The S&P 500 hit a new high yesterday, rising 0.62% to 6,944.82 points. Futures were slightly lower this morning, as expected by traders looking to sell and lock in some of the gains. The STOXX Europe 600 Index also hit a new high yesterday and was flat in early trade this morning.
Much of the bullish sentiment comes as analysts realize that the massive capital expenditures (capex) used to build AI data centers are unlikely to stop anytime soon.
The result of all this new spending will be “We expect U.S. stocks to have another solid year of gains in 2026. We expect S&P 500 total returns to reach 12%, reaching year-end levels of 7,600,” Goldman Sachs analyst Ben Snider and colleagues told clients in a note sent this morning.
However, the problem in 2026 will be that AI capex growth will start to slow, he said. In turn, the amount of profit needed to justify all capital expenditures won’t materialize, Snyder et al. Arguably, this will lead to traders picking winners and losers among the large tech companies in the S&P 500.
“The 10 largest stocks in the S&P 500 account for 41% of market cap and drive 53% of the S&P 500’s 2025 returns. We expect AI spending to exceed consensus estimates this year, but growth is starting to slow as enterprise adoption increases, leading to a rotation among the largest U.S. tech stocks, creating two-way risk for the overall index,” he told clients.
Capital expenditures by large “hyperscalers” (Yuan, Amazon, letterGoldman Sachs calculates that this number will be approximately $400 billion by 2025, growing at 70% annually. Big tech companies are also beginning to fund much of their growth through debt.
“As expenses and debt grow, so will ultimately the profits required to justify continued investment,” Snyder said.
Goldman Sachs estimates that so far, technology companies are happy to spend the money because they generate profits two to three times the investment. The problem, Snyder said, is that it may not be sustainable. “Given consensus estimates of average annual capital expenditures of $500 billion from 2025 to 2027, maintaining the returns on capital that investors have become accustomed to will require these companies to achieve annual profit run rates of over $1 trillion, more than double the consensus estimate of $450 billion in revenue in 2026,” he wrote.
While some of these companies will succeed in making the required profits, others will not, he said. “The scale of current spending and market capitalization, as well as the increase in intra-group competition, suggests that the likelihood that all of today’s market leaders will generate sufficient long-term profits to adequately reward today’s investors is diminishing.”
analyst pioneer and Piper Sandler Also follow the AI capex profit story.
Nancy R. Lazar, chief global economist at Piper, and her colleagues predict that technology companies have not yet reached the cap of their capital spending budgets, especially with the Beauty Bill Act (OBBA) giving companies new tax breaks for capital expenditures. “Tech capex has been a huge story for some time, but compared to history, it’s still not ‘too high’ relative to GDP. Given OBBA’s total capex spending, Fed easing, and banks easing lending standards, there’s plenty of upside ahead,” they told clients.
Wang Qian, global head of capital markets research at Vanguard Group, also warned that if profits don’t follow capital spending, then investors should expect an economic downturn. “We are bullish on the potential of AI to transform the economy. But transformative technologies require profitable business models to win. And, in financial markets, returns depend on expectations. Tech companies’ earnings have been strong so far, but their valuations may have exceeded their own expectations. When expectations diverge too much, it wouldn’t be surprising to see a market correction.” wealth.
Here’s a snapshot of the market ahead of the opening bell in New York this morning:
- S&P 500 Index Futures This morning was mediocre. It closed up 0.62% on the previous trading day at 6,944.82 points, a record high.
- Stoxx Europe 600 Index Prices were unchanged in early trade.
- British FTSE 100 It fell 0.65% in early trading.
- Japanese Nikkei 225 Index down 1.06%.
- Chinese CSI 300 down 0.29%.
- South Korea Korea Composite Index up 0.57%.
- Indian nifty 50 Down 0.14%
- Bitcoin It fell to $91,800.