Biweekly Investment Insights: Earnings remain the clear driver for equity returns, yet risk underdelivering

Yanni Angelakos, Head of Investment Insights, Nasdaq Capital Access Platforms

Mike Cho, Senior Research Analyst, Nasdaq Capital Access Platforms

Tony Kristic, Senior Research Analyst, Nasdaq Capital Access Platforms

Key Points

• Epicenter of YTD equity story—semiconductors—2026 estimated EPS growth rate of 100%+ YoY. An increasingly high earnings bar with estimated AI capex of $5.5 trillion through 2030
• Equal-weighted U.S. equity indexes, small caps, and the value factor have outperformed since the recent equity highs on June 2nd
• Softer June CPI and PPI readings help market’s near-term Fed rate hike angst

Biweekly Chart in Focus: PHLX Semiconductor Index (SOX) 2026 estimated EPS growth rates vs. average of 2023-2025 EPS growth rates (YoY%) in monthly intervals 
 

Source: Bloomberg

Summary

As hypothesized in our May 21^st piece, equities have mostly traded sideways over the past two months as the markets awaited the next catalyst. From a fundamental perspective, that catalyst has likely arrived in the form of Q2 earnings which could set the tone for equities heading into the fall. Earnings growth is still expected to be very strong for broader U.S. equities and, even more so, for semiconductors, per our Biweekly Chart in Focus.

While U.S. earnings and the AI theme have underpinned equities—keeping us constructive—the risk is that these lofty U.S. earnings expectations underdeliver. This could leave equities vulnerable in the near-term, amidst elevated valuations, though valuations are lower from the start of the year given the strong earnings story. Where is the AI theme susceptible If estimated AI capex of $5.5 trillion (J.P. Morgan) through 2030 fails to result in a meaningful ROI for companies-namely, the hyperscalers. This would result in free cash flow and profitability headwinds, likely leading to a scaling back of capex intentions. This, in turn, could hurt the insatiable demand for chips from semiconductor companies.

Since the recent U.S. equity highs on June 2^nd, U.S. semis are lower by 10%, and value and small caps have outperformed growth and large caps, respectively. Concurrently, a Morgan Stanley U.S. long/short momentum basket fell by 22% on a rolling 3-week basis—its largest decline since March 2021. Despite notable drawdowns in equity leadership recently—some profit taking was inevitable—headline U.S. indexes are still up solidly YTD. This illustrates a broadening in U.S. equity returns as respective equal-weighted indexes are in-line/outperforming their cap-weighted brethren. Looking further under the surface, while index level volatility is subdued, stock-specific volatility is extreme—speaking further to shifting undercurrents in the markets.

With over 50% of broad U.S. equity market cap set to report Q2 earnings over the next two weeks, investors will be looking for another “show me” moment for equities. The bottom-up insights that investors will glean this earnings season will be balanced by the ongoing top-down dynamics such as inflation trends—June’s were softer—and the resurgence of military actions between the U.S. and Iran which factor into oil prices (+24% MTD), and play out in real-time via rates markets (Treasury 10-year yields at 2-month highs, over 4.6%) and Federal Reserve rate expectations.

Details

Strong earnings outlook coupled with the latest AI jitters

The driver of U.S. equity returns has, of course, been the AI-fueled earnings story: as of July 10^th, Nasdaq-100® earnings growth was 48.5% over the prior 12 months, multiple expansion was -17.8%—resulting in a total return of 31.5% (factoring in residuals). With the strong earnings growth, Nasdaq-100 NTM P/E has gone from 25.6x on January 1^st to 24.7x as of July 10^th (per FactSet data).  

Per Figure 2, S&P 500 rolling next 12-month estimated EPS growth is 32% YoY—levels seen only following deep earnings recessions during 2008-2009 and briefly in early 2020; the prior, more mid-cycle high was around 22% in 2018.  

Figure 2: S&P 500 12-month forward estimated EPS growth rate (YoY%) 
 

Sources: FactSet, Strategas

The latest market paranoia around the AI capex trajectory came on July 17^th when Chinese AI startup, Moonshot, released Kimi K3. This model reportedly rivals OpenAI and Anthropic models (Figure 3) at a lesser cost, which reignited DeepSeek fears from January 2025. We suspect that the markets will likely have to endure waves of competitive rivals launching new, efficient models, and reportedly more inexpensive—this is simply an evolution of any new technology, product, or service. Yet it nevertheless brings into question just how much AI infrastructure spending is needed.

