Why U.S. corporate profits are surging
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U.S. corporate profits are surging as the AI boom broadens out, lifting companies outside Big Tech.
Why it matters: AI investment is boosting the economy and making the U.S. more reliant on a boom that could eventually peter out.
Driving the news: New data Thursday showed profits of domestic companies captured 12.2% of U.S. gross domestic income in the first quarter, which is the highest since the early 1950s.
What they're saying: "The U.S. profit cycle – broadening, accelerating, and underpinned by the most ambitious infrastructure investment program in decades – remains the dominant force in global markets and the strongest argument for staying invested," Barclays analysts wrote in a report Thursday.
Between the lines: This is largely a function of scale of the boom, which ranks among some of the great bonanzas in the history of American capitalism, from the railroad building mania of the 19th century to the energy boom of the 1980s and the vast sums spent to rewire the world for the internet in the 1990s.
- JPMorgan corporate bond analysts recently estimated total capital expenditures on AI will grow to $5.5 trillion through 2030, up from their previous estimate of $5.1 trillion produced in November.
- And Barclays analysts say aggregate AI infrastructure spending is on track to hit $1 trillion by 2027.
- "A trillion-dollar build-out does not stay inside data centers. It flows into power generation, electrical infrastructure, construction, cooling systems, and the labor required to install and maintain all of it," they wrote. "For as long as this cycle runs, it acts as a structural tailwind to earnings, employment, and GDP growth."
The latest: Just Thursday, massive profits and strong guidance from American memory chip giant Micron Technology rippled throughout the market, banishing some of the AI jitters that cratered chip stocks earlier in the week.
- Micron jumped almost 16%, pulling stocks like Sandisk and Western Digital up as well.
Yes, but: There were also some pockets of market softness suggesting skepticism that AI can simultaneously lift all economic boats.
- Apple shares tumbled after announcing price increases for laptops and tablets aimed to offset the AI-driven surge in the cost of data storage and memory.
- Other consumers of memory like AI server makers Dell and Hewlett-Packard Enterprise, as well as hyperscalers like Microsoft and Oracle, dropped sharply too.
The big picture: Hovering above it all is a question about the durability of this investment cycle. Previous booms — railroads, telecom, oil and gas, etc. — all eventually imploded, despite the real benefits they delivered to the economy.
- Why would this time be different? And what would happen to an increasingly AI-oriented economy in such an event?
What we're watching: Second-quarter results may provide some clue. They start rolling in when JPMorgan Chase kicks off the season on July 14.
- Analysts expect the S&P 500 will grow earnings by a strong 21.3% for the three months that end on June 30.
The bottom line: That's a high bar, but the AI boom hasn't disappointed investors — yet.
