This earnings season is still all about AI. That won’t last. – Crypto News

The bank sees collective S&P 500 profits for the three months ending in December rising by around 7% from 2024 levels. That is modestly shy of the 8.8% growth rate collated by LSEG, but BofA notes that upward revisions to fourth-quarter forecasts on Wall Street could see companies topping expectations and delivering an overall growth rate of around 11%. Corporate guidance is the most positive since 2021, the bank’s data suggests.

JPMorgan Chase will kick things off on Tuesday. The six largest banks on Wall Street will issue updates on the December quarter over the next three days.

Tech is still expected to deliver the vast majority of earnings growth. Profits for companies outside of both the Magnificent Seven cohort and the sector itself are only likely to increase by around 1% from a year earlier, according to BofA analysts led by Savita Subramanian and Victoria Roloff.

Looking into 2026, however, the picture appears set to change.

“Analysts expect tech earnings to outperform, but optimism in cyclicals is picking up, especially with tax refunds, stimulus talk ahead of mid-terms etc,” Subramanian and Roloff said.

Mag Seven earnings growth will likely rise from 8% for 2025 to 9% this year, the bank predicted. It said growth outside of the sector will improve from 7% to around 11%.

LSEG forecasts point to collective S&P 500 earnings for the whole of 2026 rising 15.5% from 2025 to around $313.81 a share. That level would mean stocks are trading at 22.1 times the earnings expected over the next 12 months.

Mark Malek, chief investment officer at Siebert Financial, is also looking for a change in market performance this year, although he sees the influence of tech and the AI investment boom as remaining paramount.

“2026 will be the year when we start to see the first of the weak players drop off the pull-up bar,” he said. “Additionally, many AI impostors will be revealed this year as well; the 2026 equivalents to Pets.com will not make it through to 2027.”

“The big challenge for investors is to separate the wheat from the chaff and make sure that they don’t punish the true winners,” he said.

To some degree, markets are already processing a separation between AI-related stocks with a clear path to profitability and those that are at greater risk of not being able to follow through.

Oracle, for example, has fallen more than 37% from its early September peak thanks in part to concerns tied to OpenAI, one of its biggest customers. CoreWeave, meanwhile, has fallen more than 40% from its recent all-time high, with Super Micro Computer down around 50%.

Even shares of some wildly profitable companies have fallen. The AI chip maker Nvidia, the world’s biggest stock by market value, is down around 10% from its late October peak, while Meta Platforms is down around 18%.

Tech will still be in the driver’s seat in terms of both earnings and performance, according to Wei Li, the BlackRock Investment Institute’s chief investment strategist. It simply means more earnings generation and stock performance outside of the sector.

“Consensus expectations for the magnificent seven have been revised upward to show 20% earnings growth in the fourth- quarter versus a year ago and then holding up at 19% in 2026,” she said in a note published Monday. “That compares with 6% for the other S&P 493 in the fourth-quarter and 15% in 2026.”

Those figures might suggest a healthier market heading into the new year, especially now that the economic picture is improving. Growth is proving resilient, inflation has yet to spike as a result of President Donald Trump’s tariff policies, and the labor market, while softening, has yet to worsen significantly.

Adam Turnquist, chief technical strategist for LPL Financial, is already seeing evidence of the 2025 rally moving beyond tech in 2026 The Dow Jones Industrial Average and Dow Jones Transportation Average have both posted double-digit percentage gains over the past six months.

Both indexes are cornerstones of “Dow Theory,” he said, referencing a longstanding observation that stock markets move in predictable waves tied to economic growth.

“A key principle of ‘Dow Theory’ is confirmation, requiring the industrial and transportation averages to move in tandem,” Turnquist said. They have done so amounts to a “buy signal” that has historically led to S&P 500 gains of between 11% and 14% over the subsequent 12 months, he said.

Eric Clark, portfolio manager at LOGO ETF, is also bullish, and not based on tech gains. “The market should be more broad-based (this year), and we’re already seeing that with small- and mid-cap stocks performing better than tech,” he said.

“In 2026, I think the average stock will outperform the market, and the real returns will come from outside the S&P 500,” he added. “For now, the crowded trade in tech has already started to unwind.”

Write to Martin Baccardax at martin.baccardax@barrons.com