Figure 3: Artificial Analysis Intelligence Index (higher is better)  
 

Source: https://artificialanalysis.ai/ via WSJ. Notes: Artificial Analysis Intelligence Index is a composite benchmark scaled from 0 to 100. It measures AI model capabilities across reasoning, multi-step tasks, instruction following, and coding. It is constructed using a weighted average across four core categories that emphasize agentic, real-world workflows: agents, coding, scientific reasoning, and general.

However, it is not only the staggering estimates of AI capex to which investors pay attention—J.P. Morgan estimates $5.5 trillion in AI spend through 2030—but the funding sources as well (Figure 4). The mega cap tech space and hyperscalers are shifting from funding via cash flows to borrowing in the corporate debt market and through other financing channels. While the profit margins and balance sheets of Nasdaq-100 companies remain relatively strong per Nasdaq Index Insights, investors are likely to closely monitor company fundamentals should enterprise AI platforms fail to spur sufficient revenue.  

Figure 4: Anticipated AI capex funding sources through 2030 (in trillions)  
 

Source: based on J.P. Morgan estimates

Broadening equity returns

The recent sell-off in the AI ecosystem has been in flight since the June 2^nd U.S. equity highs as investors have looked elsewhere given lofty earnings and AI capex expectations and assumptions (Figure 5). This has pushed the market cap-weighted indexes to weaken on a YTD basis—though with still solid returns in 2026—and equal-weighted indexes to outperform (Figure 6).

Figure 5: Equity themes YTD and since the recent June 2^nd highs 
 

Source: Bloomberg. As of July 21, 2026.

Figure 6: YTD % returns across market cap- and equal-weighted U.S. equity indexes 
 

Source: Bloomberg. As of July 21, 2026. 

Given the presence of AI-linked names in the long momentum baskets, Morgan Stanley’s U.S. momentum long/short index experienced its largest drawdown over a 3-week period since the March 2021 (Figure 7).  

Figure 7: Long/short U.S. momentum factor index on a rolling 15-day basis 
 

Source: Bloomberg, Morgan Stanley. As of July 21, 2026.

Equity volatility at theindex level remains subdued with the VIX under 18 and below its 5-year average of around 19. However, individual stock volatility, as measured by VIXEQ, hit its highest since March 2020 and its spread to VIX reached its highest on record going back to June 2014. So, while overall market volatility remains low, single-stock volatility is extremely elevated as investors digest more idiosyncratic risks. Is this a harbinger of weaker forward equity returns? Not according to history over the past 10 years: per Bloomberg, the S&P 500 has returned an average of 11.7% in the ensuing three months after VIXEQ eclipsed 50—it closed at 50.4 on July 21^st.

An inflation respite 

June CPI came in well below expectations, with headline CPI falling 0.4% MoM and +3.5% YoY (vs. +3.9% consensus). Core CPI was flat MoM and +2.6% YoY, driven primarily by a sharp drop in gasoline prices—the largest monthly decline since 2022—which more than offset still-elevated shelter and services costs. June PPI similarly surprised to the downside, with headline PPI falling  0.3% MoM and rising 5.5% YoY (vs. +6.2% consensus). Core PPI ex-food and energy rose just 0.2% MoM and 4.7% YoY (vs. +0.3% and +5.1% consensus, respectively), as a 6.4% MoM plunge in energy prices drove the broad deceleration.  

June’s PCE report, the Fed’s preferred inflation gauge, will be released on July 30th—a day after the Fed’s next meeting—with consensus estimates also calling for a cooling in the headline and core readings. Despite CPI and PPI YoY indicators still hovering near multi-year highs (Figure 8), this was a needed reprieve for Fed fund futures pricing. Before the most recent inflation reads, markets were pricing in a 43% chance of a hike at the July 29^th meeting vs. around 26% as of this writing. 

Figure 8: June inflation readings moderated, softening near-term Fed rate hike expectations 
 

Source: Bloomberg

Headlines regarding a more concrete resolution or agreement between the U.S and Iran will likely remain volatile in the interim. However, if taking our cues from market-based inflation indicators (Figure 9), they continue to portend for an aversion of the left tail-risk scenarios of a more protracted and prolonged conflict which could retest the April highs in oil prices.  

Figure 9: Short-term market-based inflation expectations at nearly 2-year lows 
 

Source: Bloomberg. Notes: Break evens derived from subtracting real yield of Treasury Inflation-Protected Securities (TIPS) from the yield of the closest nominal Treasury maturity. TIPS are U.S. government-backed bonds designed to protect purchasing power by adjusting their principal value based on inflation per CPI.

_Disclaimer:

_{Nasdaq®, Nasdaq-100®, and Nasdaq Stock Market® are registered trademarks of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.}

_{© 2026. Nasdaq, Inc. All Rights Reserved.}