Barclays: US third-quarter earnings broadly improve as AI giants’ misses trigger defensive rotation

Why have AI giants’ misses not changed the overall earnings trend?

As of the report’s cutoff, 308 of the 502 companies in the S&P 500 had reported third-quarter results. Of those reporting, 83% beat earnings-per-share expectations, above the previous week’s 80% and the ten-year median of 79%.
Combining reported results with estimates for companies yet to report, the index’s blended third-quarter earnings-per-share growth rose to 29.8% year on year, from about 28% the previous week; revenue growth on the same basis was 12.2% year on year. Most sectors’ earnings growth exceeded their respective ten-year medians.
The divergence remains pronounced: the technology sector’s blended earnings per share grew 65.5% year on year, above its ten-year median of 17.2%; communication services grew just 3.3%, below its ten-year median of 8.8%. Barclays noted that results from Alphabet and Amazon weighed on the communication services sector’s performance.

Barclays noted that earnings misses at some important AI companies have heightened market concerns: capital expenditure continues to expand, while free cash flow and margins are under pressure.
Alphabet’s chief financial officer said, by way of example, that the company must first stock up on TPU systems and pay cash, recovering the funds only after delivery and invoicing customers. Revenue from some system sales has already been recognized, and the company expects more revenue to be recognized in 2027.

The market’s consensus S&P 500 earnings-per-share estimate for 2027 continued to edge up to 423 dollars, 14.6% above the consensus forecast of 369 dollars for 2026; technology and energy were the main drivers of upward revisions to 2027 earnings estimates.
Meanwhile, last Friday’s sell-off wiped out all of the S&P 500’s gains since before earnings season began, leaving the index lagging its typical earnings-season performance. Concerns about AI and interest rates prompted a shift into defensive stocks and stocks outside big tech.

Barclays said the technology sector trades at roughly 18 times earnings based on expected earnings per share over the next 12 months, a relatively low level for the past decade. Continuing upward revisions to earnings estimates alongside falling stock prices provide the valuation backdrop for the bank’s assessment of potential opportunities.
Midterm elections also inform its assessment: in the 12 months following nine historical midterm elections, the technology sector outperformed the S&P 500 eight times, with average excess returns of 14.5%. Barclays believes that even if Democrats control both houses of Congress, divided government will persist, benefiting the stock market.