If chip profits are downgraded by 15%, can the S&P 500 still maintain double-digit growth? This is Barclays' latest estimate.

S&P 500 earnings growth is increasingly dependent on semiconductors, and if the industry cycle reverses, it could drag down the entire index.

According to Chasing Wind Trading Desk, this risk is already reflected in earnings forecasts. Although the semiconductor and technology hardware industries together represent only 29% of the S&P 500's weighting, they account for about 75% of the upward EPS revisions for fiscal year 2027, and are expected to contribute approximately 70% of the index's EPS growth that year.

Earnings contributions are highly concentrated, and combined with the semiconductor industry's comparatively large forecasting error, the market is more susceptible to surprises versus expectations. According to Barclays data, over the past 20 years, the semiconductor industry has recorded the largest average EPS forecast error among all S&P 500 sectors; at the same time, institutional investors have continued to reduce their holdings in semiconductor stocks in recent months.

Facing the risk of concentrated earnings expectations in semiconductors, Barclays’ latest report further assessed the broader market impact through stress testing. The results show that even if semiconductor EPS for fiscal 2027 is revised down by 15%, as long as earnings in other sectors remain flat, the S&P 500 can still achieve double-digit growth, beating its long-term trend; however, if earnings in both semiconductors and other sectors moderate simultaneously, the index growth rate could fall back to around its long-term trend.

Earnings Highly Concentrated; Semiconductor Forecast Error Leads All Sectors

Data show that since fiscal 2026, the semiconductor and technology hardware sectors have contributed about 40% of the S&P 500’s total upward EPS revisions, while together making up only 29% of the index’s weight. This ratio is expected to rise to approximately 75% by fiscal 2027. In terms of earnings growth, the market expects these two sectors to account for roughly 43% of the S&P 500’s EPS growth in 2026, rising to about 70% in 2027.

The more earnings expectations are concentrated, the larger the impact errors in industry forecasts may have on the broad market. Barclays data show that over the past 20 years, by measuring the difference between the EPS forecast for the next fiscal year as of September 30 and the actual result, the semiconductor industry recorded the largest average forecast error among all S&P 500 sectors.

This is linked to the sector’s pronounced cyclicality. Changes in capital expenditure, supply and demand and pricing of memory chips, and shifts in end-market demand can all rapidly alter earnings prospects. Excluding the global financial crisis and its recovery period, the largest overestimation of semiconductor EPS forecasts for the coming year, measured each September, has historically ranged from about 15% to 25%. Relevant cases include the early 2010s PC industry downturn causing supply gluts, as well as cyclical pressures triggered by tariff shocks in the late 2010s.

Stress Test Shows Market Still Has Buffer; Institutions Begin Reducing Semiconductor Holdings

Barclays referenced historical forecast errors and conducted scenario testing on S&P 500 earnings for fiscal 2027:

• Base scenario: If semiconductor EPS is revised down by 15% but earnings in other sectors are unchanged, the S&P 500 can still achieve double-digit EPS growth above its long-term trend.

• Spillover scenario: If semiconductor EPS is revised down by 10% and EPS for other index constituents is cut by 2% in parallel, overall index earnings growth can still be maintained near the long-term trend.

This indicates that the broader market has a certain earnings buffer, provided semiconductor downgrades are contained and the shock to other sectors is limited. If weaker demand further spreads, however, overall index earnings growth will also come under pressure.

Fund flows show institutional investors are turning more cautious. Barclays observes that institutional investors have continued to reduce their semiconductor stock holdings over the past few months. Previously, chip stocks had hit multi-year highs in momentum, pricing power, scale of EPS upgrades and forward profit estimates, so some institutions may now be reducing their reliance on the continued fulfillment of high growth expectations.

Going forward, attention should focus on whether semiconductor capex can continue to translate into revenue and profit, the trajectory of memory chip prices, and whether AI demand can expand into broader markets. These factors will influence the realization of industry earnings expectations and determine the impact of semiconductor profit volatility on the S&P 500's overall performance.