Businesswoman looks at stock exchange market display screen board. For the stock market's last six months of 2026, continue to monitor Fed meetings, inflation and AI company earnings reports.
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The S&P 500 has risen 7.7% for 2026 as of June 9. The catalysts for the market’s rise include a mixture of headwinds and tailwinds — the fear of rising interest rates in the wake of higher oil prices induced by the Iran war and tariffs has been overpowered by enthusiasm over the capital spending boom for AI data centers.
For the balance of 2026, analysts are quite bullish, but they have a poor track record. Investors will have to consider whether fear of rising interest rates — in light of 4.2% inflation in May, the highest in three years — is enough to offset the fever for AI stocks likely to be reinforced by more than $3 trillion expected market capitalization from initial public offerings SpaceX, OpenAI and Anthropic.
The macroeconomic landscape has been shaped by the valuations of large technology companies participating in the AI buildout; the inflationary effects of rising oil prices in the wake of the Iran war and the Trump tariffs; and concerns about whether the resulting boost in inflation over the Fed’s 2% target will prompt an increase in interest rates.
Rising prices of AI stocks have offset the fears of rising inflation and higher interest rates. To be sure, there are fundamental reasons why this has happened.
The companies benefiting from AI capital spending have large market capitalizations, with the top 10 S&P 500 companies accounting for roughly 40% of index market capitalization. More broadly, AI-infrastructure beneficiaries account for roughly half of S&P 500 EPS growth this year. Google, Amazon, Microsoft and Meta alone plan to allocate $725 billion to capital expenditures in 2026 — up 77% from last year’s $410 billion, according to Yahoo Finance.
For example, memory chip companies such as SanDisk and Western Digital beat expectations, raised growth guidance and are enjoying triple-digit product price increases due to demand exceeding supply, making them the top stocks of 2026. Makers of AI servers which fill data centers – such as Dell and HPE – have also enjoyed big gains.
AI valuations are looking very high, however. For instance, the Shiller Cyclically Adjusted Price-to-Earnings Ratio first crossed 40 on January 6 (40.58) and reached 41.6 in May, the second-highest in over 140 years of U.S. market history, surpassed only by the December 1999 peak of 44.19.
If the companies driving up the market announce quarterly earnings that fall short of investor expectations or the three IPOs do not go well, investors could decide to sell, which would drive down the market averages.
The Iran war has sent oil prices way up, which have contributed to higher inflation. Prospects for reopening the Strait of Hormuz, which is blocking the release of about 25% of the world’s oil and putting pressure on prices, seem to keep slipping away.
Since the war began, the price of oil has increased as much as 66%, with Brent Crude peaking at $114 a barrel on May 4. The price has since declined, meaning the price of oil had risen 37% in 2026 between the start of the war and June 10. While tariffs – now at 15% remain – and midterm elections looming, the most significant macroeconomic threat to markets seems to be spiking inflation.
With Kevin Warsh’s confirmation as Fed Chair, investors may have been expecting him to preside over holding interest rates where they are, or even cutting them. With markets having fallen on June 10 in the wake of higher interest rates, investors may be increasing their estimates of the likelihood the Fed will raise interest rates.
Such higher rates could make it more expensive to borrow money for AI capital expenditures – a combined $1.5 trillion of which are expected to be financed with new debt. Share prices of the AI stocks benefiting from this spending could dive as a result.
Wall Street expects the S&P 500 to rise 5% more by the end of 2026. However, historical analysis suggests these forecasts are often too low.
For Societe General, the 2026 year-end S&P 500 target is sustained from June until the end of 2026.
These estimates could be too low if history is any guide. Strategists underestimated S&P 500 returns in 13 of the past 16 years, missing year-end targets by about 10% on average, per Tradesmith.
Investors may wish to keep a close eye on technology and communications services and energy and utilities. These have benefited from the market tailwinds so far this year. They should also monitor health care and biotechnology which could receive capital if investors decide to take profits in the first two sectors.
With capex for AI data centers expected to keep rising rapidly, this sector is likely to have fundamental support due to higher earnings. However, institutions may sell shares of the biggest winners and rotate the funds into companies with lower valuations.
Health care may be a likely destination for that rotation. JPMorgan favors health care due to its forward earnings per share-growth estimates (about 14%). This sector also has lower valuations and could benefit from AI – which may streamline the development of new drugs and other innovations.
Energy is a sector to watch due to the Iran war and demand for energy to fuel AI data centers. As long as these drivers of higher energy prices remain in place, this could be a good sector to consider.
Investors should consider that all the macroeconomic factors cited above could turn into headwinds for the market. The AI bubble could burst, inflation could remain higher for longer — prompting higher interest rates — and the Iran war could take much longer to resolve than people expect.
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