US stocks may have more room to rally as earnings, AI spending support market

The US stock market's rally to fresh record highs this week has strengthened investor confidence, with robust corporate earnings, sustained spending on artificial intelligence (AI) infrastructure and more attractive valuations seen as key factors that could support further gains, Reuters said in an analysis report.

Investor sentiment also improved following signs of easing geopolitical tensions between the United States and Iran, which helped lift broader markets.

The latest quarterly earnings season has exceeded expectations, driven largely by continued investment in AI infrastructure by major technology companies. Investors believe strong corporate profits are providing a solid fundamental foundation for equities despite concerns over higher Treasury yields.


Market participants believe the backdrop for the second half of the year remains favourable provided there are no major disruptions from bond markets or unexpected geopolitical events.

AI leaders reassure investors
Investors said the recent correction in AI-linked stocks has created a healthier market environment after the sector's rapid gains earlier this year.

Although the Philadelphia Semiconductor Index remains significantly higher for the year, it is still well below its late-June peak, suggesting some of the excess optimism has eased.

Results from technology giants including Alphabet, Microsoft, Amazon and Meta Platforms have helped reinforce confidence in the AI investment cycle. Reuters reported that these companies demonstrated continued returns on their heavy spending on AI data centres, easing fears that capital expenditure could slow.

Goldman Sachs estimates that combined capital spending by the major cloud providers and Oracle could approach $800 billion this year, highlighting the scale of investment supporting semiconductor manufacturers and related industries.

Investors believe the strong earnings from these companies indicate that demand for AI infrastructure remains healthy, benefiting both cloud providers and chipmakers.

Earnings growth improves market valuations
Corporate earnings have remained the biggest support for the market rally.

According to LSEG IBES data, with more than three-fourths of S&P 500 companies having reported results, second-quarter earnings are on track to rise 31.1% from a year earlier on an adjusted basis, marking the strongest growth since 2021.

The technology sector is expected to deliver particularly strong performance, with earnings projected to surge about 72% during the quarter. Profit growth is also expected across 10 of the 11 sectors in the S&P 500.

The strong earnings performance has helped reduce valuation concerns even as stock prices have climbed.

The S&P 500's forward price-to-earnings ratio has declined to about 20.4, compared with 22.2 at the end of 2025, according to LSEG Datastream data. The technology sector's forward valuation has also eased, reflecting stronger earnings growth.

Treasury yields remain a key risk
Despite the positive outlook, investors continue to monitor the bond market closely.

Higher Treasury yields can make fixed-income investments more attractive relative to equities while also increasing borrowing costs for businesses and consumers.

The benchmark 10-year U.S. Treasury yield recently touched its highest level since early 2025 before retreating as easing Middle East tensions pushed oil prices lower and reduced inflation concerns, Reuters reported.

Investors believe that sustained moderation in bond yields could provide additional support for equity valuations.

Seasonal challenges ahead
Market participants are also entering a period that has historically been more volatile.

The months leading up to the U.S. midterm elections have often produced weaker equity market performance, with historical data from CFRA showing that August and September have generated negative average returns during midterm election years since World War II.

Investors are also keeping a close watch on sentiment surrounding AI-related companies, as rapid shifts in expectations could continue to drive volatility in technology stocks.

Overall, investors believe that strong earnings growth, continued AI investment and improving valuations provide a supportive backdrop for U.S. equities, although interest rates, geopolitical developments and changing market sentiment remain important risks to monitor.

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