The bull market has given investors plenty of reasons to become cautious. Stock valuations are elevated, the major indexes have already posted enormous gains, AI spending is reaching almost unimaginable levels, and the federal government continues to run deficits that would normally be associated with a recession rather than a growing economy. On top of that, we are now entering a seasonally difficult stretch for stocks, with midterm election years historically prone to heightened volatility between late summer and Election Day.
Yet beneath those concerns, the fundamental backdrop remains remarkably strong.
In fact, two of the trends investors most frequently point to as potential problems, namely the AI capital-spending boom and enormous federal deficits, are also among the most powerful forces supporting economic growth and corporate profits today.
The largest technology companies are pouring hundreds of billions of dollars into data centers, semiconductors, networking equipment, power infrastructure and the broader AI ecosystem. At the same time, Washington continues to inject enormous amounts of money into the economy through deficit spending. Whatever one thinks about the long-term effects of either trend, both are creating substantial demand in the here and now.
That combination is showing up clearly in the data. Economic growth remains very strong, corporate revenues continue to expand at an exceptional pace, and earnings growth has broadened well beyond the handful of mega-cap technology companies that initially drove the rally. The most recent earnings season has demonstrated unequivocally that this is no longer exclusively an AI-stock story, as businesses across a wider range of industries are participating in the expansion.
None of this means stocks will move higher in a straight line. The coming months may be punctuated by a more challenging environment, as midterm-election seasonality leaves the market vulnerable to a correction.
But a correction is not the end of the bull market.
As long as AI investment remains strong, fiscal policy stays expansionary and corporate earnings continue advancing, the fundamental fuel behind this cycle should remain in place. That makes any meaningful bout of election-driven weakness less likely to mark the end of the bull market and more likely to create another attractive buying opportunity.
Below, I will break down the two enormous spending engines powering the US economy, how the strength is increasingly spreading across corporate America, and why it seems this bull market has at least another year to run.
Focus on the Forces That Actually Matter
Financial markets are infinitely complex, with thousands of variables influencing prices at any given moment. That complexity makes it critically important to identify the core forces actually driving the advance.
Investors can easily get pulled from one narrative to the next, from inflation and interest rates, to elections, geopolitics, valuations or the latest concern surrounding AI, even when those developments do little to change the underlying drivers.
Many of the sage investors throughout history have emphasized the importance of following liquidity, and that is exactly what we will do here. Today, two enormous liquidity spouts stand above the rest: the extraordinary wave of capital spending surrounding artificial intelligence and persistent fiscal deficit spending from Washington.
Together, these forces are pumping enormous amounts of money into the US economy, supporting strong economic growth and, increasingly, earnings growth across a broader range of businesses. Until those core drivers materially weaken, intermittent bouts of volatility or transient narratives should not be confused with the end of the bull market.
AI Capex Is a Core Engine of Economic Growth
The first major pillar of the bull market is the extraordinary capital-spending cycle surrounding artificial intelligence, and the scale of the buildout is becoming difficult to overstate.
Moody’s estimates that Microsoft, Amazon, Alphabet and Meta will collectively spend roughly $725 billion on capital expenditures in 2026, with that figure expected to approach $1 trillion in 2027. For perspective, that is equivalent to roughly 2.4% of the current US economy, though some of that spending occurs overseas.
More narrowly, AI-related data center construction, computing hardware and networking equipment already represent a meaningful share of US investment, putting the current buildout in the same conversation as some of the great infrastructure booms of the past. It has already reached a scale comparable to the telecom investment boom of the late 1990s, though it currently remains below the most extreme estimates of railroad investment during the 19th century.
And importantly, that spending does not disappear into a black hole. Every dollar of capital expenditure becomes revenue somewhere else. Nvidia may sell the GPUs, but those chips require data centers, servers, networking equipment, power infrastructure, cooling systems, land and construction. What began as a semiconductor boom is increasingly flowing through industrials, utilities, energy companies and the broader economy.
There are legitimate questions about the eventual return on all this investment, but even that picture is beginning to improve. The hyperscalers are increasingly pointing to accelerating cloud growth, stronger AI demand and, expanding cloud profitability as evidence that the spending is beginning to generate meaningful returns.
The ultimate ROI does not need to be settled today for the investment boom to have an enormous economic impact today. With hyperscaler capex still accelerating into 2027, this first major liquidity spout remains wide open.
Washington Is Providing the Second Growth Engine
The second major liquidity source is Washington.
The federal government is projected to run a roughly $1.9 trillion deficit in fiscal 2026, equal to 5.8% of GDP, an unusually large shortfall for an economy that is still growing and operating near full employment. For comparison, federal deficits have averaged about 3.8% of GDP over the past 50 years.
Whatever one thinks about the long-term consequences of that policy, the near-term economic effect is straightforward: the government is spending far more into the economy than it is taking out through taxes. That provides another powerful source of liquidity and demand alongside the AI investment boom.
