U.S. firms brace for gentler earnings growth even as AI investment steals the spotlight

09 October 2025

As the third quarter earnings season approaches, analysts expect a softer performance across U.S. corporations though beneath the surface the rising bets on artificial intelligence are reshaping expectations about where value might emerge.

According to forecasts from LSEG analysts, the S&P 500 companies are projected to report an average earnings increase of 8.8 percent year on year for Q3. That represents a step down from the more robust gains above 13 percent reported in each of the first two quarters of 2025. While that slowdown may draw attention, observers expect that many businesses will still outperform those standards particularly where AI-driven growth is tangible.

One of the major headwinds cited is the rising burden of tariffs. Customs duties have surged about 33 percent year to date, reaching roughly $93 billion a cost that could pressure margins in sectors with tight cost structures. Nonetheless, many companies appear to be holding margins steady despite macro pressure, and consensus estimates suggest sales for S&P 500 constituents jumped about 5.7 percent over the year.

What is truly capturing investor imagination is the allocation of capital toward AI. The so-called “Magnificent 7” technology firms those seen as the leading AI playmakers are expected to deliver standout earnings, buoyed by aggressive infrastructure spending, compute cycles, and cloud commitments. Many believe that in this earnings season the narratives accompanying AI capital expenditure (capex) will matter as much as raw results.

Yet the thinking among market watchers is becoming more cautious. Some warn that although AI spending can fuel growth narratives, the real test will be whether these investments yield sustainable returns. Anthony Saglimbene, chief market strategist at Ameriprise, noted that investors are growing more skeptical of how quickly that capital will pay off.

Valuations in big tech and growth stocks already reflect optimism. The S&P 500 now trades at about 23 times forward earnings, markedly above its 10-year average of roughly 18.7. That multiple suggests that much of the future is being priced in today, raising concerns over how much downside is baked into expectations.

Amid this backdrop, the blackout of federal economic data caused by the ongoing government shutdown compounds uncertainty. With agencies like the Bureau of Labor Statistics and the Bureau of Economic Analysis paused, investors have fewer conventional indicators to lean on. That has elevated the weight placed on corporate guidance and commentary during earnings calls.

Still, some financial institutions project cautious optimism. Goldman Sachs, for example, anticipates most companies will hold their margins steady in Q3 despite tariff headwinds. It also expects a rebound in investment banking earnings to bolster larger U.S. bank results.

Beyond the numbers, the deeper narrative may be how the relationship between AI spending and profit generation evolves. For now, markets are rewarding commitment to AI, even when direct returns remain speculative. But in an environment where valuations are rich, the bar for execution is high. If enterprises fail to translate investment into durable advantage, capital flows could shift fast.

In the coming weeks, as quarterly reports unfold, all eyes will be on how CEOs frame their AI bets, whether guidance signals conservatism or aggression, and which industries or individual companies defy the broader trend by delivering both growth and discipline.