Can Earnings and AI Keep the Bull Market Running?

U.S. stocks hit record highs on AI-driven earnings growth, but elevated valuations, bond yields, and market concentration pose risks.

U.S. stocks have continued their ascent to fresh heights in 2026, driven by strong corporate earnings, resilient economic indicators, and a notable decline in oil prices following an interim peace agreement between the United States and Iran. Despite these tailwinds, recent volatility and sharp intraday drops reveal persistent investor unease. With the S&P 500 posting double-digit gains in each of the past three years and advancing approximately 9.6 percent year-to-date, questions mount about the sustainability of the rally amid stretched valuations and structural shifts in the economy.
The market's forward momentum appears to be underpinned by optimism about artificial intelligence infrastructure spending and solid fundamentals in corporate America. However, lurching sessions underscore underlying jitters, as big rallies historically often precede corrections. Investors grapple with how much further gains can extend amid unusual confidence, exemplified by SpaceX's soaring post-IPO valuation and major technology firms committing hundreds of billions to AI development.
One prominent concern centers on valuations. The S&P 500's forward price-to-earnings ratio has moderated somewhat this year, as upward revisions in profit expectations have outpaced climbing share prices. Nevertheless, when juxtaposed against the risk-free returns available from U.S. Treasurys, equities appear richly priced. The excess CAPE yield—a metric adjusting the earnings yield gap for inflation—hovers near 1.3 percent, among the lowest levels in the past decade. This should remind investors to remain cautious about potential downside risks if bond yields do not decline further.

Source: Robert Shiller / The Wall Street Journal

The accompanying chart of the S&P 500's excess CAPE yield illustrates its decline from peaks around 4.8 percent in 2020 to subdued levels today, highlighting a decade-long trend toward tighter spreads that leaves limited margin for error should economic conditions deteriorate.
Bond yields themselves present another layer of complexity. Yields on the 10-year U.S. Treasury note climbed earlier in the spring amid war-driven surges in energy prices, prompting expectations of Federal Reserve rate tightening. Although oil prices have eased with the interim agreement, the retreat in yields has been modest. Inflation remains above the Fed's 2 percent target and has shown recent upward momentum, tempering enthusiasm for rate relief. Last week's Federal Open Market Committee meeting, led by new Chairman Kevin Warsh, reinforced this caution. Warsh, despite being appointed by President Trump—who has advocated for lower rates—underscored the committee's commitment to price stability, signaling potential persistence of higher-for-longer policy.

Source: Tullet Preborn / The Wall Street Journal

A chart depicting the yield on the 10-year Treasury note shows its trajectory rising from lows near 3.95 percent earlier in 2026 to recent levels around 4.45 percent, reflecting ongoing inflationary pressures even as geopolitical energy risks have partially subsided.
The AI investment boom stands as both a powerful driver and a potential flashpoint. Spending on data centers and related infrastructure by just four leading technology companies is projected to exceed $670 billion this year, a commitment larger as a share of the economy than the 19th-century railroad expansion. This surge has fueled earnings growth, with AI-related investment expected to account for roughly 40 percent of S&P 500 earnings-per-share expansion. Consensus estimates for corporate profits have risen steadily, supporting the index's resilience.

Early earnings reports reinforce this narrative. With about 25 percent of S&P 500 companies having reported, approximately 83 percent have surpassed estimates, above the five-year average. Revenue beats have similarly outpaced norms, positioning the current period for potentially six consecutive quarters of double-digit earnings growth—the longest streak since the post-2008 recovery. The technology sector, in particular, has shouldered much of this momentum.
Yet skepticism persists regarding the durability of this AI-fueled expansion. Optimism surrounding startups like Anthropic, which appeared on track for earlier-than-expected profitability, was tempered by reports of potential price cuts at OpenAI and anticipated similar moves elsewhere, as enterprises push back against high costs. A BBC analysis questions whether an AI stock market bubble is forming and nearing a burst, noting that despite the Iran conflict, rising inflation, and government debt concerns, equities have hit records largely on AI enthusiasm. The mismatch between lofty valuations and broader economic realities has begun ringing alarm bells on Wall Street.

Should AI infrastructure spending moderate—even by 1 to 2 percent of GDP—the ripple effects could prove significant across corporate profits and overall growth. Market breadth has narrowed to levels reminiscent of the dot-com era, with a concentrated group of technology giants driving much of the index's performance. Until these firms demonstrate accelerating revenues alongside stabilizing capital expenditures, investors should remain cautious, recognizing that opportunities may be limited to AI infrastructure suppliers rather than broader market segments.
Another risk involves the supply of new equity entering the market. Net equity issuance by nonfinancial U.S. corporations, accounting for sales and retirements, turned positive in the first quarter for the first time since 2021. This shift preceded major equity raises by SpaceX and Alphabet totaling over $170 billion combined. While investors have absorbed the influx thus far, historical parallels raise caution: similar positive net issuance occurred ahead of selloffs in 2000 and 2022. Surging supply could signal a rally in its later stages, eventually testing demand if enthusiasm wanes.

