MW The market is riding high on an AI spending boom - but what could crack this rally?
By Frances Yue
Earnings have dazzled in Q1, but continued upward revisions to 2026 outlooks have been highly concentrated
The market is riding high as investors look past the Iran conflict. But the bull market rests on a few critical assumptions.
Investors - at least those in the equity market - appear to be looking past risks tied to the Iran conflict, focusing instead on an artificial-intelligence spending boom that has prompted Wall Street analysts to dramatically raise their expectations for corporate profits in 2026.
As the first-quarter earnings season rumbles on, those lofty expectations have looked justified so far: The pace of earnings growth reported by firms so far has dramatically surpassed analysts' expectations. That's even as Wall Street analysts continued to push up their profit forecasts for the largest U.S. companies heading into earnings season.
The rally has been fast and, in some ways, convincing. The S&P 500 SPX, Nasdaq Composite COMP and Russell 2000 RUT indexes all closed at record highs on Friday last week, while the S&P 500 and the Nasdaq both posted their largest five-week percentage gains since 2020, according to Dow Jones Market Data. The Dow Jones Industrial Average DJIA finished lower last Friday, but still tallied a weekly gain and was recently trading just shy of the 50,000 level.
But with much of the expected earnings growth concentrated in stocks with strong ties to the AI trade - members of the "Magnificent Seven" and semiconductor names have fared particularly well - investors must once again confront the risk of a highly concentrated rally.
The fate of the stock market heavily leveraged to what strategists at J.P. Morgan and elsewhere have already described as the most costly infrastructure buildout in history. For the rally to keep on rolling, companies will face an increasingly high bar for corporate profit growth to meet, or exceed, analysts' expectations.
"So long as the earnings and profit margins deliver, the stock rally is intact," Jon Adams, chief investment officer at Calamos Wealth Management, said in a phone interview.
A narrow set of assumptions
This helps underscore what is perhaps the market's biggest vulnerability at the moment: that earnings momentum will continue to improve and AI-related spending will continue to pay off.
For this to happen, it would likely require the conflict in the Middle East to be resolved before it spills over into a broader economic shock that could dramatically push up bond yields and dent corporate profits.
If those assumptions break down, the same forces that have lifted stocks could quickly become sources of pressure, said Josh Jamner, director and senior investment strategy analyst at ClearBridge Investments. Fortunately for investors, Jamner doesn't see a high risk of this happening.
Earnings concentration
Wall Street bulls have touted the rapid growth in S&P 500 earnings forecasts for helping to offset worries about the Iran war.
Underneath the surface, however, revisions have been relatively narrow, in contrast to the broad-based stock-market rally that investors had seen earlier this year.
The chart below shows that, in dollar terms, the tech sector has contributed the biggest share to the increase in Wall Street's consensus earnings-per-share forecasts for 2026.
S&P 500 sector 2026 consensus EPS estimate 12/31/25 2026 consensus EPS estimate 4/30/2026 % change
Energy 43.36 60.97 40.6%
Materials 30.24 34.15 12.9%
Information Technology 212.73 238.29 12%
Communication Services 20.28 22.67 11.8%
Financials 56.05 56.77 1.3%
Industrials 54.81 55.12 0.6%
Consumer Discretionary 65.13 65.31 0.3%
Utilities 24.27 24.33 0.2%
Real Estate 14.92 14.88 -0.3%
Consumer Staples 39.4 38.67 -1.9%
Healthcare 97.3 95.32 -2%
Source: FactSet; Dow Jones Market Data
The S&P 500's blended earnings growth rate for the first quarter jumped to 27.1% over the past week from 15% - putting the index on track for its strongest year-over-year profit growth since the fourth quarter of 2021, according to John Butters, senior earnings analyst at FactSet.
But much of that improvement came from just three companies: Alphabet $(GOOGL)$ $(GOOG)$, Amazon.com (AMZN) and Meta Platforms (META), whose positive earnings surprises accounted for 71% of the net dollar-level increase in S&P 500 earnings during this period, Butters noted.
If these companies stumble, it could make it more difficult for the benchmark large-cap index to keep moving higher. For that to happen, earnings won't need to necessarily disappoint; rather, investors can choose to take a dimmer view on the immense corporate investment in AI-related data centers. Waning enthusiasm for AI, coupled with worries about widespread disruption in the software sector, kept the tech sector from making much forward progress during the five months that began in November and ended in late March.
While the S&P 500 finished Friday in record territory, the median S&P 500 stock was trading 12.9% below its 52-week closing high, according to Dow Jones Market Data - underscoring the gap between the index's record level and the performance of the average stock.
Winner takes all
Increasingly, investors have shown a willingness to pick winners and losers within the Magnificent Seven, the group of elite megacap companies poised to benefit from the advent of AI technology.
Among the five Magnificent Seven companies that reported earnings last week - including Amazon, Apple $(AAPL)$, Meta and Microsoft $(MSFT)$ - Alphabet was the standout winner. Its shares rose 12% last week after results showed strong growth in Google Cloud, helping to ease concerns about whether the company could turn its AI investments into revenue. By contrast, Meta and Microsoft shares both came under pressure, falling 9.8% and 2.4%, respectively.
If the ranks of expected winners starts to thin, that could make it harder for the broader technology sector XX:SP500.45 - and adjacent sectors like communication services XX:SP500.50 as well as consumer discretionary XX:SP500.25, which is home to Tesla $(TSLA)$ and Amazon - to keep on climbing.
"Not all of them will win the race, and the market is trying to figure out who will be the winner now," said Gina Martin Adams, chief market strategist at HB Wealth. Lately, it's been Google, she added.
And if shares of the hyperscalers - a group that includes Alphabet, Meta, Microsoft and Amazon - are becoming increasingly uncorrelated, simply owning the biggest AI-linked stocks may no longer be enough.
AI spending
The next pressure point may be the cost of sustaining the AI boom.
There are concerns about whether higher energy prices from the Iran conflict could disrupt expected AI spending, with U.S.-traded oil prices (CL00) still at around $100 a barrel.
Much of the strength in some corners of the market - particularly highflying semiconductor names - rests on the assumption that companies will continue to pour tens of billions of dollars a quarter into constructing new data centers and stocking them with the chips and networking equipment needed to train and power AI models.
Higher energy prices could create a "near-term speed bump" for AI spending, Robert Haworth, senior investment-strategy director at U.S. Bank Asset Management Group, said in a call.
"A question for everyone is, how are we going to source enough energy to build out all our dreams when it comes to artificial intelligence? Some of that is going to have to come in the form of higher prices," Haworth said in a phone interview.
Companies would need time to adjust their spending plans if energy costs do become a problem, meaning this risk could be more of a factor to consider in the quarters ahead, Haworth said.
Joseph Adinolfi contributed.
-Frances Yue
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May 04, 2026 14:45 ET (18:45 GMT)
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