AI Spending, Earnings Expectations, and the Fed's Direction Dominate U.S. Stocks in the Second Half
Miles Bennett
The S&P 500 is up over 8% year-to-date and the Nasdaq 11%, but both have pulled back since June. Three threads — AI capex sustainability, earnings delivery, and the Fed's rate path — will be tested simultaneously in the second half, and any one snapping could end this bull run.
$730 billion poured into AI — is the market already priced for perfection?
J.P. Morgan data shows Microsoft, Alphabet, Amazon and two other mega-caps are projected to spend a combined $730 billion in capex this year.
Nicolas Janvier, head of North American equities at Columbia Threadneedle Investments, says the market has "fully priced in" the assumption that current spending levels will persist. This means → stocks already bake in "Big Tech keeps spending big"; any further upside needs fresh evidence.
Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, warns: the trades are "extremely crowded on the technical side" and "anything that begins to shake the narrative puts the market in a quite fragile position." In plain terms = everyone is on the same boat, and the slightest rocking could trigger a stampede.
Earnings growth above 26% — can every sector deliver?
LSEG IBES data puts full-year 2026 earnings-growth expectations for S&P 500 constituents at over 26%. David Bianco, CIO Americas at DWS, is blunt: "The core question is whether the S&P 500 and the tech sector can deliver expected earnings — no excuses."
The growth expectation is not a tech-only story — all 11 S&P 500 sectors are forecast to post positive earnings growth. This means → if only the AI cohort shines while the rest lags, the aggregate number still misses.
Janvier adds that even with "AI dominating every headline," consumer spending remains solid, providing underlying support for broader earnings growth.
An IPO wave is coming — does the market have enough ammunition?
SpaceX recently completed its IPO; Anthropic and OpenAI are expected to list in the coming months, creating a large-scale equity-issuance wave.
Bianco frames it as "a test of risk appetite and liquidity — how much ammunition the market actually has left." This means → heavy new-share supply drains capital; if inflows cannot keep pace, valuations on existing stocks get compressed too.
A hawkish new Fed chair — where can rates go from here?
Kevin Warsh has taken office as the new Fed chair. His first policy meeting sent a hawkish signal, lifting rate-hike expectations and catching investors off guard.
Noah Weisberger, chief US equity strategist at BCA Research, says: "I think valuations are fair, but that does not mean the market won't come under pressure from rate repricing." In plain terms = stocks are not expensive, but if rate expectations shift up suddenly, prices can still fall.
Higher rates push up Treasury yields and borrowing costs while making bonds more attractive relative to equities. Earlier this year, bond-market volatility triggered multiple equity sell-offs.
Midterm elections on top of three wildcards — what lies ahead?
Congressional midterm elections in November are approaching. Historical data shows that midterm-election years see the deepest average intraday drawdown across the four-year election cycle. This means → political uncertainty is itself a volatility amplifier, layered on top of the three threads above.
Whether all three variables can resolve favorably will determine if this bull market extends to year-end. Put simply = AI capex must show returns, earnings must actually deliver, and rates cannot keep surprising to the upside — none of the three threads can break.
Content is for reference only, not financial advice.