Despite pronounced volatility early in the year, U.S. equities remain on track to deliver a third consecutive year of double-digit gains—only the third such occurrence since the Global Financial Crisis. Against this backdrop of strong performance, investors are approaching 2026 with three central questions in mind.

1. Are equities too expensive?

There is no denying that valuation levels are elevated, but there are also compelling factors underpinning them. Most notably, earnings growth has been exceptionally strong, posting double-digit increases for four consecutive quarters. Earnings remain the single largest driver of U.S. equity outperformance, both in absolute terms and relative to global peers. Importantly, this combination of valuation resilience and earnings strength has occurred in an environment where policy rates have remained above 4% for the past three years, alongside slowing consumption, fading fiscal stimulus, and limited cyclical tailwinds.

In addition, structural shifts provide further justification for higher valuation multiples. The composition of major indices has tilted increasingly from value toward growth, a transition that inherently supports a higher valuation baseline.

2. Can earnings remain this strong?

Earnings growth is expected to remain robust, though current expectations may prove somewhat optimistic—particularly for the technology sector and with respect to

tax-related assumptions. S&P 500 earnings are projected to grow 11% in 2025 and a further 13% in 2026. The so-called “Magnificent Seven” are expected to see earnings growth moderate slightly to around 20% in 2025, while the remaining constituents are forecast to grow earnings by approximately 11%. Even so, the Magnificent Seven are still expected to account for roughly 64% of total index earnings growth.

That said, true earnings broadening has yet to materialize. As of May 2026, overall earnings expectations have been revised upward by 3.4%, while earnings estimates

for the S&P 493 (excluding the Magnificent Seven) have been revised downward by 1.2% since the start of the year. Markets are also pricing in a potential acceleration in earnings growth to around 12% in 2026, driven by AI-related catalysts.

Provisions within the OBBBA Act related to capital expenditures, R&D spending, and accelerated depreciation may defer certain tax liabilities, improving free cash flow for R&D-intensive sectors such as technology and healthcare, as well as

capital-intensive sectors like industrials and energy. However, these benefits could be partially offset if companies choose to increase investment spending. Meanwhile, consumer-oriented sectors may benefit from spending supported by tax refunds, though margin pressure from tariff-related costs could temper these gains.

3. Is AI a bubble?

Unlike past cycles driven largely by speculative excess, the current AI cycle is being led by highly profitable, cash-rich companies, with tangible and durable demand underpinning investment. Free cash flow margins in the technology sector now exceed 20%—roughly double 1990s levels—highlighting strong profitability and the ability to self-fund and reinvest at scale. Capital spending across hardware, cloud infrastructure, and software is expanding in parallel, not as idle capacity, but to build the infrastructure required to meet growing real-world demand. Historically, bubbles have tended to “build the story first and search for demand later”; AI, by contrast, appears to be “building infrastructure first to serve expanding demand.”

That said, pricing a technology advancing at exponential speed remains inherently challenging. While corporate earnings growth has been impressive, market expectations have risen even faster. Over the past 12 months, the technology sector has accounted for 36% of S&P 500 earnings growth and 56% of total capital expenditure growth, making valuations highly sensitive to any deviation from expectations. Slower enterprise adoption, constraints in compute or energy supply, or faster-than-expected hardware replacement cycles could all weigh materially on valuations and sentiment. As a result, the bar for AI-related investment is rising, and tolerance for error is narrowing.

From a longer-term perspective, the current phase appears more like the early turbulence of a structural transformation than the eve of a traditional bubble burst. Whether the outcome ultimately resembles a “boom” or a “bubble” in terms of valuations, earnings, or technological progress, selectivity and balance will be critical. Within growth sectors, technology retains clear comparative advantages due to strong profitability, lower dependence on consumer spending, and relative resilience to tariff pressures. By contrast, areas more exposed to consumer weakness and tariff compression may remain under pressure. At the same time, the financial sector is demonstrating notable resilience, supported by solid earnings and differentiated catalysts such as deregulation and yield-curve steepening.

Overall, while markets may appear fairly valued—or even undervalued—on the surface given strong fundamentals, periodic corrections are likely as structural transformation unfolds. Investors should be prepared for a path marked by both

successes and setbacks, embracing the long-term AI theme while maintaining clear-eyed awareness of volatility, dispersion, and risk.