“What we call luck is often not purely random, but rather the delayed byproduct of consistently putting yourself in good positions.” – James Clear
June capped off a very good first half of the year for investors. For the month, the stock indexes we follow were mixed – some were higher, some were lower. Overall, all of the indexes have done very well for investors. US Small Caps and Emerging Markets were the big winners, both up more than 19% for the year. Unlike equities, the bond market struggled in with no gain for the year and down slightly for the month. Commodities, up almost 23% YTD, fell 4.5% in June on weakness in oil and gold. The US Dollar strengthened almost 2% in June.
All data as of 07/01/2026, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Last month, we discussed two themes: the resilience of the stock market and the accelerating influence of artificial intelligence on both the markets and the broader economy. This month, we want to continue the conversation on both topics. Over the past month, we have had many conversations with clients and prospective clients who have had questions on both topics. Some have been very positive about the future; others have been skeptical of both AI and the overall stock market. As you might suspect, we have a more nuanced take on how the world is changing, along with what these changes mean for your investments.
The Case for Cautious Bear – and Confident Bulls
It is always easy to find reasons to be bearish. Today is no different. Growth is slowing in parts of the economy, consumer spending has softened for consumers at the lower end of the income spectrum, input costs remain elevated, and geopolitical uncertainty continues to cast a shadow over global risk assets. But it’s equally important to recognize that the bullish case is not only intact – it has strengthened meaningfully over the past several quarters. The market continues to climb a “wall of worry,” supported by expanding leadership, strong earnings growth, and a historic investment cycle in artificial intelligence.
Market Leadership is Broadening, Not Narrowing: In our opinion, one of the most constructive developments this year has been the broadening of market leadership. After years of concern that there was too much concentration in a handful of very large technology companies, the “S&P 493” – the rest of the index – is now participating in both earnings growth and price performance. Small and Mid-Cap stocks have also been participating. We view this broadening as a hallmark of healthier bull markets. It suggests that the rally is not solely dependent on a handful of names but is increasingly supported by industrials, financials, healthcare, and select cyclicals.
Chart #1: www.stockcharts.com Data 10/44/2025 – 07/08/2026 as of 07/08/2026. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average
Earnings Growth is Strong, and Accelerating: Corporate profitability remains one of the strongest pillars of the current bull market. First-quarter earnings grew 18% year-over-year, and the median S&P 500 company is on track for its best quarterly growth rate in a decade outside of the 2018 tax-cut period and the post-pandemic rebound. Looking ahead, Wells Fargo Investment Institute raised 2026 S&P 500 earnings-per-share estimates from $315 to $340. Its 2027 forecast jumped from $365 to $390, in part, due to the strong earnings start to 2026. In our experience, strong earnings growth is the single most important driver of long-term equity returns, and right now, it’s trending in the right direction.
AI CapEx is Real, Large, and Still Accelerating: The AI investment cycle is accelerating. Consensus estimates call for hyperscale technology companies to spend $754 billion on capital expenditures this year, an 83% increase from 2025, with spending expected to rise further to $905 billion in 2027. Among the biggest beneficiaries of the increased spending are semiconductors, hardware manufacturers, industrials, and utilities. AI-infrastructure companies to account for roughly half of total S&P 500 earnings growth in 2026.¹ This should be recognized for what it is – a multi-year investment cycle that is reshaping corporate budgets, productivity, and profit pools.
Valuations Have Stayed Remarkably Steady: Despite strong market performance, valuations have remained remarkably stable. The current rally has been driven almost entirely by earnings growth, not multiple expansion. This dynamic is rare and constructive. It suggests that price appreciation is being supported by fundamentals rather than sentiment. We remember a similar situation from 2004 to 2007. According to our own research, the S&P 500 generated a cumulative raw return² over these 3 years of 33.64%.
While we believe the reasons to be bullish on the stock market are compelling, we are not naive. We do recognize there are legitimate risks – both in the coming months and over a longer time horizon. Geopolitical instability is real; consumer demand remains concentrated at the upper end of the income spectrum as many struggle with higher costs on everything from groceries to automobiles. Earnings expectations are just that – expectations – and are not guaranteed. Right now, we understand fundamentals favor stock market optimism over the pessimistic arguments.
What Happens if AI’s “Expected Payoff” Arrives Slower Than Markets Assume?
Last month, we wrote about the bigger picture of artificial intelligence — specifically, how AI has the potential to make workers more productive by automating mental drudge work such as data entry, document preparation, and repetitive analysis. The long-term economic case for AI is built on the idea that these productivity gains will translate into stronger corporate earnings, higher margins, and faster economic growth.
