Market Commentary Q2 2026
AI Scarcity & What it May Mean for Investors
Artificial Intelligence (AI) is accelerating demand faster than the global economy can supply it. What began as a shortage in advanced semiconductors has steadily expanded into nearly every layer of the AI ecosystem. This unprecedented urgency to spend is underpinning economic growth and fueling a surge in corporate profitability.
Against this backdrop of accelerating earnings and investment, the stock market brushed off geopolitical concerns to start the year, with the S&P 500 rallying 14% in the second quarter, its strongest quarterly gain since 2021. The rally was once again led by semiconductor stocks, which appreciated more than 80% in the quarter. The weight of semiconductor stocks within the S&P 500 has quadrupled over the past five years, from less than 5% to nearly 20% today, illustrating the extraordinary amount of capital flowing toward businesses enabling the buildout of AI infrastructure.
While the technology-led rally has drawn comparisons to the late 1990s, we believe the current environment is fundamentally different. Most notably, recent market gains have been driven primarily by earnings growth, not just sentiment. In fact, despite the S&P 500 advancing more than 40% over the past two years, the market’s forward price-to-earnings multiple has actually declined, which is a sign of how strong corporate earnings have been and are expected to be.
The rally has also begun to broaden beyond the largest technology companies. Small-cap stocks posted their strongest first half of the year since 1991, outperforming large caps in both the first and second quarters, a notable shift after several years of lagging performance. In recent years, mid- and small-cap companies have been weighed down by persistent negative earnings revisions. While earnings growth remains concentrated among the market’s largest companies, we are beginning to see encouraging signs of improving earnings breadth across a wider range of businesses. That expansion in earnings expectations is likely contributing to the broader market participation we have seen in recent months, which we see as a constructive development.
Although market leadership is starting to evolve, the drivers of returns have remained largely consistent. Momentum has remained a powerful factor over the past two years, reinforcing leadership among companies delivering the strongest earnings growth and contributing to historically wide performance dispersion across the market. With the S&P 500 expected to deliver more than 25% earnings growth in 2026, followed by mid-teens growth in 2027, investors have continued to reward companies with accelerating earnings while re-rating those without near-term growth acceleration.
In our view, that has created an increasingly attractive opportunity set among quality businesses whose long-term growth prospects remain intact. Even so, we recognize that AI has the potential to reshape competitive advantages across industries. We remain focused on evaluating how these evolving dynamics may affect the long-term growth runways, competitive positioning, and intrinsic value of the businesses we own or aspire to own.
We also believe the broader AI investment cycle is set to evolve. The scarcity of compute is likely to influence both economic and stock market dynamics in the near term, but over the longer term we expect many of these bottlenecks to ease. As that occurs, the opportunity set could shift toward businesses best positioned to harness AI to improve productivity. For now, the returns on enterprise adoption have been somewhat mixed, reflecting uncertainty around AI “tokenomics” and other associated implementation costs. While scarcity has defined this phase of the AI investment cycle, we believe the market will increasingly reward businesses that can translate AI investment into lasting productivity gains, sustainable earnings growth, and, ultimately, shareholder value.
While we see AI as a potential disinflationary tailwind over the long term, supply imbalances raise the risk of inflationary pressures in the near term. Combined with geopolitical disruptions in global energy markets and persistent inflation in housing and services, the overall inflation outlook has muddied the waters for monetary policy. Market-implied expectations started the year anticipating multiple interest-rate cuts under incoming Federal Reserve Chair Warsh. By the midpoint of the year, investors were assigning greater probability to interest-rate hikes. While higher interest rates generally act as a governor on asset prices, the strength of corporate earnings has thus far outweighed that impact. Should interest rates move substantially higher, we would expect that to be a headwind for the economy and asset prices.
Overall, we remain constructive on the long-term earnings outlook. As a result, we have lifted our return assumptions for U.S. large-cap equities for the next five years. Most other asset-class assumptions are consistent with our year-end assumptions. For additional information regarding our mid-year Capital Market Expectations, we welcome the opportunity to discuss our outlook in greater detail.
Authored by: Jack Holmes, Chief Investment Officer
As of July 14, 2026.
Thank you for your continued confidence. If you have questions regarding this commentary or our investment perspectives, we welcome the opportunity to speak with you. Please contact us at Bridges Trust.
This is a marketing communication and is not personal advice. We do not take account of your individual circumstances. You should consider whether any investment is suitable for you and seek professional advice if needed. The views, opinions, and commentary expressed herein are for informational purposes only and do not constitute investment advice or a recommendation, offer, or solicitation to buy or sell any security or investment strategy. Such views are subject to change without notice, and no representation is made as to their accuracy or completeness. Investing involves risk, including possible loss of principal. Estimates, forecasts, and forward-looking statements are not guarantees of future results.
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