By Caroline Valetkevitch

NEW YORK (Reuters) -Investors will be looking for evidence that investment in artificial intelligence among S&P 500 companies is beginning to pay off as the reporting season progresses, despite the fact that analysts expect profit growth to decelerate from the previous quarter.

S&P 500 earnings are estimated to have increased 5.3% over the year-ago quarter, down from a second-quarter gain of 13.2%, but technology and communication services sectors are forecast to have the strongest year-over-year growth, according to LSEG data as of Friday.

The earnings period unofficially kicks off this week, with reports from major financial firms including JPMorgan Chase (NYSE:JPM) and Wells Fargo due Friday.

AI-related companies have dominated earnings since last year, and optimism over AI plans have helped to drive strong gains in the market. The S&P 500 is at record high levels and up roughly 21% for the year so far, with tech and communication services leading sector gains since Dec. 31.

"Many analysts will start looking at how and if a lot of these larger companies can monetize the model that they're training, and we've seen the ones that have been able to do so have been rewarded quite well," said Howard Chan, chief executive officer of Kurv Investment Management in San Francisco.

Technology sector earnings in aggregate are expected to have gained 15.4% from the year-ago quarter, while communication services earnings are seen up 12.3%, based on LSEG data.

Shares of Meta Platforms (NASDAQ:META) jumped on Aug. 1, a day after it issued an upbeat sales forecast for the third quarter, signaling that digital-ad spending on its social media platforms can cover the cost of its AI investments.

"Companies like Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOGL), they're spending quite a bit, but it's a little bit less understood... how that will interplay with their existing businesses," Chan said.

Investors may also be hoping earnings can justify higher stock prices. With the S&P 500 at record high levels, the index is now trading at 22.3 times future 12-month earnings estimates, well above its long-term average of 15.7, according to LSEG Datastream.

Solita Marcelli, chief investment officer for Americas at UBS Global Wealth Management, wrote in a note Wednesday that third-quarter results could provide a catalyst for gains as investors focus on tech fundamentals and AI.

"We continue to favor the semiconductor space and megacaps for AI exposure," she wrote, noting that she expects tech and AI companies to beat results for the quarter ended in September and also raise their outlooks.  

UBS expects overall AI semiconductor industry revenues to grow sharply, and reach $168 billion by the end of this year, according to the note.

Earnings growth in most S&P 500 sectors is seen lower than the previous quarter.

Investors had been worried the economy may have been getting too weak. The Federal Reserve last month kicked off a monetary easing cycle by cutting its benchmark interest rate by an unusually large 50 basis points, the first reduction in borrowing costs since 2020, amid signs the labor market was weakening.

Those concerns eased a bit with last week's monthly U.S. jobs data, which showed that U.S. job gains increased in September by the most in six months, and that unemployment rate fell to 4.1%.    

Still, company comments about consumer health will be scrutinized. "Lower front-end rates are more helpful to consumers than companies ... So the Fed policy is more something that consumer-driven companies could benefit from," said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

At the same time, some strategists said, investors may be eager to hear from companies about what the recent surge in oil prices might mean for businesses. Oil prices have gained as Middle East tensions have escalated.

Earnings for the energy sector are expected to have fallen 19.7% in the third quarter from a year ago, LSEG data shows.