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New York — The US stock market faces a gauntlet of tests to keep its rally going in the second half of 2026, from the sustainability of AI spending to a high bar for corporate earnings and the outlook for interest rates under a Federal Reserve with a new chair.The benchmark S&P 500 has climbed more than 8% so far this year, extending its bull run well over three years, while the technology-heavy Nasdaq composite has increased by 11%. But investors have shown signs of unease recently, with those indices pulling back in June.AI spending Massive spending on AI infrastructure has been at the heart of the market’s rally, bolstering profit estimates for a wealth of companies. Five companies, including Microsoft, Alphabet and Amazon, are forecasting combined capital expenditure of about $730bn this year, according to JPMorgan.“It is certainly priced into the market that the level of capex we’re seeing will continue for the foreseeable future,” said Nicolas Janvier, head of North American equities at Columbia Threadneedle Investments. Some investors are wary that hyperscalers need to show sufficient returns on their spending. In the meantime, AI-driven optimism has sparked sharp gains in semiconductor shares while also driving other tech stocks, industrials and energy shares tied to the buildout and powering of data centres.“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 puts you in a somewhat vulnerable position,” said Garrett Melson, portfolio strategist with Natixis Investment Managers Solutions.Profit expectations A robust first quarter for US corporate results has driven equity performance, and profits are expected to remain strong going forward, with S&P 500 earnings forecast to rise more than 26% in 2026, according to LSEG Ibes.“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 for which there can’t be any excuses.”Tech and AI-related earnings are not the only expected stellar results. All 11 S&P 500 sectors are projected to post higher earnings in 2026, with Janvier pointing to solid consumer spending even as “AI gets all the headlines”.The recent initial public offering (IPO) of SpaceX is expected to be followed in coming months by AI bellwethers Anthropic and OpenAI, creating a wave of hot new companies for potential buy-in by investors.Taken together, the mega IPOs could create a significant amount of equity issuance for the market to absorb. The cycle is also being watched for signs of market froth.“It’s this test of risk appetite and liquidity, just how much dry powder is out there,” Bianco said.Fed leadership Kevin Warsh is the newly installed chair of the US Federal Reserve, and the start of his era has already caught investors off guard with a hawkish first meeting that raised prospects for near-term interest rate hikes as policymakers focus on controlling inflation.The path for interest rates stands to influence Treasury yields, with rumbles in the bond market earlier this year already leading to bouts of equity selling. Higher rates translate into higher borrowing costs and could also pressure equities by making bonds more competitive investments.“Valuations, I think, are justifiable,” said Noah Weisberger, chief US equity strategist at BCA Research. “But that doesn’t mean the market is not vulnerable to a re-rating of interest rates.”The midterm elections in Congress have largely taken a back seat for markets this year, but politics-related volatility could ramp up as the November elections near.Midterm years on average have the deepest intra-year market drawdowns of any in the four-year election cycles, averaging 18% declines for the S&P 500, while third quarters of midterm years have turned in a negative average performance, according to CFRA data since 1945.“Midterm years certainly are open to a little bit of turmoil leading up to the elections,” Melson of Natixis Investment Managers Solutions said.
