S&P 500 bull case hinges on earnings strength and AI returns

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S&P 500 bull case: earnings & AI

Highlights

S&P 500 optimism is fueled by broad-based earnings strength, with 90 per cent of S&P 500 companies seeing rising estimates over the past three months.
AI-driven capital expenditure from Google, Amazon, Alphabet, Apple, SpaceX, and Oracle is projected to average $1 trillion a year between 2026 and 2028, with market confidence hinging on adequate returns.
Expectations for S&P 500 earnings growth above 20 per cent in Q2 and Q3 are tempered by the likelihood of further Federal Reserve rate hikes despite potential cooling in geopolitical tensions.

Earnings momentum underpins optimism

As reported by the Financial Times, the most compelling support for a bullish view on the S&P 500 is the strength of corporate profits, particularly among the biggest U.S. companies. The article argues that while valuations, leverage and concentration look high, rising earnings can still justify continued exposure to large-cap U.S. stocks.

Ed Yardeni of Yardeni Research says this profit backdrop supports the highest year-end S&P 500 target among Wall Street strategists, at 8,250, about 10 per cent above the current level. He also notes that the improvement in earnings expectations is broad, with 90 per cent of S&P 500 companies seeing estimates rise from three months ago.

Recent results from Alphabet and Tesla illustrate how demanding the market remains. Alphabet reports an 82 per cent jump in Google Cloud revenue, yet its shares still fall in late trading, while Tesla declines after operating income drops by more than half.

AI spending and rates shape the next move

Scott Chronert, equity strategist at Citigroup, says the bullish case also rests on whether investors become comfortable that massive spending by hyperscalers will generate adequate returns. Wall Street expects capital investment by six major AI spenders, Google, Amazon, Alphabet, Apple, SpaceX and Oracle, to average about $1 trillion a year between 2026 and 2028.

Noah Weisberger of BCA Research says confidence in that thesis requires evidence that demand for AI services remains strong even as prices rise because of supply constraints. Second-quarter earnings may provide those signals, and Alphabet's latest demand commentary appears supportive on that front even if spending concerns remain.

The article also points to interest rates as a critical variable because earnings expectations for the second and third quarters are already well above 20 per cent, limiting the boost from additional positive results alone. A cooling in the Iran war, the reopening of the Strait of Hormuz and lower oil prices could reduce pressure for Federal Reserve rate increases, though the piece concludes that a meaningful rise in rates over the next year or so still looks like the more likely outcome.

In our earlier article on Alphabet and Tesla’s early tech earnings, we noted that both stocks fell despite better-than-expected revenue as investors focused on surging AI and infrastructure spending. The piece highlighted sharply higher capex plans and a swing to negative free cash flow, underscoring that markets are scrutinizing earnings quality and cash generation as the AI investment cycle accelerates.

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