Weekly Investment Perspective

U.S. equities pushed higher last week as corporate earnings strength and renewed enthusiasm around AI investment outweighed still-volatile developments in the Iran conflict and related energy risks. For the week, the tech-heavy Nasdaq led the way with a 4.5% gain while the S&P 500 rose 2.4% and the Dow Jones eked out just a 0.2% increase. The S&P 500 and Nasdaq both notched a sixth straight weekly gain and closed at fresh record highs. The market’s message has been clear: investors are looking through geopolitical tail risks for now, with the AI compute and capital spending cycle again dominating sentiment. That said, the rally has become notably top-heavy. Citadel noted that only 22% of S&P 500 companies have outperformed the index over the past 30 days, a 30-year low and down sharply from 65% in February. The market’s early-year breadth has given way to a narrower rally led by a smaller group of AI-linked winners.

The clearest expression of that move has been in semiconductors. The Philadelphia Semiconductor Index is now up nearly 60% over the past six weeks, its second-best six-week run on record behind only March 2000, due to rapidly upgrading expectations for AI infrastructure spending. Coming into the year, major hyperscalers including Microsoft, Meta, Alphabet, Amazon, and Oracle were expected to spend roughly $500 billion on capital expenditures in 2026. Following first quarter earnings updates, that estimate has moved closer to $750 billion. This is a powerful fundamental support for the long-term AI buildout thesis, but it also introduces a near-term caution. When a trade moves this far this fast, momentum itself becomes part of the story. We continue to believe AI infrastructure remains one of the defining investment themes of this cycle, but periods of extreme enthusiasm can bring sharper bouts of volatility along the way.

Importantly, recent earnings strength has not been limited to AI, even if AI remains the central pillar of the market narrative. With roughly 90% of S&P 500 companies having reported, first-quarter earnings are tracking nearly 28% higher year-over-year, the strongest pace since late 2021 and far above the 13% growth expected at quarter-end. Materials, industrials, and financials all delivered earnings growth above 20%, highlighting that the profit recovery has broadened beyond the largest technology companies. Looking ahead, 2026 earnings expectations have also improved meaningfully. FactSet data now shows S&P 500 earnings growth expectations near 21%, up from less than 13% at the start of the year, with eight of eleven sectors expected to post double-digit growth.

There are still pockets of caution beneath the stronger headline numbers. Several companies exposed to lower-income consumers flagged pressure from higher gasoline, grocery, and electricity costs, even as aggregate consumer spending remains resilient. Last week’s April jobs report added to that balanced picture. Nonfarm payrolls rose by 115,000 in April, roughly double consensus expectations, following a stronger 185,000 gain in March. Hiring breadth was also encouraging, with more than half of industries adding jobs for the fourth consecutive month. However, the labor market is not without cracks: job-finding rates remain low, voluntary quits are subdued, and wage growth has cooled, with average hourly earnings rising just 0.2% in April and slowing to a 2.8% annualized pace over the past three months. The job market remains a source of economic support, but higher energy prices are now eating into real purchasing power, particularly for lower-income households.

The Iran conflict also moved somewhat to the background during the busiest stretch of earnings season, but it has not gone away. Over the weekend, President Trump called Iran’s latest response to a U.S. peace proposal “totally unacceptable,” a sign that diplomatic progress remains uncertain. The timing is notable with this week’s Trump-Xi summit in Beijing, where President Trump is expected to push China to help broker a deal and use its influence with Iran, particularly given China’s exposure to oil supply from the Middle East. Oil prices fell last week on optimism that a negotiated path could eventually emerge, but the underlying risk is still meaningful. A renewed escalation, prolonged disruption to energy supply, or a closure of the Strait of Hormuz would quickly shift investor attention back toward inflation, consumer spending pressure, and the Federal Reserve’s ability to respond.

The week ahead will bring several important tests for that inflation outlook. April CPI will be released Tuesday, followed by PPI on Wednesday and retail sales on Thursday. CPI is expected to accelerate to 3.7% year-over-year from 3.3% in March, largely reflecting the impact of higher energy costs tied to the Iran conflict. Investors will also watch retail sales for signs that higher prices are beginning to weigh more heavily on spending. For now, markets are being supported by impressive earnings growth and an extraordinary AI capital spending cycle. The challenge is that those positives are arriving alongside narrow market leadership, stretched momentum, and a geopolitical shock that could still reprice inflation risk quickly. Our approach remains to participate in durable long-term growth themes while staying disciplined on diversification and quality, especially when enthusiasm becomes concentrated in a small corner of the market.

2026 The Long View | First Merchants Bank