Quick Read
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SPY is up 13% this year as earnings growth outpaced valuation compression, with the S&P 500’s forward P/E falling from 22 to 19.
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Hyperscaler capex hits $1.1 trillion in 2027, but growth drops from nearly 100% to 37%, shrinking revenue gains for chipmakers and equipment suppliers.
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Mike Wilson calls it a classic mid-cycle transition: 40% of Russell 3000 stocks have dropped 20% since June while the index holds near highs.
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Corporate America is having one of its best profit years on record. S&P 500 earnings are expected to rise 35% in 2026, the fastest pace since 2021. Analysts tracked by LSEG IBES expect growth to drop to 15% in 2027, according to Reuters. The economy is returning to a normal pace, and stock prices have already started to correct.
Why 15% Growth Will Still Feel Like a Slowdown
Government data show how big the boom has been. The Commerce Department reports that total U.S. corporate profits reached a $4.7 trillion annual rate in the second quarter, 20.8% higher than a year earlier. Manufacturing profits rose to $1.05 trillion from $812 billion just one quarter before. Much of that came from factories supplying chips, servers, and power gear for data centers.
Results that strong are hard to top. “We’ve had great earnings. The bad thing is the comparisons are going to be very difficult next year,” Walter Todd, chief investment officer at Greenwood Capital, told Reuters. Barclays strategists note that 15% would still top the 10% median annual growth rate of the past 35 years.
AI Spending Keeps Rising, but More Slowly
Five hyperscalers are expected to spend just over $800 billion this year and $1.1 trillion in 2027. The growth rate drops from nearly 100% to 37%. For chipmakers and cooling-equipment suppliers, smaller budget increases mean smaller revenue gains (we profiled seven of the power, cooling, and networking names behind that expansion in a free report you can grab here).
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Interest rates make this harder. The Federal Reserve raised rates by 25 basis points in September, and Chair Kevin Warsh indicated that he will keep fighting inflation. Higher borrowing costs make companies less willing to fund AI buildouts with debt. They can also cool household spending, which grew at a 3.8% rate in the second quarter.