LIVE MARKETS-Q3 results show US profit growth strong, but no longer accelerating

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Q3 RESULTS SHOW US PROFIT GROWTH STRONG, BUT NO LONGER ACCELERATING

With the third-quarter reporting period now more than halfway over for S&P 500 companies, results for the season underscore a challenge facing equity investors: that while earnings growth has been strong, it is no longer accelerating, according to Goldman Sachs strategists.

Third-quarter growth is now estimated at about 33% year-over-year, they say, but would "mark an end to the pattern of acceleration that has characterized the last few quarters."

In addition, the rate of upward revisions has slowed, they write.

"While companies with estimate upgrades continue to outnumber those with downgrades, earnings revision breadth has moderated relative to the last several months. In particular, analysts have trimmed profit margin estimates for many companies alongside rising energy prices," they say.

The results also support the view that while AI investment spending will continue to grow, the growth rate of AI capital expenditures is peaking. They note that "analyst estimates show earnings growth for S&P 500 AI infrastructure stocks peaking at 80% this quarter and slowing to roughly 40% in 2027."

At the same time, high investor expectations for cloud revenue growth have created a "high bar for share prices."

Companies such as Alphabet GOOGL.O saw their share prices fall following quarterly reports.

LSEG data shows estimated year-over-year earnings growth for S&P 500 companies at 31.6% as of Friday, up from 30.6% at the start of October. Adjusted second-quarter S&P 500 earnings growth, which excludes mark-to-market gains for Alphabet and Amazon AMZN.O, was about 35%, according to Tajinder Dhillon, head of earnings and equity research at LSEG Data & Analytics.

(Caroline Valetkevitch)

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