Wall Street Expects the S&P 500's Earnings Growth Rate to at Least Get Cut in Half in 2027. Should Investors Be Worried?

The S&P 500 (SNPINDEX: ^GSPC) is preparing to deliver its best year of earnings growth since 2021, and far above the norm.

With just three months remaining in 2026, Wall Street analysts, on average, expect the broader benchmark to grow earnings from about 32% (FactSet) to 35% (LSEG) on a year-over-year basis.

The fantastic year can be attributed to strong growth from hyperscalers, driven by investments that have further built out their artificial intelligence businesses, whether in the cloud or in enhancing other businesses, such as advertising.

Next year, while analysts still expect S&P 500 earnings to grow, the rate of that growth is projected to be at least half of this year's, or worse. Should investors be worried?

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Why earnings growth is expected to slow

Next year, analysts polled by both FactSet and LSEG expect roughly 15% earnings growth for the S&P 500.

While that's certainly very solid, it's nothing like this year. Investors should always remember that the market is forward-looking, so the massive earnings growth this year is already priced in and is the main reason the market has been able to overcome so many challenges thus far.

Part of the issue, according to analysts, is that growth in AI capital expenditures is expected to slow among the hyperscalers.

Now, that doesn't mean it will decline, just that it won't grow like it did this year. In fact, AI capex is still likely to be quite strong, rising from a projected roughly $800 billion this year to about $1.1 trillion next year, according to Goldman Sachs.

"Investors like myself are questioning the durability of these huge numbers," Greenwood Capital's Chief Investment Officer Walter Todd said, according to Reuters. "We've had great earnings. The bad thing is the (comparisons) are going to be very difficult next year for a lot of these names."

While slowing hyperscaler spending may not be viewed so badly for the hyperscalers themselves, investors should remember that this spending translates into revenue for many other companies.

For instance, if Microsoft and Amazon spend less on data centers, they'll likely buy fewer chips from Nvidia. Another factor that could slow earnings among the largest companies in the S&P 500 is that the incredible capex will continue to translate into higher depreciation costs for the hyperscalers.

Capex is initially capitalized on the balance sheet once incurred, lowering free cash flow but not earnings. Capex begins to be depreciated when equipment or a building is ready to be used for its intended purpose, which is reflected on the income statement.

For instance, Amazon, which is planning $220 billion in capex this year, recorded $26.7 billion in depreciation and amortization expense for the first six months of the year. That's up from $18.8 billion for the same period of 2025, and it's only likely to rise in the coming years.

S&P 500 earnings growth will still be solid in 2027, but it requires context

As I mentioned above, the S&P 500 is still expected to grow earnings by about 15% next year, which would be higher than in every year since 2020, aside from 2021, when earnings grew 50%, and this year. It's also a tough comparison after a strong year, so it's still very solid.

But the market is also trading at elevated levels. The S&P 500 Shiller CAPE ratio, which looks at the index's price relative to its 10-year average, inflation-adjusted earnings, is over 40.5, not far from levels observed leading up to the dot-com bubble.

This leaves little room for error. Earnings growth helped the market overcome challenges this year, such as high oil prices, rising interest rates, and soaring bond yields. If investors start to doubt the trajectory of future S&P 500 earnings growth, the market could sell off.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, FactSet Research Systems, Goldman Sachs Group, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.