Bear with me; this will take some explanation.
(Hint: AI) The S&P 500 once again exhibited impressive resiliency last week, rallying more than 1% despite a surge in bond yields (to near-20-year highs), higher oil prices, and no actual progress on a U.S./Iran diplomatic solution. However, AI enthusiasm, a strong economy, and expected earnings growth offset those negatives (as they've done since March).
The simplest way to see this is basically that tech carried the S&P 500, and without it, the index would have declined. Look at the performance of the S&P 500 and tech/AI aligned sectors vs. RSP (the equal-weight S&P 500 ETF). SPY rose 1.27%, XLK (the Information Tech Sector SPDR) gained 3.52%, AIQ (Global X AI & Tech ETF) leapt 2.87%, and RSP, which represents the "rest of the market," declined 0.56%.
The S&P 500 rallied last week despite rising yields and higher oil, but it was basically all because of tech. The catalyst last week was Muse, META's personal AI agent. (Meta is a major technology company—formerly named Facebook, Inc.—that owns and operates popular social platforms like Facebook, Instagram, and WhatsApp.)
As we covered in last week's Report, Muse is generating another round of AI bullishness for three main reasons:
1) Personal AI agents (that act as a useful personal assistant) could dramatically accelerate AI adoption amongst the populace, which could boost revenues for AI/tech companies and reduce ROI (Return on Investment) concerns about AI.
2) Personal agents like Muse require a lot of computing power and network capacity. If these become widespread, then it's only going to dramatically increase demand for AI infrastructure and just make the AI boom even bigger. Demand for chips, memory, networking, etc., will all surge even more if agents like Muse become popular.
3) Based on the initial success of Muse, we can expect copycats from OpenAI, Google, Anthropic, Microsoft (they are already rebranding Copilot), and that could speed up numbers 1 and 2 (meaning more personal AI agents could increase adoption and put even more demand on AI infrastructure). Bottom line, if Muse is the next big thing, then it's very bullish for hyperscalers (They run millions of physical servers across giant facilities worldwide) and AI infrastructure (and bearish for software).
The potential positive impact of this isn't theoretical. It could mean even more earnings growth for the tech sector. Since earnings growth is the number one driver of this bull market, adding more fuel to that fire would help further support stocks despite headwinds.
Finally, it's important that we don't mistake the renewed tech leadership for a sign that the market can't go down even if tech rallies. It can, but conditions have to be worse. Yes, yields are surging, oil is higher, and there's no actual progress on Iran or Russia/Ukraine. But so far, it really doesn't "matter" to stocks because 1) Economic growth is very strong and accelerating (as we saw from the flash PMIs (Purchasing Managers Index) and virtually all economic data recently) and 2) Earnings growth has upward pressure.
For all the focus on geopolitics, the reality is that if economic growth is strong and earnings are growing above trend, they trump everything else.
Now, here's the negative part. If we get another bout of "AI anxiety" as we saw in Jan/Feb or July, the "rest of the market" will likely not be able to hold up now as it did then, because for the rest of the market, conditions are worsening (i.e., higher yields, compressed margins). Point being, AI is carrying this market through difficult times, but if AI falters, we're probably looking at something more like a 10% correction now compared to a 5% pullback.
The bottom line is the market is resilient, but I wanted to make sure we all understood that it's being carried by AI enthusiasm and the attendant expectations for higher earnings. If that falters, then the tough macro setup (higher yields and compressed margins) will hit stocks. Just understand that, for now, AI is king and its earnings are accelerating.
Source: Sevens Report 9/28/26