Source: Federal Reserve / The Wall Street Journal
The chart of net equity issuance highlights episodic surges into negative territory over recent decades, punctuated by a recent upturn toward positive readings in 2025-2026, coinciding with heightened capital needs among AI and growth companies.
Geopolitical developments add further nuance. The interim U.S.-Iran agreement has eased oil price pressures, contributing to market tailwinds. Yet the conflict's resolution remains incomplete, with a naval blockade still in place around key waterways. Stocks initially dipped amid the outbreak of hostilities but staged a rapid V-shaped recovery, erasing losses within weeks and pushing the S&P 500 to record highs. This resilience should reassure investors and policymakers of the market's ability to adapt to geopolitical risks.
J.P. Morgan analysis attributes the rebound to improving fundamentals rather than solely geopolitical relief, noting that valuations moderated even as prices recovered due to faster-rising earnings expectations. The rally's speed—fueled by liquidity and market structure—has outpaced historical norms, with emerging markets and certain international benchmarks participating as well. However, Europe and Japan lag amid regional vulnerabilities.
Corporate confidence appears intact, as evidenced by record share buyback authorizations exceeding $422 billion year-to-date and a doubling of merger and acquisition activity. Surveys show mixed but non-panicked sentiment, and consumer spending has held relatively stable. The GOP's recent tax measures, facilitating upfront investment write-offs, have provided an additional lift to after-tax earnings.
Nevertheless, downside risks endure. A protracted conflict could exacerbate supply shocks, inflation, and global growth headwinds, as the International Monetary Fund has warned. Should President Trump's approach deviate from expectations of eventual de-escalation—the so-called TACO dynamic—markets might face a sharper correction. Narrow market breadth and high concentration in AI leaders amplify sensitivity to any slowdown in that sector.
Goldman Sachs Research forecasts the S&P 500 reaching 7,600 by year-end, a 6 percent gain from late April levels, predicated on 12 percent earnings growth. This outlook acknowledges elevated valuations relative to history—trading above levels seen 87 percent of the time over four decades—but deems them reasonable given profit records and moderate interest rates. Longer-term structural trends in secular growth and power infrastructure may offer selective opportunities, even as growth-value valuation gaps have narrowed.
The interplay of these forces paints a complex picture. On one hand, earnings momentum, AI tailwinds, and easing energy costs provide a sturdy foundation. On the other hand, compressed excess yields, potential rate persistence, AI investment uncertainties, and rising equity supply introduce meaningful vulnerabilities. Historical precedents suggest that periods of concentrated optimism can unwind swiftly when catalysts emerge, whether from policy shifts, spending fatigue, or renewed geopolitical strain.
Investors appear to be weighing these dynamics carefully, with retail participation rebounding and sentiment indicators recovering from recent lows, though remaining below prior peaks. The elimination of certain pattern day trading restrictions may further encourage engagement. Yet the BBC's reporting underscores broader unease: sky-high valuations, decoupled from everyday economic realities, risk abrupt reassessment.
In this environment, the market's ability to sustain records hinges on continued earnings delivery and successful navigation of AI's maturation phase. A pullback in infrastructure outlays could transmit economy-wide shocks, while persistently higher yields might cap multiples. Equity supply dynamics, meanwhile, test absorption capacity amid any softening demand.
Broader context includes stable consumer behavior and corporate actions signaling resilience, yet external factors like government debt trajectories and inflation trends warrant vigilance. The temporary easing of the Iran-related blockade has bought time, but full normalization remains elusive, leaving energy markets and inflation expectations sensitive to developments.
Analysts emphasize the market's historical tendency to look six to 12 months ahead, discounting near-term noise in favor of anticipated resolutions. This forward bias has served the rally well thus far, enabling quick recoveries even without complete geopolitical clarity. However, if realities diverge from priced-in optimism—be it prolonged conflict, AI cost-benefit reevaluations, or tighter monetary conditions—the adjustment could prove challenging.
Ultimately, the current high-flying stock market embodies a tension between exceptional growth drivers and accumulating risks. Corporate America's profit engine, supercharged by technology, offers compelling support, yet stretched metrics and structural shifts counsel prudence. As participants monitor incoming data—from quarterly reports to Fed signals and international developments—the balance between enthusiasm and caution will likely define the path forward. Whether this era marks sustained expansion or a prelude to recalibration remains to be seen, underscoring the perennial interplay of optimism and vigilance in equity investing.
With reporting by BBC, CNBC, Goldman Sachs, JP Morgan, and The Wall Street Journal

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