S&P 500 Earnings Soar to Record High Amid AI Boom

The stock market has been showing signs of a bubble, with high valuations and concerns about circular financing in the AI industry. However, new data suggests that the gains in the market are warranted, and the AI boom is generating real wealth.

Earnings per share for the S&P 500 are expected to grow by 50.4% this quarter, which would be its fastest pace since Q2 2021. This growth is driven by the AI infrastructure build-out, with profits at chip companies such as Nvidia and Micron surging due to increased demand for AI.

The current earnings boom is unique in that it's not a rebound from a previous drop in earnings, unlike past instances in 2009-10 during the financial crisis and 2003 in the rebound from the dot-com bust. Instead, S&P 500 earnings were already at a record level before this year.

The period of time that seems to be the best analog for the current tech-driven infrastructure is the beginning of the dot-com boom in 1994. In that year, internet infrastructure demand was starting to ramp higher, and demand for products from companies like Cisco, Intel, MCI Worldcom, and Micron began to take off.

Stocks have already jumped from the AI boom, so at least some of the 50% earnings surge this quarter is priced in. However, the earnings boom also seems to justify the high valuations in the market as the S&P 500 now has a forward P/E of just 20.