Market Outlook: AI spending drives U.S. earnings despite slower GDP
U.S. first-quarter GDP growth fell to 1.6% annualized, below expectations, as weaker consumer spending weighed on the economy, while AI infrastructure investment sustained corporate earnings and market performance. Analysts at Citi Research emphasize that AI-related spending remains the primary driver of U.S. earnings momentum, with traditional sectors like consumer and cyclical industries under pressure due to lower forward expectations.
The U.S. economy grew at a slower-than-expected 1.6% annualized rate in the first quarter, down from the forecasted 2%, according to newly released GDP data. The weaker-than-anticipated growth was largely attributed to declining consumer activity, raising concerns about broader economic resilience. Drew Pettit, director of U.S. equity strategy at Citi Research, noted that AI infrastructure spending has become a key driver of U.S. corporate earnings, supporting market performance despite the sluggish GDP reading. Pettit highlighted that AI-related investments, particularly in tech and hyperscalers like Google and Meta, are sustaining growth in an otherwise uneven economic landscape. Without AI-driven spending, U.S. GDP growth would likely have stagnated or even contracted, he said. Meanwhile, traditional sectors such as consumer goods and cyclical industries are showing signs of weakness, with companies revising downward their earnings outlooks despite strong first-quarter results. Investors remain focused on large-cap technology and AI-linked stocks, which continue to outperform due to their pricing power and earnings momentum. Smaller-cap and broader cyclical stocks, however, are underperforming as uncertainty persists over inflation and interest rate expectations. Pettit suggested that the market may remain concentrated in secular growth areas like tech and AI until macroeconomic conditions become clearer. Hyperscalers, including major tech firms, are still generating returns on their cash investments, though the efficiency of capital expenditures has declined due to rising costs for memory, servers, and infrastructure. Despite heavy spending on AI infrastructure, these companies continue to find ways to optimize cash flow, ensuring sustained growth in the sector. The outlook for AI-driven earnings remains robust, though broader economic concerns linger.
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