Despite a broadly strong US third-quarter earnings season, analysts have been cutting profit forecasts for companies in the S&P 500 for 2027. Bloomberg reports that concerns about a slowdown in artificial intelligence (AI) related spending, together with the potential effects of Democratic gains in the midterm elections, are driving the downward revisions.
How big are the cuts?
Bloomberg Intelligence data show analysts have reduced next-year profit expectations for four consecutive weeks. Forecasts for 2027 profit growth now stand at 20 percent, down from the roughly 30 percent growth expected for this year.
These downward revisions come even though so far more than 80 percent of the index by market capitalization have reported results that beat expectations. Earnings per share (EPS) rose 33 percent, led by energy and technology companies, surpassing the second-quarter pace of 32 percent.
Why are analysts concerned?
Bank of America strategists Savita Subramanian and Victoria Roloff said corporate guidance is generally encouraging, but noted that Democratic midterm gains could delay AI-related spending. Questions around future regulation of the sector and policies affecting data centers have added to worries about runaway AI costs, which in turn has sparked selling pressure in technology stocks.
Vivek Arya, an analyst at Bank of America, warned that if political changes lead to next-year cuts in capital expenditures (capex), profit expectations could fall further in the first quarter. BofA’s calculations suggest a 20 percent cut to AI-related investment could reduce S&P 500 EPS by as much as 8 percent.
Atif Malik, an analyst at Citigroup, highlighted additional potential bottlenecks: permitting delays, local opposition to data center construction, and caution around a new generation of cloud providers focused specifically on AI could all act as brakes on investment.
UBS strategists added that slower data center buildouts would not only hit technology firms but would ripple out to equipment manufacturers, energy providers, and even real estate and labor markets, limiting the breadth of any market advance.
Wider market implications beyond tech
Outside technology, the picture is not much brighter, particularly for companies dependent on consumer spending. While profit expectations in that sector held up surprisingly well after the outbreak of the Iran war, much of the boost from tariff refunds has faded, and 2027 forecasts for consumer-facing firms lag the broader market.
Bank of America sees inflation and interest-rate levels as the two decisive factors for whether consumer-sector companies can sustain profits.
Upcoming reports to watch
Walmart and Target’s upcoming earnings will provide more clarity on how consumers are coping with inflation and how producers of essential consumer goods are managing price pressures. Nvidia will also report next week; Citigroup’s analyst warned the bigger risk for Nvidia may not be 2027 demand (largely already booked) but the visibility into 2028 orders and the pace at which the company can fulfill its current backlog.
Conclusion
Even though recent quarterly reports have exceeded expectations across many sectors, analysts’ four-week run of downward revisions leaves the market looking for much more modest profit growth in 2027. A slowdown in AI investments, political shifts, and risks around data center permitting and construction could have broad implications for S&P 500 aggregate profits and sectoral outlooks.
This article is based on Bloomberg reporting. It does not constitute investment advice.
