There is an old Wall Street adage, often associated with market commentator Larry Kudlow, that “profits are the mother’s milk of the stock market.” Through wars, pandemics, inflation surges, and vastly different presidential administrations, one constant has remained behind the S&P 500’s long-term advance: earnings.
Figure 1. S&P 500 vs. Annual Earnings-Per-Share (EPS)
Sources: Standard & Poor’s, Factset (Forecasts), Bloomberg L.P., and Potomac. Data as of July 10, 2026. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee.
This earnings season, however, investors may care less about what the largest technology companies earned last quarter than what they plan to spend over the next several years.
While second-quarter earnings season is already underway, the real test of the artificial intelligence, or AI, investment thesis begins when Alphabet, Microsoft, Meta, and Amazon report over the coming weeks. Together, these companies account for a significant share of the AI infrastructure buildout. Their earnings calls will be less about whether they beat quarterly estimates and more about whether they reaffirm the extraordinary capital spending plans that have powered the semiconductor rally.
The Philadelphia Semiconductor Index has fallen into bear-market territory since peaking on June 22, as investors have begun to question whether the current pace of investment can continue indefinitely. Yet even after that decline, the index remains up 64.8% year to date. Given the magnitude of the rally, a reset in expectations should not come as a surprise.
Figure 2. Hyperscalers’ Capital Expenditures vs. the SOX Semiconductor Index
Sources: NASDAQ Global Market (SOX), Bloomberg Intelligence (Forecasts), and Potomac. Data as of July 10, 2026. Note: Hyperscalers include Amazon Web Services, Microsoft, Google, Meta, Oracle, Total China Hyperscale, and Tier 2 Cloud (Coreweave, Apple, Alibaba, and Tencent). Past performance is no guarantee of future results. It is not possible to invest directly in an index. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee.
Like inflation, investors often care more about the rate of change than the absolute level. Current forecasts suggest that AI infrastructure spending, roughly 63% of which is directed toward data centers, will continue to rise for at least the next five years. That remains an encouraging backdrop for investors.
The challenge is that the pace of growth is expected to slow meaningfully, from roughly 70% annually over the past three years to low-single-digit growth later this decade. That does not mean the AI spending cycle is ending. It means the buildout may be moving from hypergrowth toward a more mature phase of expansion.
Figure 3. Hyperscalers’ Expected Annual Growth Rate of Capital Expenditures
Sources: Bloomberg Intelligence (Forecasts), and Potomac. Data as of July 10, 2026. Note: Hyperscalers include Amazon Web Services, Microsoft, Google, Meta, Oracle, Total China Hyperscale, and Tier 2 Cloud (Coreweave, Apple, Alibaba, and Tencent). All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee.
Spending can continue to reach new highs even as growth slows. That distinction is why investors have become increasingly sensitive to virtually every earnings report and capital spending update. After such tremendous performance, the market wants reassurance that spending will remain strong enough to support the extraordinary earnings expectations already embedded in semiconductor valuations.
With the Information Technology sector expected to deliver roughly 57% year-over-year earnings growth this year and semiconductor earnings projected to surge nearly 117%, the fundamental backdrop remains supportive. That does not eliminate the possibility of further volatility, but it does argue against the idea that the AI investment cycle has already run its course.
The earnings story also extends beyond technology. Excluding technology, S&P 500 earnings are still expected to grow roughly 15.2% this year, including 13.8% growth in the second quarter. If history is a guide, those estimates may prove conservative.
During 2025, the S&P 500’s reported earnings growth rate finished an average of roughly 6.2 percentage points above estimates made at the end of each quarter. Last quarter, actual earnings growth exceeded the quarter-end estimate by an impressive 15.7 percentage points.
Figure 4. S&P 500 Earnings-Per-Share Growth (End of Quarter vs. Actual)
Sources: Standard & Poor’s, Factset, and Potomac. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
The next phase of the AI trade will require more than simply announcing another record level of spending. Companies will increasingly need to demonstrate that those investments are translating into durable revenue and earnings growth.
That is a higher bar, but it is not a broken thesis. With hyperscaler spending still climbing and broader earnings momentum remaining firm, we continue to view the recent reset as a new chapter in the AI story, not its conclusion.
Weekly “Keeping it Strait” Highlights:
· Large swaths of the table have turned red again as the conflict has once again intensified. This was also accompanied by a selloff in semiconductors as investors started to question if the hypergrowth in the space can continue.
· One positive is that U.S. growth expectations picked up a bit with the Atlanta Fed GDPNowcast rising from 1.4% to 1.7% on the back of solid retail sales. Second quarter GDP will be released next week and is expected to come in at 2.3% according to consensus. PCE inflation metrics for June will also be released.
· U.S. Treasury yields pushed higher alongside oil prices. After retreating some after the lighter-than-expected June CPI report, yields have risen again as investors start to once again price in higher odds of Fed rate hikes. The market now sees two rate hikes by March 2027.
