Last week, we focused on the fact that earnings results would likely be the most important market catalyst, and that proved true, because important earnings were strong, and that was the main reason the S&P 500 surged to another new high despite deterioration in the U.S./Iran situation.
The Q1 earnings season has been very strong, with 80% of companies beating estimates (solidly above the historical average), and if we had to point to one reason the S&P 500 is at new all-time highs, it’s earnings. But, if we look specifically at the results, there were two themes in earnings releases last week (and really all season) that powered stocks higher: The economic impact of the ongoing AI data center boom and a resilient consumer.
Starting with the AI data center boom, it’s alive, well, and strong. Not only is the insatiable demand for technology parts and capacity (semiconductors, memory, compute power, cloud storage) helping tech earnings grow sharply, but construction of the actual sites (buildings, roads, utilities) is powering numerous other sectors. The AI data center buildout is still acting like an economy-wide stimulus program, and that is benefiting many companies’ earnings, not just the tech sector.
Turning to the consumer, spending remains resilient despite geopolitical concerns and more affordability challenges. Companies from across the consumer spectrum (banks, credit cards, casual dining, luxury goods, travel) are consistently reporting resilient consumer spending, and that absolutely helped with strong earnings and higher stock prices.
Bottom line, stocks are at new highs for legitimate reasons other than just momentum (although momentum is part of it), as earnings growth is better than expected, thanks primarily to the AI data center stimulus and resilient consumer spending. And as long as that’s true, it’ll be hard for this market to have a sustained decline.
However, don’t confuse that with a market that can’t go down! Risks to both of these positives are building and can’t be ignored. On the AI front, the reality is it’s not sustainable longer term unless we start to see better ROI from AI, and we are not seeing that yet. It doesn’t mean it won’t happen, but it must happen at some point, otherwise the AI building boom will stop, and that will be an earnings and economic headwind.
As for the consumer, higher gas prices (really higher everything prices) do matter. Low unemployment is keeping the consumer resilient, but it’s not indefinite, and the longer the Strait of Hormuz is closed, the longer and stronger the stagflation impact will be on the economy, and that could be a problem in the coming quarters. Bottom line, this market is stretched in the short term, and there are risks to monitor. But there are real, fundamentally positive reasons for the new highs. So, while this market remains vulnerable to an air pocket on U.S./Iran disappointment, there are legitimate, fundamental financial positives supporting stocks, which should limit downside as long as they stay in place (if that changes, we will be the first to tell you.
Source: Sevens Report 5-4-26