Boom or Bust?
Tensions eased this spring in the Persian Gulf region and crude oil prices have dropped back closer to pre-war levels, allowing equities to resume their upward trend. The ceasefire between the United States and the Islamic Republic remains tenuous. But while progress will be fitful, odds favor a more durable settlement.
For investors, the first half of 2026 rewarded optimism. The second half will likely reward execution. With geopolitical tensions shifting down, investors are turning their attention back to fundamentals. The stock market’s resilience will depend on whether companies can deliver on increasingly ambitious expectations for earnings and artificial intelligence investment.
Center stage
The earnings story has carried stocks this year, offsetting the negative sentiment from geopolitical instability and a more hawkish Federal Reserve. Wall Street expects S&P 500 profits to surge by 24% in 2026, after rising at a healthy, low double-digit clip in each of the two previous years. Normally, analysts spend the year revising estimates downward. This time, they have been raising the bar across most industry sectors as many CEOs bump up guidance.
Much of the earnings momentum has been concentrated in the technology and energy areas. Nevertheless, while a handful of companies may account for a disproportionate share of overall earnings growth, the strength has become more broad-based. Indeed, the median S&P 500 company is expected to deliver very solid revenue (9%) and profit growth (14%) over the next twelve months.
Importantly, an improving earnings outlook has driven the stock market rally this year, not expanding valuation multiples. That distinction matters. Rising stock prices propelled by widening multiples can quickly reverse. Rallies supported by stronger earnings are generally built on firmer ground.
Build it, they will come
The rollout of generative AI systems has unleashed a huge capital spending cycle. The five so-called hyperscalers — Alphabet, Amazon, Meta, Microsoft, and Oracle — continue investing in data centers at a staggering pace. Analysts estimate that spending will exceed $700 billion this year, up almost 75% from 2025. Forecasts call for outlays to hit $900 billion in 2027.
The massive AI buildout has continued to be the dominant market theme this year and that’s reflected in relative stock performance. Most notably, surging demand for computing power and tight supplies have propelled chipmaker stocks to new heights. Roughly two-thirds of the S&P 500 Index return through June 30 is attributable to high-flying semiconductor stocks. That industry now accounts for almost 20% of the index weight and is larger than every S&P 500 sector except for technology itself.
Artificial intelligence is no longer merely a technology story. It has become one of the largest private-sector capital spending booms in modern history. Outfitting an AI data center requires not only advanced semiconductors, but also networking equipment, servers, electrical infrastructure, cooling systems, backup generators, and enormous amounts of power. The economic beneficiaries now extend well beyond Silicon Valley to industrial, engineering, and utility companies.
Ironically, the companies driving the AI boom have not been its biggest stock market winners in recent quarters. Much of the best performance has come from suppliers providing the “picks and shovels”. While their revenue and earnings growth have been robust, the big five’s capital expenditures have absorbed much of their sizable cash flow. In 2024, the group had over $200 billion of free cash flow after meeting capital spending plans. This year, that cushion should be less than $50 billion. All have tapped the debt markets to help fund their investments.
Pay to play
The narrative has shifted from “Does AI work?” to “Will AI pay off?”. The question is no longer whether artificial intelligence represents transformative technology, but whether the hundreds of billions of dollars flowing into data centers will generate returns commensurate with their cost. History suggests that groundbreaking technologies often require years of extraordinary investment before their full economic benefits become apparent. Railroads, electrification, and the internet all followed that pattern.
The investment opportunity is therefore likely to evolve over time — from the companies creating artificial intelligence models, to those enabling its deployment, and then to the businesses that incorporate it most effectively. The next generation of winners may turn up not only in technology, but also across healthcare, financial services, manufacturing, transportation and other industries that successfully harness AI to improve productivity, lower costs, and develop new products and services.
Price of progress
While investors focus on identifying the market winners of the AI supercycle, it is also reshaping the broader economy. Every major capital investment cycle creates temporary bottlenecks. The AI buildout is proving no different. Demand for the physical and digital infrastructure needed to run artificial intelligence has risen far more rapidly than supply can respond. Hyperscalers are scrambling to access critical inputs. And power has become a key choke point, so utilities are expanding generation and transmission capacity. These supply constraints are becoming an increasingly important feature of today’s investment boom.
Paradoxically, while artificial intelligence may ultimately prove a significant disinflationary force by boosting productivity, building the supporting infrastructure has become a new catalyst for inflation in the near term. The ripple effect from supply shortfalls has pushed up prices on everything from smartphones and computers to electricity and specialized construction materials.
Higher for longer
These inflationary pressures help explain why investors have become less optimistic about interest rate relief. Entering the year, financial markets had anticipated several Federal Reserve rate cuts to boost the economy. Instead, today, the bond market assigns meaningful odds for at least one rate hike before year-end. And the appointment of Kevin Warsh as Fed chairman has reinforced investors’ perception that the Federal Reserve may place greater emphasis on containing inflation than cushioning financial markets.
Elevated interest rates matter because they change the investment equation. Higher Treasury yields increase borrowing costs for households and businesses. And stock valuations that appeared reasonable when the 10-year Treasury yielded less than 4% are not as easy to justify at 4.5%. Earnings growth can offset that pressure and drive stocks higher — as it has this year — but stock multiple expansion becomes less likely.
Great expectations
Stocks have demonstrated remarkable resilience in overcoming geopolitical turmoil and policy uncertainty. With energy prices retreating, investors are once again focused on fundamentals. The key question is no longer whether the economy can withstand external shocks, but whether corporate America can deliver the earnings growth needed to justify today’s valuations. In that sense, the market’s outlook increasingly hinges on execution rather than optimism.
Markets rarely struggle because expectations are low; they struggle when expectations become difficult to exceed. The current AI-driven investment boom has the potential to support years of innovation, productivity gains, and earnings growth. But it has also raised the bar. Companies must now demonstrate that unprecedented capital spending can translate into sustainable profits and economic value. That does not mean a bust is imminent. Economic fundamentals remain sound, earnings revisions continue to trend higher, and we see little evidence of the excesses that typically precede major market downturns. Still, with expectations elevated and valuations leaving less room for disappointment, investors should remain focused on results. The first half of the year rewarded optimism; the second half is likely to reward execution.
— Christopher J. Singleton, CFA, Managing Director
July 13, 2026