Kevin Gordon, head of macro research and strategy at Schwab, notes that the S&P 500 index currently sits 1% below its peak. However, the average stock within the index has experienced a 14% drawdown since early August. The market's performance is heavily reliant on AI-related stocks, which currently sustain the index despite broader underlying weakness.
Gordon warns that a shortfall in capital expenditure from a single mega-cap company could disrupt earnings. He emphasizes that the current market environment is defined by spending budgets rather than traditional earnings cycles. FactSet projects S&P 500 earnings growth to reach 32.4% for 2026, a significant increase from the 15% forecast at the start of the year.
Concerns regarding AI-funded debt persist, with Torsten Slok of Apollo Global Management noting that the cost of insuring cloud giants' debt against default indicates potential risk. Meanwhile, Gordon suggests that a Federal Reserve interest rate hike pace of roughly every other meeting would represent an optimal scenario for stocks, avoiding sharp growth deceleration or labor market damage.
The upcoming third-quarter earnings season will serve as a critical test for these corporate spending budgets. Investors are closely monitoring whether the heavy reliance on AI-related capital expenditure will continue to support market valuations or if a budget miss will trigger a broader correction.
