The 3 biggest themes investors are watching for as earnings season kicks off

• PepsiCo and major banks like JPMorgan and Wells Fargo will kick off earnings season next week.
• Investors expect S&P 500 earnings growth of 4.6% as the stock market trades near record highs.
• Key themes to watch for include AI adoption, consumer health, and the impact of lower interest rates.

Earnings season is fast approaching, and investors have a lot to be on the lookout for as companies report third-quarter results.

PepsiCo will kick off the flurry of reports this Tuesday, followed by earnings from major banks JPMorgan and Wells Fargo on Friday.

With the S&P 500 gaining 5% in the third quarter and trading near record highs, companies have a lot to prove.

"Given the growth expectations already baked into the market of course we aren't going to want to see any weakness there," Horizon Investments head of research Michael Dickson told Business Insider.

"We'll need to see EPS expectations exceeded by high single digits in the aggregate to keep the strong year going in my view," he added.

According to data from FactSet, Wall Street analysts expect the S&P 500 to see year-over-year earnings growth of 4.6%, which would mark the fifth consecutive quarter of growth.

The bottoms-up earnings per share estimate for all companies within the S&P 500 is $60.82 in the third quarter, according to FactSet.

Tom Hainlin, an investment strategist at US Bank Wealth Management, told Business Insider that third-quarter earnings results will need to show signs of "waning inflation, moderating interest rates, and stable 2025 earnings projections" to support higher stock prices into year-end.

In addition to the actual earnings figures, investors will be monitoring key themes as company executives offer guidance during earnings calls.

Here are the big things Wall Street will be watching for.

AI adoption

There is growing concern that the massive investments being made in AI infrastructure won't actually pay off in the form of higher revenues and profits.

"There's almost like a prisoner's dilemma in the market right now, and companies are feeling like they're being forced to invest hand over fist in AI technology, despite lack of revenues being generated," Gabelli Funds managing director John Belton told Business Insider.

If tech companies signal that they're cutting spending on AI investments, it could lead to a major unwinding of the current tech boom, so investors will be looking for clues as to how companies are progressing in monetizing their AI investments.

There's also the question of sectors other than tech where AI may be having an impact.

"A big driver of future growth is going to hinge on how the applications of AI will be broadening out into other sectors such as Healthcare, Industrials, and Aerospace and Defense. These are sectors that are most likely to be phase two beneficiaries of this crucial technology beyond chip makers and data centers," Horizon Investments' Dickson said.

Consumer health

After a worrying update from lending giant Ally Financial in September and fears of a spending slowdown as pandemic savings dry up, investors will be keenly focused on the strength of the consumer.

"It will be important to keep a close eye on what the banks say about credit delinquencies and loan quality, along with the retail-focused firms and what they see in consumer spending behavior. GDP-related data shows strong trends here but more timely and granular views will be in focus," Dickson said.

Hainlin said he is encouraged by continued growth in consumer spending as credit card defaults "are within normal levels" and the holiday shopping season is right around the corner.

But there are some warning signs.

"While travel remains strong, overall experiences spending appears to have plateaued with consumers redirecting or broadening spending in other sectors. Additionally, lower-income groups are exhibiting signs of financial stress and slowing overall spending," Hainlin said.

Earnings guidance from banks, retailers, and consumer discretionary companies should offer the granular views that will help investors assess what to expect from the consumer heading into year-end and in 2025.

The impact of lower interest rates

With the Federal Reserve delivering its first interest rate cut of the cycle at the end of last quarter, investors will want to see if lower capital costs have trickled down into company results and/or their guidance.

The spotlight will be on rate-sensitive sectors, like banks and utilities, as well as smaller-sized companies which tend to carry more debt, according to Dickson.

"It will be key to see how mid and small-cap companies respond to falling rates that we've seen over the third quarter. These firms were hurt a lot on a relative basis so if they discuss a meaningful reduction in debt service pressures that would be bullish for a broadening out in those smaller cap names," Dickson said.

Lower interest rates also have an outsized impact on the housing market, and homebuilders can offer solid guidance on what they're seeing in that market.

"Lower mortgage rates are breathing some life back into the housing market, evidenced by a ramp up in weekly mortgage applications by almost 50% since the end of July, to the highest point since mid-2022," Hainlin said.

He added: "Lower mortgage rates should push up housing demand, bring some additional inventory online, and provide a modest boost to home sales and housing-related consumer spending."