A report released by Bank of America on Tuesday stated that the US stock market is about to enter a "virtuous investment cycle", which will bring record breaking corporate profits, all thanks to the wave of artificial intelligence (AI).
Bank of America strategists led by Savita Subramanian have stated in their latest report that corporate investments in artificial intelligence will trigger a wave of spending across different industries, ultimately becoming the driving force behind the earnings per share of the S&P 500 index.
Subramanian has raised her earnings per share expectations for companies in the S&P 500 index for 2024 from $235 to $250, setting a new high on Wall Street and far exceeding the average expectation of $235. If her estimate is proven to be accurate, then it will mean a 12% year-on-year increase in corporate profits.
She expects the earnings per share of S&P 500 index constituent stocks to be $275 in 2025, a 10% year-on-year increase from her forecast for 2024.
The key to the recent rebound in the US stock market was profit growth after better than expected performance in the fourth quarter. Subramanian believes that with the wider application of artificial intelligence technology, record profits will emerge in the future.
"We see a potential virtuous cycle of investment in artificial intelligence. Semiconductors and networks are the most obvious beneficiaries, but the increase in electricity usage and the physical construction of data centers will lead to more demand for electrification, utilities, commodities, and more." Strategists write.
Most of the initial investments come from super large enterprises such as Microsoft, Amazon, Google's parent company Alphabet, and Meta. Overall, the capital expenditures of these four companies are expected to reach $180 billion this year, a year-on-year increase of 27%.
Subramanian explained, "Capital expenditures increased by $38 billion year-on-year, which is equivalent to about 80% of the expected year-on-year growth in profits, meaning they are entering a reinvestment cycle."
She concluded that a resilient economy, productivity improvements brought about by artificial intelligence, and a surge in domestic investment, combined with these factors, should ultimately help boost corporate profits and thus boost the stock market.
Last week, Subramanian raised the year-end target price of the S&P 500 index to 5400 points, which means the index may rise by more than 4% from its current level.