S&P 500 earnings per share continue to beat expectations. Q3 earnings per share are on track to rise to a new record high. They are driving the S&P 500 stock price index to new record highs. The Magnificent-7 are leading the way higher on both fronts. As a result, the S&P 500 market-weight index continues to outperform the equal-weight index (chart).
On Friday, Amazon provided the latest amazing earnings report from the Magnificent-7. Amazon shares jumped 9.6% after the online retail giant reported that AWS, its cloud computing unit, saw revenue increase 20% in Q3. CEO Andy Jassy said that AWS is "growing at a pace we haven't seen since 2022" and that AI and core infrastructure are experiencing "strong" demand.
This confirms our view that AI is essentially a high-powered app with myriad uses, which is significantly increasing demand for cloud computing. The profits aren't so much in monthly fees for AI software (i.e., large language models, or LLMs), but in providing cloud capacity in data centers to run the models. The Digital Revolution, which started in the 1960s, is all about processing more data, more quickly and more cheaply. As a result, more and more data are being processed. There is no limit to the supply of data. So the outlook for the Digital Revolution is to “infinity and beyond”!
That's clearly a very bullish outlook for earnings, assuming that the demand for processing data is as open-ended as we suggest. That is a bet that AI will deliver on the promise of boosting the productivity and earnings of companies that are the customers of the cloud providers. The stock market is currently discounting this version of our Roaring 2020s scenario.
As for where earnings stand now, S&P 500 companies’ aggregate forward earnings per share rose to yet another record high during the week of October 30 of $299.61 (chart). It is nearly at the $300 we have been predicting it would reach by the end of this year; clearly, the year-end level will be higher than that. We expect forward earnings to rise to $350 per share by the end of 2026.
