parts of the economy. Valuations are high, with the companies’ shares trading at an average of 32 times earnings. Pressure is mounting on companies to deliver on some of the earnings hope embedded in their ever-rising stock prices.

“We’re getting closer to the moment when the companies that are claiming AI-related profits will have to start showing them,” said Mark Lehmann, chief executive at JMP Securities. “I am not calling for an expansion of multiples next year; the returns will have to come from companies actually turning in better profits.”

The companies just delivered record profits of $99 billion in the third quarter. Now more is being asked of them, testament to how high the stakes have become for the stocks that have added around $5 trillion to the market’s value this year. At nearly 30% of the S&P 500, they have more sway over the benchmark than ever before.

Nvidia Corp. has been the engine powering much of the group’s profit growth this year. It’s the only megacap that has delivered a significant jump in results as a result of demand for AI. The chipmaker is projected to generate about $28 billion in profit this year, up from about $4.4 billion last year. Most of the gains stem from sales of so-called accelerator chips used to train the large-language models that underpin applications like ChatGPT.

Big Tech Profit Growth is Poised to Slow