By Lewis Krauskopf
NEW YORK, Aug 5 (Reuters) – As the U.S. stock market soars to fresh record highs this week, investors say a powerful corporate profit engine, a reset in high-flying AI shares and still-reasonable valuations can further fuel the rally.
The benchmark S&P 500 on Tuesday posted its first record closing high in two months. In between, swoons in high-flying semiconductor and other technology shares weighed down indexes, but stocks gained sharply in recent days, boosted by signs of calming U.S.-Iran tensions.
Markets are also in the midst of another quarterly earnings season that has surpassed lofty expectations, driven by massive spending on AI-related infrastructure. That profit optimism should provide critical fundamental support for equities in the months ahead, investors said, even as they caution that risks such as rising Treasury yields remain.
“Absent something coming out of left field, absent major concerns around the yield curve, we have a generally favorable backdrop for the back half of the year,” said Marta Norton, chief investment strategist at retirement and wealth services provider Empower.
MARKET CLEARS HYPERSCALER RESULTS TEST
With its recent surge, the S&P 500 was last up about 13% in 2026. Some investors argue that the index is in a healthier position after a sharp pullback in an AI trade that had become overheated. After tumbling from its late June high, the Philadelphia SE semiconductor index is still down about 17% from that peak, even as it remains up over 70% on the year.
“Now that we’ve gone through the selling pressure, you’re at a more balanced state around some of these key names that were rising in the second quarter,” said Anthony Saglimbene, chief market strategist at Ameriprise.
One key hurdle for the stock market was the results from Alphabet, Microsoft, Amazon and Meta Platforms — whose combined massive spending on AI data centers is boosting semiconductor firms and other companies involved in the expansion. Capital spending by those hyperscalers plus Oracle is expected to reach nearly $800 billion this year, according to Goldman Sachs strategists.
In their reports, hyperscalers showed returns on their investments, alleviating concerns they would reduce spending, a move that would have hurt those companies that have been boosted by those outlays, according to Eric Johnston, chief equity and macro strategist at Cantor, the investment banking arm of Cantor Fitzgerald.
“The hyperscalers can work because they’re getting an ROI on their cloud business,” Johnston said. “But so can semis because … the capex can continue. And it’s that combination which is super powerful right now.”
VALUATION MODERATES EVEN AS MARKET GAINS
With more than 75% of S&P 500 companies having reported results, overall second-quarter earnings are on track to climb 31.1% on an adjusted basis from a year ago, according to LSEG IBES data as of Wednesday, the highest growth since 2021. Estimates for the third and fourth quarters have also ticked higher.
Second-quarter tech sector earnings are on pace to rise 72%, with growth expected in 10 of 11 S&P 500 sectors.
“Corporate profits have been spectacular,” said Eric Kuby, chief investment officer at North Star Investment Management.
Earnings growth, Kuby added, has been “explosive in mega-cap technology and specific sectors, but it’s strong across the board.”
Stronger earnings have helped moderate valuations. The forward price-to-earnings ratio of the S&P 500 stood at 20.4 on Tuesday, according to LSEG Datastream. That is down from a P/E ratio of 22.2 at the end of 2025, and below 21.3 on June 2, the S&P 500’s last record high.
The tech sector’s P/E ratio is down to 22.1 from 26.5 at the end of 2025.
“We’re in a pretty strong fundamental environment,” Saglimbene said. “The valuations have gotten more attractive over the last month and a half.”
RISING TREASURY YIELDS POSE RISK TO STOCKS
Rising Treasury yields could undermine the optimism. The benchmark 10-year Treasury yield last week hit its highest level since January 2025.
Treasury yields can create more investment competition for stocks as they rise. Higher yields also translate into higher borrowing costs for consumers and companies, dragging on economic growth and equities.
More recently, the 10-year yield has fallen to 4.63%, as calming of tensions in the Middle East lowered oil prices, easing inflation worries.
“The fact that oil prices are now back below 80 (dollars a barrel) might go a long way in helping contain the rise in yields,” said Angelo Kourkafas, senior global investment strategist at Edward Jones.
But, Kourkafas said, “we’ll have to see some relief on that front to see any meaningful increase in valuations.”
Markets are entering a seasonally tricky stretch, ahead of the November midterm elections that will determine which political party controls the U.S. Congress. In midterm years since World War Two, the S&P 500 posted negative average returns in both August and September, according to CFRA.
Another worry is evolving Wall Street narratives involving the AI trade.
“The sentiment shift around AI can be so severe,” Norton said.
(Reporting by Lewis Krauskopf; Editing by Megan Davies and Will Dunham)
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