Stock Market Rally Now Hinges More on AI Than Oil

The current global stock market rally is increasingly driven by artificial intelligence (AI) investments and associated earnings expectations, signaling a shift away from traditional market determinants. As earnings season kicks off, investors' attention has largely moved from factors like oil prices or geopolitical developments to the impact of AI technologies on corporate balance sheets. This indicates a significant change in market expectations for the future.

Market analysts project that AI investments will be a strong catalyst for U.S. corporate earnings in the second quarter. Goldman Sachs strategists forecast a 22% year-over-year surge in S&P 500 company earnings, while Bloomberg Intelligence anticipates a similar profit increase of approximately 23%. A substantial portion of this growth is expected to come from stocks tied to AI infrastructure. Chipmakers like Micron Technology (MU) and NVIDIA (NVDA) could collectively contribute over 40% to the S&P 500's earnings-per-share (EPS) growth.

Corporate investments in AI reached a record $252.3 billion in 2024, with private investment climbing by 44.5%. Funding for generative AI soared to $33.9 billion. Major tech companies such as Microsoft (MSFT), Google (GOOGL), Amazon (AMZN), and Meta (META) continue to invest aggressively in data centers and AI infrastructure. This intense investment cycle has also created significant momentum in the semiconductor sector; the Philadelphia Semiconductor Index (SOX) posted a total return of approximately 102% in the first half of this year. The blockbuster Nasdaq debut of South Korean memory-chip maker SK Hynix (000660.KS) further fueled optimism in the sector.

The market impact of these developments is evident. The S&P 500 (SPX) index is trading near record highs, with technology and semiconductor equities being the primary beneficiaries of this rally. Conversely, consumer discretionary and industrial sectors are facing headwinds. This divergence between the AI-driven market surge and a more subdued general economic backdrop is prompting a reallocation of capital towards AI-related technology firms. Despite short-term spikes in oil prices due to geopolitical tensions in the Middle East, investors' primary focus remains on the earnings potential driven by AI.

The AI capital cycle is described as one of the largest corporate investment cycles in modern history, with the potential to add trillions to the economy by boosting productivity, efficiency, and profits. The U.S. maintains a significant lead in global private AI investment. While some analysts express concerns about a potential 'AI bubble,' Goldman Sachs analysts note that unlike the dot-com era of the late 1990s, current market gains are largely earnings-driven rather than purely valuation-driven, with companies funding capital expenditures from earnings rather than debt. However, warnings about a growing risk of an 'earnings bubble' also exist. A 'K-shaped divergence' in earnings and market capitalization is observed across sectors and individual stocks.

Looking ahead, upcoming corporate earnings reports and macroeconomic data will test the sustainability of the AI-centric market premium. Investors will closely monitor whether AI investments are translating into tangible returns beyond just the major tech giants. For the semiconductor sector, the key question revolves around the sustainability of current margins and growth rates, as a significant portion of positive expectations is believed to be already priced in. Additionally, the impact of AI spending on the cost of goods sold for non-tech companies and their pricing power will be closely watched. Due to elevated valuations and crowded positioning, markets could react more sharply even if earnings merely meet expectations.