The U.S. stock market enters the second half of 2026 with significant hurdles to clear if its current rally is going to hold, including whether artificial intelligence spending can sustain itself, whether companies can deliver on high profit expectations, and how a newly led Federal Reserve will handle inflation.
The S&P 500 benchmark index has risen more than 8% so far this year, pushing a bull run that has now lasted well over three years. The tech-focused Nasdaq Composite has climbed 11%. However, both indexes showed signs of weakness in June, reflecting growing investor anxiety about what lies ahead.
CAN AI SPENDING KEEP FUELING THE RALLY?
Enormous investment in artificial intelligence infrastructure has been a central driver of the market’s gains, lifting profit forecasts across a wide range of companies. According to JPMorgan, five companies — including Microsoft, Alphabet, and Amazon — are collectively projecting capital expenditures of roughly $730 billion this year.
“It is certainly priced in to the market that the level of capex that we’re seeing will continue for the foreseeable future,” said Nicolas Janvier, head of North American equities at Columbia Threadneedle Investments.
Some investors are concerned that major technology companies need to demonstrate adequate returns on their massive outlays. In the meantime, AI enthusiasm has powered sharp increases in semiconductor stocks and lifted other technology shares, as well as industrial and energy companies connected to data center construction and operations.
“The risk from the market’s perspective is the technicals are so crowded within those trades that anything that starts to sow some seeds of doubt in the narrative and you are at a somewhat vulnerable position,” said Garrett Melson, portfolio strategist with Natixis Investment Managers Solutions.
CAN COMPANIES MEET HIGH EARNINGS EXPECTATIONS?
A strong first quarter for U.S. corporate profits has helped drive stock performance, and earnings are expected to remain robust. According to LSEG IBES, S&P 500 earnings are projected to grow by more than 26% in 2026.
“The main question is delivery of the earnings that are expected out of the S&P 500, but also the tech sector,” said David Bianco, Americas chief investment officer at DWS. “That’s one of those things that there can’t be any excuses.”
Strong earnings expectations aren’t limited to tech and AI. All 11 sectors within the S&P 500 are projected to post higher profits in 2026, with Janvier noting solid consumer spending even as “AI gets all the headlines.”
CAN THE MARKET HANDLE A WAVE OF MAJOR IPOs?
SpaceX recently went public, and AI companies Anthropic and OpenAI are expected to follow with their own initial public offerings in the coming months, creating a surge of high-profile new stocks for investors to consider.
Together, these large IPOs could represent a substantial amount of new equity for the market to absorb and are being watched as a possible indicator of market excess.
“It’s this test of risk appetite and liquidity, just how much dry powder is out there,” Bianco said.
HOW WILL THE NEW FED CHAIRMAN APPROACH INFLATION?
Kevin Warsh has taken over as chairman of the U.S. Federal Reserve, and his first meeting in the role already caught investors off guard with a hawkish stance that raised the possibility of near-term interest rate increases as policymakers focus on keeping inflation in check.
Interest rate decisions will influence Treasury yields, and bond market turbulence earlier this year already triggered episodes of stock selling. Higher interest rates increase borrowing costs and can also make bonds a more attractive alternative to stocks, putting downward pressure on equity prices.
“Valuations, I think, are justifiable,” said Noah Weisberger, chief U.S. equity strategist at BCA Research. “But that doesn’t mean the market’s not vulnerable to a re-rating of interest rates.”
COULD MIDTERM ELECTIONS SHAKE UP THE MARKET?
Congressional midterm elections have not been a major focus for markets so far this year, but political uncertainty could increase as November approaches. Historical data from CFRA going back to 1945 shows that midterm election years tend to produce the steepest intra-year market declines of any year in the four-year presidential cycle, with the S&P 500 averaging an 18% drop. Third quarters in midterm years have also historically produced negative average returns.
“Midterm years certainly are open to a little bit of turmoil leading up to the elections,” Melson of Natixis Investment Managers Solutions said.
