BofA increases its forecast for S&P 500 earnings due to the AI wave

The 2024 S&P 500 earnings per share (EPS) estimate of $250 was raised by Bank of America strategists from the $235 initial projection.

With this new estimate, Wall Street's biggest top-down projection to date, a year-over-year (YoY) upside of over 12% is implied.

Analysts released a statement on Tuesday stating, "Companies delivered another strong beat in 4Q and our economists raised their 2024 GDP forecast to +2.7% YoY (vs. +1.4% in November)".

According to BofA, its top-down framework shows that EPS expanded by 3 percentage points less in 2023 than anticipated; however, this difference is anticipated to be made up in 2024.

In addition, they unveiled their projected EPS for 2025, which is $275.

According to the bank, the so-called hyperscalers - Microsoft, Amazon, Alphabet, and Meta - will devote $180 billion to capital expenditures in 2024, a 27% YoY increase.

About 80% of their projected YoY profit growth is accounted for by this $38 billion increase in capital expenditures, suggesting that these businesses are starting a reinvestment cycle.

Analysts pointed out, “History suggests companies in reinvestment cycles underperform, but we see a potential virtuous cycle forming from AI investments”.

(Sources: investing.com, reuters.com)