During the U.S. earnings season, analysts' focus on AI is spreading to stocks beyond tech giants

During the fourth quarter earnings season in the United States, artificial intelligence is becoming the focus of analysts' attention, and this interest has spread from tech giants to a broader range of S&P 500 constituent companies, raising their earnings expectations for these companies.On February 10, an analysis by Morgan Stanley strategist Michael Wilson, cited by Bloomberg, showed that the number of mentions of AI applications during fourth quarter earnings call reached a historic high. While the software industry still leads in overall mentions, financial, media, and entertainment companies are also frequently appearing in discussions. Before mid-2024, Wilson was one of the most pessimistic about U.S. stocks, but now he states:“The productivity boost brought by AI is the ‘key structural catalyst’ for my optimistic view on software, finance, and consumer service industries such as hotels, restaurants, and leisure.”Data shows that the AI boom has driven the annual increase of the U.S. benchmark stock index by more than 20% over the past two years. However, most of the gains are concentrated in the "seven giants" of U.S. stocks.Although they have performed well in terms of earnings growth in 2023 and 2024, analysts expect that other constituents of the S&P 500 will catch up with this growth pace in the coming quarters. The profit growth of the "seven giants" is expected to slow to less than 30% in the fourth quarter, down from the peak of 57% in the same period of 2023. Meanwhile, the earnings of the remaining companies, the "S&P 493," are expected to surge by 8.5% during this reporting period, compared to a decline of 1.7% in the same period last year.Goldman Sachs strategist David Kostin also believes that the superior earnings growth and returns of the "seven giants" relative to the S&P 493 will narrow by 2025:“From the perspective of earnings per share, the gap between tech giants and the other 493 stocks narrowed to 19 percentage points in the fourth quarter, the smallest gap since early 2023. Consensus expectations indicate that this gap will further narrow—falling to 6 percentage points in 2025 and 4 percentage points in 2026.”