To The Moon

Wall Street is expecting a strong earnings season, but there is a detail investors should not overlook: much of the expected profit growth is coming from a surprisingly small group of companies.

Analysts expect S&P 500 companies to deliver approximately 30% earnings growth in the third quarter compared with a year earlier. According to the figures cited in the report, Nvidia and Micron alone account for 34% of that expected growth, while just 10 companies contribute roughly two-thirds.

That raises an important question: Is the US stock market experiencing broad-based earnings growth, or is it becoming increasingly dependent on the AI boom?

1. AI is driving earnings expectations

Nvidia and Micron are benefiting from demand for AI computing and memory infrastructure. Broadcom and Meta are also among the companies contributing to the earnings growth story.

The investment case is straightforward. Businesses are spending heavily on AI chips, data centres and supporting infrastructure, creating opportunities for companies supplying the technology.

As long as spending continues and customers generate returns from their investments, earnings could remain strong.

However, high expectations leave less room for disappointment. If companies report slower growth or reduce their outlooks, valuations could come under pressure even when earnings remain positive.

2. The concentration risk goes beyond share prices

When a small number of companies drive a large share of earnings growth, the broader market becomes more sensitive to their results.

If Nvidia delivers strong results, confidence in AI spending could improve. But if major AI companies cut capital expenditure, the effects could spread across semiconductor manufacturers, memory suppliers, data-centre operators and other businesses connected to the investment cycle.

The risk is not limited to individual stocks. Because large technology companies carry substantial weight in major US indices, weakness in a few market leaders can also affect index performance.

3. What about companies outside AI?

A concentrated earnings boom does not necessarily mean the rest of the market is performing poorly. Individual companies can still deliver solid results across healthcare, consumer staples, financials and industrials.

However, investors need to distinguish between a rising index and a broadly improving market.

If earnings growth gradually spreads to more sectors, that could provide a stronger foundation for the market. If growth remains concentrated, the market may be more vulnerable to disappointment among its biggest contributors.

4. What investors should watch next

Three developments deserve attention:

• Earnings guidance: Are Nvidia, Micron and other major contributors meeting expectations and maintaining their outlooks?

• AI spending: Are customers generating enough revenue from AI to justify continued infrastructure investment?

• Earnings breadth: Are more companies and sectors beginning to contribute meaningfully to profit growth?

These indicators may reveal more about the market’s underlying strength than the headline S&P 500 earnings growth figure alone.

My takeaway

The AI boom is generating real business opportunities, but strong aggregate earnings figures can hide an uneven distribution of growth.

The key question is whether today’s AI leaders can sustain their earnings momentum while the rest of the market catches up.

If earnings growth broadens, the market may become less dependent on a handful of companies. If it does not, disappointing results from just a few major players could have an outsized impact on market sentiment.

A strong earnings season matters, but the breadth and sustainability of that growth matter just as much.

For discussion purposes only.