AI-focused tech giants are entering a 'virtuous cycle' of spending that will see their profits explode, BofA says

• A virtuous investment cycle sparked by AI is set to drive S&P 500 profits to record highs, according to Bank of America.
• The bank raised its 2024 and 2025 S&P 500 earnings per share estimates to $250 and $275, respectively.
• Corporate investments in AI technologies will eventually spill over into utilities as electricity demand rises, BofA said.

The stock market is about to enter a "virtuous investment cycle" that leads to record corporate profits, according to a Tuesday note from Bank of America.

Strategist Savita Subramanian said corporate investments in artificial intelligence will spark a wave of spending across different sectors, which will ultimately be a tailwind for S&P 500 earnings per share.

Subramanian raised her 2024 S&P 500 earnings estimate to $250 per share from $235, representing a record high on Wall Street and well above the average consensus estimate of $235. If Subramanian's estimate proves accurate, it would represent a 12% year-over-year jump in corporate profits.

For 2025, Subramanian issued an S&P 500 earnings per share estimate of $275, which would represent year-over-year growth of 10% from her 2024 forecast.

The crux of the stock market's latest rally has centered on profit growth following better-than-expected fourth-quarter earnings results, and Subramanian thinks there will be record profits in the future as AI technologies are more broadly adopted.

"We see a potential virtuous cycle forming from AI investments. Semis and networking are the most obvious beneficiaries, but increased power usage and the physical build-out of data centers will lead to more demand for electrification, utilities, commodities, etc," Subramanian said.

Much of the initial investments are coming from the mega-cap hyperscalers like Microsoft, Amazon, Alphabet, and Meta. As a whole, these four companies are expected to spend $180 billion on capital expenditures this year, which represents year-over-year growth of 27%.

"The $38B YoY increase in capex of represents ~80% of their expected earnings growth YoY - i.e., they're entering a reinvestment cycle," Subramanian explained.

The combination of a resilient economy, productivity gains from AI, and a surge in domestic investments should ultimately help boost corporate profits, and therefore the stock market.

Subramanian raised her year-end S&P 500 price target to 5,400 last week, representing potential upside of 5% from current levels.