Earnings, Data Centres, and Judgement Day

Nearly two-thirds of S&P 500 companies have now reported earnings, and 83% have beaten expectations, which is comfortably above the long-term average. Aggregate earnings growth for those that have reported stands near 8.5%, whilst the Magnificent Seven fared even better. Analysts now forecast full-year 2025 earnings growth of 17.1%.

Is that enough to justify current valuations? There is little doubt that the likes of Nvidia, Meta, and the rest of their tech behemoth friends are not cheap. On the other hand, it’s hard to call it a bubble when you’re generating $403 billion in profits. That’s a far cry from the dot-com era, when most “innovators” had negative earnings.

For investors fretting over adding yet more exposure to Amazon and Alphabet when buying the S&P500 index, consider how far they are ahead in the grand scheme of things. Over the past five years, these firms have poured more than $800 billion into R&D, primarily focused on AI. That’s roughly double the combined total of the rest of the world, including China.

This isn’t just about clever algorithms and self-driving cars. Much of that spending is directed toward physical infrastructure and data centres, the new cathedrals of the digital age. And again, it’s not even close. The US boasts 5,426 data centres, while Germany, the next closest, has 529. Judgment Day (Terminator, 1984) may yet indeed come to pass, but for now, it’s good for earnings.