In today's tumultuous global economic landscape, the fourth quarter earnings season in the United States has emerged as a critical barometer of economic health, drawing considerable attention from analysts and investors alikeAt the heart of this year's earnings discussions is artificial intelligence (AI), which has rapidly gained traction and is now transcending its traditional boundaries within the tech sector to make waves across the broader S&P 500 indexThe implications of AI's rise are profound, with analysts revising their earnings expectations for companies involved in AI, thereby reshaping the dynamics of American capital markets.

On February 10, Morgan Stanley strategist Michael Wilson shared insights grounded in robust market research and data analysis, shedding light on the pivotal role AI is playing in this earnings seasonHe highlighted that mentions of AI applications during fourth-quarter earnings calls have reached unprecedented levelsThe software sector, closely intertwined with AI technology, continues to dominate these discussions

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However, it's noteworthy that sectors such as finance, media, and entertainment are also increasingly engaging in AI-related conversationsThis trend signals a significant shift; AI’s influence is no longer confined to the tech realm but is now a critical driver of innovation and growth across various industries.

Wilson, who had previously harbored a dramatically pessimistic view on the U.S. stock market until mid-2024, has undergone a substantial pivot in his outlookHe articulately insists that "the productivity boost brought by AI is a key structural catalyst behind my optimistic stance on software, finance, as well as consumer service sectors such as hotels and restaurants." With AI technology at the helm, the software industry is developing smarter, more efficient applications that enhance user experience and improve productivityMeanwhile, the finance sector is leveraging AI for precise risk assessments and intelligent advisory services, streamlining operations, and reducing costsAdditionally, consumer service industries are using AI to enhance customer service, optimize supply chain management, and elevate service quality and efficiencyThis surge in AI-motivated potential unfolds a plethora of opportunities for investors looking for fertile ground.

Reflecting on the last two years, the impact of the AI trend on the U.S. capital markets has been nothing short of astonishingThis trend has propelled the benchmark U.S. stock index to annual gains exceeding 20%, establishing itself as a pivotal force behind market ascensionHowever, these gains have predominantly concentrated among seven major technology companies captured under the moniker "the Magnificent Seven" — comprising Apple, Microsoft, Google, Amazon, NVIDIA, Meta, and TeslaThese giants have solidified their positions early in the AI arena, capitalizing on their technological prowess, massive user bases, and substantial financial resources to reap substantial rewards.

Despite the outstanding performance of these seven tech titans in profit growth through 2023 and 2024, the ever-evolving market is known for its unpredictability

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Analysts, armed with thorough research on market dynamics and individual firm fundamentals, predict that earnings from other components of the S&P 500 will catch up over the next few quarters, gradually narrowing the growth gap with "the Magnificent Seven." Specifically, projections indicate that the profit growth of these seven companies will slow to below 30% in the fourth quarter, a notable decline from last year's peak of 57%. Conversely, the other 493 S&P components (referred to as "S&P 493") are anticipated to witness robust growth, with earnings soaring by 8.5% compared to a decline of 1.7% in the same period last year, starkly illustrating the subtle yet significant shifts in market structure.

Goldman Sachs strategist David Kostin corroborates this market trend, offering a longer-term perspectiveHe argues that the superior earnings growth and returns of "the Magnificent Seven" relative to the S&P 493 will shrink further by 2025. In the fourth quarter, the disparity in earnings per share between these tech giants and the other 493 stocks has contracted to a mere 19 percentage points, marking the narrowest gap since the beginning of 2023. Market consensus suggests that this gap will continue to diminish, potentially dropping to 6 percentage points in 2025 and further down to 4 percentage points by 2026. This shift indicates that, with the proliferation and application of AI technology, a broader range of companies will stand to benefit, leading to a more balanced competitive landscape and a gradual leveling of developmental disparities between industries.

The seminal role of AI in the current U.S. earnings season is indisputable; it has not only transformed analysts' expectations regarding company profits but has also fundamentally altered the landscape of American capital markets

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