Why US Equity Returns Are Broadening Beyond AI Stocks

Market Performance & Earnings Data

• S&P 500 has reached all-time highs despite significant "under the surface" volatility experienced throughout July.
• Q2 earnings season is 92% complete, with 64% of reporting companies beating estimates by more than one standard deviation, a rate among the highest on record.
• 2027 consensus earnings have been revised upward by approximately 2%, implying an EPS range of 390 to 400, signaling extraordinary growth expectations.
• Nine of the 11 S&P sectors have recorded double-digit year-over-year earnings growth.
• The median stock earnings growth rate is up 14% year-over-year, the largest increase observed since the post-COVID recovery.

Sector Rotation & AI Dynamics

• The market is broadening beyond the "Magnificent Seven"; the equal-weight S&P has outperformed the cap-weighted index by nearly 300 basis points year-to-date.
• Despite strong beats, specific AI-related tech names underperformed the S&P by 130 basis points the day after earnings, suggesting investor skepticism regarding the peak of the AI earnings cycle.
• July saw synchronized volatility drops across AI subcomponents (memory, power, optical networking, liquid cooling), while August revealed discernment with varying bounce levels among themes.
• Investors are de-risking from high-volatility AI positions by rotating into sectors previously written off, such as software and healthcare, which now show strong fundamentals and attractive valuations.
• Consumer experience sectors (live sports, theme parks, concerts) are identified as under-owned and undervalued, trading at a 17x P/E versus a six-year median, with spending growth rising to 6% in Q1 2026 (up from 1% in Q1 2025) compared to a stable 2% in broader services.

Volatility & Hedging Trends

• The VIX index has declined from approximately 21 at the end of July to 15 currently.
• Volatility within specific AI sectors is dampening as companies sign long-term agreements and initiate share buybacks, increasing cash flow transparency.
• Net buying on the firm's prime book has reached the highest levels since the pandemic, indicating investors are lowering gross risk (fewer longs vs. shorts) while buying broadly across sectors.
• Implied correlation at the S&P index level is near all-time lows, making index-level options and hedging strategies appear significantly undervalued.
• Clients are increasingly using ETFs to hedge macro and geopolitical risks, specifically by buying oil ETFs to offset equity portfolio exposure.

Macroeconomic Factors & Rates

• Bond markets face supply pressure from U.S. hyperscalers funding CapEx, European defense spending, and Japanese fiscal expansion, pressuring the back end of the yield curve.
• The U.S. Treasury announced an increase in the size of its bond buyback programs, which helped stabilize back-end bond yields following oil price increases.
• Goldman Sachs Research forecasts a slowing in the U.S. economy during H2 relative to H1, necessitating close monitoring of unemployment and claims data.
• Rising oil prices are viewed as a concern for bond market stability, creating a link between oil yields, bond curve dynamics, and Federal Reserve policy paths.

Forward-Looking Statements & Risks

• The upcoming Jackson Hole symposium is identified as a critical event for new Fed Chair (likely a typo in transcript for "Warsh," contextually Jerome Powell or successor; transcript says "Chairman Warsh") to establish a policy framework, given his stated preference against forward guidance.
• The sustainability of the current market broadening depends on whether the economy can support it; a Fed rate hike could revert the market focus back to the AI trade.
• Market uncertainty regarding Fed policy (hiking vs. holding) was priced at a 33% chance of a hike immediately prior to the July meeting, the highest uncertainty level since 1990.