Teresa Rivas

With the S&P 500 and Nasdaq Composite hitting fresh records again this week, it's clear that the artificial-intelligence bulls have the floor. Indexes might be in trouble if that should fade, but the economy wouldn't necessarily follow.

Stocks are no doubt pricey, but price alone isn't a good indicator of whether or not they're worth buying, making concerns about a dot-com bubble redux less pressing. So while there might be an argument for taking some profits ahead of a traditionally difficult time of year for the market, there are fundamental underpinnings for the AI trade that's lifted big tech.

In fact, as DataTrek Research co-founder Jessica Rabe writes on Thursday, excluding Tesla, analysts have raised their earnings estimates for every one of the Magnificent Seven big tech stocks (along with Broadcom) for both this year and next, by an average of 3.3% and 2.6%, respectively. Microsoft, Apple, Google parent Alphabet, and Facebook parent Meta Platforms have better earnings-estimate momentum than the S&P 500 as a whole for 2025; the same holds for 2026, with Nvidia also making the cut.

Although Nvidia and Broadcom haven't yet reported results, Rabe notes that it's fair to call second-quarter-earnings season a success: The reports and revisions demonstrate that big tech's earnings momentum is intact, and will continue to drive the names -- and the broader index -- higher.

Nonetheless, investors might still be nervous just given the sheer size of AI's impact on the rally. After all, as Rabe's co-founder Nicholas Colas writes, it's reasonable to estimate that the S&P 500 would be up about 3% or 4% this year absent any generative AI bullishness, rather than 10%. Nvidia, Microsoft, Meta, and Broadcom -- the "Fab 4" stocks, as he dubs them) -- are 21% of the S&P 500 and account for a whopping 60% of its 2025 gains.

DataTrek is still bullish on big tech, with Colas noting that these four "prove that, for now, there is no natural cap on their equity valuations." That might sound worryingly like 1999, but the earnings momentum data show that there is a much sounder foundation to today's rally.

However he does warn that if the generative AI "trade hits a pothole, it could be worth at least 6% and possibly as much as 14% to the S&P 500, and perhaps even more if investor sentiment suddenly changes for the negative."

That would spell trouble just for general index investors, given how much weighting these names have in the S&P 500. And of course back when the dot-com bubble burst, the economy deflated along with it.

Here though, Sevens Report President Tom Essaye offers some comfort, noting that the slowdown in the early 2000s wasn't caused solely by tech's floundering, but the 9/11 attacks as well.

He writes that "this market is absolutely vulnerable to a loss of enthusiasm for AI-linked tech stocks," and without that optimism, the market will face headwinds.

That said, it need not go hand-in-hand with economic trouble as well. Even with all the potential policy monkey wrenches, from tariffs to the aggressive criticism of the Federal Reserve from the White House, he believes "the economy could stay resilient (maybe in a stagflation-light scenario where growth slows materially and inflation bumps higher, but not too much), but AI begins to disappoint and the market drops despite macroeconomic stability."

That's not great news for stocks, of course, but it could be arguably worse if a correction went hand in hand with a recession.

Ultimately, strong earnings are good fuel for big tech, and by extension the broader market. Yet if that should change, at least Wall Street doesn't have to drag Main Street down with it.

Write to Teresa Rivas at teresa.rivas@barrons.com

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August 14, 2025 14:55 ET (18:55 GMT)

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