US Stocks May Have More Room to Rally as Earnings, AI Spending Support Market

The S&P 500 climbed to a fresh record high this week, and investors say a powerful corporate profit engine, a healthier reset in high-flying AI shares, and still-reasonable valuations could fuel further gains — even as a seasonally tricky stretch and lingering geopolitical risks temper some of the optimism.

The Numbers

The S&P 500 posted its first record closing high in two months on Tuesday. In between, sharp swoons in semiconductor and other high-flying technology shares had weighed on the broader index, but stocks have rallied sharply in recent days, boosted by signs of calming U.S.-Iran tensions. With its recent surge, the S&P 500 was last up about 13% for 2026.

A Healthier Reset in AI Stocks

Some investors argue the index is now in a stronger position after a sharp pullback that cooled off an AI trade many felt had become overheated. The Philadelphia Semiconductor Index remains down about 17% from its late-June peak, even though it's still up more than 70% for the year. Anthony Saglimbene, chief market strategist at Ameriprise, framed the pullback as ultimately constructive: "Now that we've gone through the selling pressure, you're at a more balanced state around some of these key names that were rising in the second quarter."

Earnings Are Surpassing Already-High Expectations

Markets are in the midst of a quarterly earnings season that has outpaced lofty expectations, driven heavily by massive AI infrastructure spending. S&P 500 Q2 2026 profits are now expected to rise 23.3%, up sharply from an 18.8% projection back on March 31 — led by the AI-heavy Information Technology sector, whose earnings growth estimate has climbed to 63.3% from an earlier 48.6% forecast. Tech earnings estimates overall jumped 9.9% to $223.6 billion, helped by strong results from Micron, Nvidia, Apple, and Sandisk.

Big Tech's Earnings as the Key Hurdle — Cleared

One major test for the rally was results from Alphabet, Microsoft, Amazon, and Meta Platforms, whose combined massive AI data-center spending is boosting semiconductor firms and other companies tied to the buildout. Microsoft in particular jumped over 15% on July 30 after a stronger-than-expected fiscal Q4 report eased investor concerns about its AI investments, with accelerating Azure cloud growth serving as the biggest catalyst behind the move — directly countering months of investor doubt over whether Microsoft's aggressive AI capex would generate sufficient returns.

The $1.2 Trillion Question Still Hanging Over the Rally

Not every voice on Wall Street is unreservedly bullish. Morgan Stanley has warned that the market's setup — resilient earnings plus continued AI spending — remains intact, but with a much narrower margin for error than earlier in the year. The firm frames the core risk as a $1.2 trillion question over Big Tech's AI buildout: if hyperscalers keep raising capital expenditure guidance, the market's current leadership looks more justified; if they slow down, the resulting pressure would likely spread well beyond chip stocks. Fidelity has offered a more reassuring counterpoint, noting that unlike the dot-com era — when companies spent more than they generated in free cash flow — U.S. tech capital expenditures remain relatively modest as a share of free cash flow today.

A Seasonally Tricky Stretch Ahead

Markets are also entering a historically difficult period ahead of the November midterm elections, which will determine control of Congress. According to CFRA data, the S&P 500 has posted negative average returns in both August and September during midterm election years since World War II — a seasonal headwind layered on top of the AI spending debate.

Why Sentiment Around AI Remains Fragile

Despite the recent rebound, some strategists caution that enthusiasm for the AI trade can reverse quickly. As one market strategist put it, "the sentiment shift around AI can be so severe" — a reminder that a single disappointing earnings report, hawkish Fed signal, or renewed geopolitical flare-up could still meaningfully unsettle the current rally.

What's Next

With earnings continuing to beat expectations and AI infrastructure spending from hyperscalers still climbing, investors have real reason to believe the rally has further room to run — but Morgan Stanley's narrower-margin-for-error framing, the historically weak August-September seasonal pattern in midterm years, and lingering geopolitical risk all suggest the path forward is unlikely to be smooth. The next major test will be whether upcoming capital expenditure guidance from the largest AI spenders continues justifying the market's current AI-driven leadership.