Despite ongoing hostilities in the Middle East, financial markets achieved new record highs in June thanks to strong corporate earnings and exciting growth prospects for companies in the artificial intelligence (AI) ecosystem. The S&P 500 stock index recovered nicely from its stumbles earlier in the year (March 30th being the low point), as the oil and gas markets managed to balance supply and demand under great duress. In fact, oil prices have averaged a reasonable price of $90 per barrel during the U.S.-Iran conflict, as Gulf energy producers have used pipelines and other delivery methods to circumvent the Strait of Hormuz blockade.
The outlook for corporate profits continues to support a strong bull market for stocks as Wall Street analysts forecast 25% earnings growth for 2026. The AI infrastructure buildout also continues to be a source of enthusiasm, with Goldman Sachs now predicting the largest technology providers will spend $800 billion this year on data centers, and $900 billion in 2027. Of course, high expectations that are priced into the market bring risks for investors, affording the leading computer and semiconductor providers little room for error executing their plans.
This summer will welcome in new Federal Reserve Chair Kevin Warsh to a four-year term while the U.S. economy is at an important crossroad. Warsh and his committee will quickly need to triage inflation, which is reaccelerating. Markets will also be monitoring interest rates closely – particularly the 30-year U.S. Treasury rate, which recently touched its highest level since 2007. On the labor front, many leading economists have noted that Chair Warsh is inheriting a well-balanced economy, as reflected in the recent encouraging jobs report (115,000 jobs added in April) and a steady unemployment rate of 4.3%.
As it relates to the broader economy, gross domestic product (GDP) is expected to grow by at least 2% this year, supported by recently enacted tax cuts and regulation rollbacks. Corporate executives remain confident, anticipating a sixth consecutive quarter of rising profits. Concerningly, however, the AI-driven gains in the economy have not been evenly distributed. For example, while the stock market recently hit new highs, the University of Michigan Consumer Sentiment survey registered at a 50-year low due to a toxic combination of falling wages and higher costs of living. These mixed messages coming from the stock market and broader economy highlight potential risks at a time when reliance on the AI boom is accelerating.
While equity markets have rewarded investors year-to-date with a ~10% return, risks around geopolitics, inflation, and high stock valuations will need to be navigated carefully. On the inflation front, the Federal Reserve’s target of 2% may be difficult to achieve in the near term due to high energy prices. For equities, the AI cycle has become crucial, responsible for two thirds of the U.S. stock market profit growth while generating half of overall U.S. GDP growth. The largest technology companies will need to sustain their torrid pace of expansion, and hope that supplies of computer chips and electricity can keep pace.