The combination is unusual. The US is simultaneously experiencing an enormous private-sector infrastructure buildout and fiscal policy that remains highly expansionary. Together, those forces help explain why nominal growth, corporate revenues and earnings have remained so resilient.
There may ultimately be a price to pay for persistent deficits, whether through higher interest costs, inflation or tighter fiscal policy. But for the purposes of understanding what is driving markets today, this second liquidity spout remains firmly open.
Continued . . .
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Earnings Growth Is Broadening Across the Market
The clearest evidence that these liquidity flows are reaching the broader economy can be seen in corporate earnings.
For the S&P 500 companies, which have reported second-quarter results thus far, aggregate earnings grew 40.9% year-over-year on 14.5% higher revenues. But those headline numbers were heavily distorted by Micron’s extraordinary earnings growth and an unrealized gain on Alphabet’s SpaceX stake.
Strip out Micron and Alphabet, and earnings for the remaining companies still grew an impressive 21.5% on 13.4% higher revenues. That is the number I think best captures the underlying strength of the earnings cycle. Meanwhile, positive surprises have been widespread, with 83.8% of companies beating EPS estimates and 76.9% topping revenue estimates, both comfortably above recent historical averages.
Technology remains exceptional, but this is increasingly more than a Tech story. Excluding the entire Tech sector, S&P 500 earnings are still expected to grow 18.7% in Q2. And even within Tech, stripping out Nvidia, Micron and Alphabet leaves earnings growth of 33.7% for the rest of the sector.
That broadening is critical. The bull market may have been started by a relatively narrow group of AI leaders, but the earnings expansion is increasingly spreading throughout corporate America. For full year 2026, earnings outside the Magnificent Seven are expected to grow 21.6%, more than twice the 9.8% growth rate recorded last year.
The Near-Term Risk: Midterm Election Volatility
Despite the strong fundamental backdrop, history suggests investors should be prepared for some turbulence over the next couple of months.
According to an analysis from Frank Holmes, in an article written for Forbes, every one of the 16 midterm election cycles since 1962 experienced a market decline between mid-August and Election Day. The average drawdown was 8.1%, while 10 of those 16 cycles ultimately bottomed in October. More broadly, the average maximum drawdown during midterm years has been 19.4%, compared with 12.5% in all other years.
The good news is that the historical pattern becomes considerably more favorable once the election passes. The S&P 500 has been higher 12 months after every midterm election since 1962, producing an average gain of 14.2%.
Seasonality is never destiny, but if weakness does emerge this fall, it would be entirely consistent with historical precedent. And with the fundamental drivers of the bull market still intact, I would view that correction as a potential buying opportunity rather than evidence that the broader cycle has ended.
What Would Prove this Thesis Wrong?
Any bullish thesis needs conditions under which it can be proven wrong. For this bull market, the clearest warning would be a deterioration in the fundamental drivers outlined above.
One of the best indicators to watch is earnings estimate revisions, which sit at the heart of the Zacks investment framework. Analysts continuously update their forecasts as new information comes in, making revisions a useful real-time measure of whether the earnings outlook is strengthening or weakening. As long as estimates are broadly moving higher, it is difficult to argue that the fundamental backdrop is breaking down.
A sharp pullback in AI capital spending, a sustained turn lower in earnings estimates, meaningfully weaker nominal GDP, tighter credit conditions or a material deterioration in the labor market would all give me reason to become more cautious.
Those would represent genuine changes in the underlying thesis. A negative headline, a weak month for stocks, another debate about AI valuations or a bout of election uncertainty would not.
That distinction is critical: focus on the earnings trend and the major liquidity drivers, not every shift in the market narrative.
Can Investors Remain Comfortably Bullish?
The bull market is not without risks, and the next few months could be considerably more volatile than the recent past. But the fundamental backdrop remains strong.
The United States is simultaneously experiencing one of the largest technology investment cycles in modern history and unusually aggressive fiscal spending. Together, those forces are supporting strong nominal economic growth, healthy corporate revenues and robust earnings.
Just as importantly, the benefits are increasingly spreading beyond the original AI leaders and into a broader range of companies and industries.
Eventually, these forces will weaken. AI capital spending will slow, fiscal conditions will change, or economic growth will roll over. When that happens, the investment framework should change with it.
But that is not what the evidence is showing today.
For now, the primary drivers of the bull market remain intact. And while midterm election seasonality could create a meaningful bout of volatility between now and Election Day, I would view that weakness as an opportunity rather than a reason to abandon the broader trend.
Until the underlying drivers change, the bull market deserves the benefit of the doubt.
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Ethan Feller
Ethan Feller has a decade of experience trading in markets. He graduated from Ithaca College with a BA in Economics. Prior to joining Zacks, Ethan worked at a proprietary trading firm where he focused on statistically significant short-term trading strategies in stocks and futures. He invites you to access the newest 7 Best Stocks for the Next 30 Days report today.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
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