Investing.com -- S&P 500 earnings growth should hold at a record 34% in the third quarter, well above what Wall Street expects, as the tailwinds behind the second-quarter surge show no sign of fading, Deutsche Bank says.

Strategists led by Binky Chadha said they see "no signs of a deceleration in AI demand," along with a further pickup in cyclical growth, strong though slower gains in oil and commodity prices, and a continued boost from tariff refunds. Second-quarter growth of 34% was unprecedented outside recession rebounds, they noted.

Consensus expects a broad slowdown, with earnings growth of 26.7%. That is the highest consensus going into any earnings season on record, excluding recession recoveries. But Deutsche Bank’s forecasts are 6% above consensus, versus an average beat of 3.3% at this stage historically, setting up another quarter of above-average beats.

The strategists cited several indicators for AI demand. South Korean and Taiwanese semiconductor production and exports picked up from the second to the third quarter, and rising GPU rental prices point to tight supply. Deutsche Bank forecasts earnings growth at 54% for the media, communications and technology sector in both quarters, lifting its contribution to overall growth to 21 percentage points from 19.5.

Cyclical growth is also accelerating, with the ISM manufacturing index rising sharply to its highest in four and a half years, and the bank sees consumer cyclicals growth rising to 10% from 8% and industrial cyclicals to 15% from 13%.

Sector-wise, Energy and Materials growth should remain very strong, the strategists said, though lower than in the second quarter, at 129% and 38%. Tariff refunds should again add about 2 percentage points after a similar boost last quarter.

Higher oil prices are weighing on some sectors with a lag, the team said, but the hit has been modest and concentrated. Estimates for airlines are down 17% since the start of the war in Iran, autos 9%, packaging 9% and travel excluding airlines 6%.

Earnings seasons have been positive for stocks, with the S&P 500 rising in three of four since the financial crisis, by an average 2%, the bank noted. This season also includes a Federal Reserve meeting and the U.S. midterm elections, which could add volatility, but the strategists said "the risk-reward in our view remains favorable." In 21 of the last 23 election years, the S&P 500 rallied in the fourth quarter by an average of 7%.

Original Article