Bank of America raises S&P 500 earnings estimates on back of AI wave By –

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The new estimate, which marks the highest top-down forecast on Wall Street, implies a year-over-year (YoY) upside of roughly 12%.

“Companies delivered another strong beat in 4Q and our economists raised their 2024 GDP forecast to +2.7% YoY (vs. +1.4% in November),” strategists said in a Tuesday note.

“The 1.3ppt increase in GDP forecast translates to a 5ppt boost to EPS growth, all else equal. 2023 was a transition year for Corporate America, and companies have now adjusted to the new higher rate and tepid demand environment,” they added.

BofA said its top-down framework indicates that EPS grew 3 percentage points less than expected in 2023, though this shortfall is expected to be recovered in 2024.

Furthermore, they have also introduced their EPS forecast for 2025, setting it at $275.

The bank projects the so-called hyperscalers, including Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), and Meta (NASDAQ:META), to allocate $180 billion towards capital expenditures in 2024, marking a 27% year-over-year (YoY) increase.

This $38 billion YoY rise in capital expenditures accounts for approximately 80% of their anticipated YoY earnings growth, indicating that these companies are entering a cycle of reinvestment.

“History suggests companies in reinvestment cycles underperform, but we see a potential virtuous cycle forming from AI (artificial intelligence) investments,” strategists noted.

“Semis and networking are the most obvious beneficiaries, but increased power usage and the physical build-out of data centers will lead to more demand for electrification, utilities, commodities, etc,” they added.

“Productivity gains from AI and domestic investments are also a major tailwind.”

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