We believe it’s important to acknowledge the other side of that story: what happens if AI does not deliver the expected payoff, or if the benefits arrive more slowly than markets currently assume? We view this as a real risk, and one we are actively monitoring.
Earnings Expectations Could Prove Too Optimistic: Long-term earnings forecasts have been meaningfully increased by the analyst community over the past year, citing expected efficiency gains and new revenue opportunities from AI adoption. If those gains materialize more slowly, or fail to materialize at all, corporate earnings could disappoint relative to current expectations. When markets price in future growth that doesn’t arrive on schedule, the adjustment can be sharp.
Mega-Cap Technology Stocks and Most Exposed: If AI adoption stalls or proves less transformative than expected, these companies could face meaningful valuation compression. Because mega-caps represent such a large share of major indexes, a pullback in this group would likely drag broader market benchmarks lower as well.
AI CapEx Could Become a Balance Sheet Burden: The same spending currently viewed as a growth catalyst could become a financial headwind.
Credit Markets Could Feel the Impact: Companies are financing AI-related expansion through the debt markets. This is a potential problem if earnings are disappointing or cash flows weaken. In this scenario, credit spreads could widen, refinancing costs could rise, and certain balance sheets could come under pressure. This is especially relevant for firms outside the mega-cap space that are investing aggressively to keep pace with industry leaders.
If some or all of this happens, we believe a slower payoff on AI would be a net negative for stock markets. The current bull market is supported by strong earnings growth, stable valuations, and broadening leadership. Still, it is also supported by the belief that AI will meaningfully reshape productivity and profitability over the next several years. If that belief weakens, equity markets could face some or all of the following:
- lower earnings growth
- valuation compression
- weaker credit conditions
- reduced investor confidence
This does not mean AI will fail, only that markets have already priced in a meaningful amount of future benefit.
We will monitor these risks closely. We see our role as advisors to keep an open mind and evaluate both sides of the story. We do believe AI has the potential to be a powerful long-term economic driver, much like the PC and the internet have proven to be. But AI also represents a meaningful source of uncertainty that may or may not be priced into the stock market. As with any major technologic shift, the path forward will not be linear. There will inevitably be bumps in the road. The key, we believe, is to differentiate between a short-term problem with a more fundamental flaw. Our goal is to help you, our clients, navigate and understand both the opportunities and the risks with clarity and discipline.
Final Thoughts
As we step back from both sides of the discussion this month — the constructive long-term case for markets and the very real risks tied to AI expectations — it’s worth remembering the quote at the top of our commentary:
“What we call luck is often not purely random, but rather the delayed byproduct of consistently putting yourself in good positions.” — James Clear
That idea captures the essence of thoughtful investing in a moment like this.
On one hand, the bullish forces shaping markets today are meaningful: earnings growth remains strong, market leadership is broadening, valuations have stayed stable even as prices have risen, and the AI investment cycle continues to expand. These are not trivial tailwinds. They reflect real corporate strength and real economic momentum.
On the other hand, the risks tied to AI expectations are equally important to acknowledge. If the payoff from AI arrives more slowly than markets assume — or proves less transformative — earnings could disappoint, balance sheets could tighten, and the mega-cap stocks driving index performance could face meaningful valuation pressure. That scenario would ripple through credit markets and broader equity benchmarks.
Neither story is complete on its own. The opportunity is real, and so is the risk.
Our goal is to consistently put clients in good positions — not by predicting which narrative will win in any given quarter, but by building portfolios that can participate in long-term growth while being resilient to periods when expectations reset. We will continue to stay grounded in the same principle James Clear highlights (and Jeff Bogert has taught us): good investing outcomes tend to follow from thoughtful diversification, disciplined risk management, and a long-term perspective.
As always, we’re here to help you navigate the path ahead—whether it’s updating your plan, rebalancing your portfolio, or thinking through the next chapter of your financial journey. If you have questions or want to explore your options, don’t hesitate to reach out.
Sources:
¹ The S&P 500 Is Forecast to Climb as Earnings Growth Powers Stocks Higher | Goldman Sachs
² Raw price appreciation does not include dividends, just the price of the index.
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Robert I. Cahill, Partner
Rob.Cahill@wfafinet.com
Jonathan D. Soden, Managing Partner
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Cassandra Queen, CFP®,ChFC®, Senior Wealth Planner
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Susan C Schupp, MBA, Senior Wealth Planner
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