As 2025 comes to a close, all the major indexes are at or right near their all-time highs. Even the Russell 2000 enjoyed a big catch-up move when it became clear a rate cut was imminent accompanied by a dovish shift in Fed monetary policy. As of last Friday, the year-to-date returns for the averages are as follows:
- Nasdaq Composite: +22.2% YTD
- S&P 500: +17.8% YTD
- DJIA: +14.5% YTD
- Russell 2000: +13.8% YTD
- S&P Mid Cap 400: +8.1% YTD
The AI boom has been a big contributor to the latest upbeat reading of third-quarter GDP, coming in at 4.3%, with the outlook for growth for AI capex spending continuing to be robust. Forecasts for global AI capital expenditure (capex) in 2026 reflect a “doubling down” by major tech firms, with total spending now projected to exceed half a trillion dollars. Wall Street analysts have repeatedly revised these numbers upward as the scale of data center and infrastructure needs become clearer.
Goldman Sachs and UBS analysts project that global AI-related capex will reach between $527 billion and $571 billion in 2026. A massive portion of this — roughly $450 billion — is expected to come from just five companies: Microsoft, Alphabet, Amazon, Meta and Oracle. This is being touted as the “Big Five Concentration.”
This is one area where investors and talking heads are more cautious, and it has shown up in year-end price action. While the year-over-year growth rate is expected to slow from the soaring 60%+ levels seen in 2024-2025, it is still forecast at a robust 25% to 36% for 2026. As good as that sounds, there is a clear rotation underway.
According to Goldman, “the past few months have seen the stock prices of AI hyperscalers diverge: Investors have rotated away from AI infrastructure companies where operating earnings growth is under pressure and where capex is being funded via debt. At the same time, investors have rewarded companies demonstrating a clear link between capex and revenues, such as some of the world’s biggest cloud platform operators.”
Earlier this year, the biggest AI stocks rose as a group on the continued strength of AI investment spending. But since June, the average stock price correlation across the large public AI hyperscalers has declined from 80% to just 20%. Goldman says some of the dispersion has been driven by the degree of investor confidence that AI investments are generating revenue benefits. This is the great payoff — when companies monetize their AI investments. More evidence of future capex trends and return on investment will emerge during the fourth-quarter reporting season that begins in mid-to-late January. But I think the market is already looking further out.
The annual growth rate of AI capex is projected to undergo a significant “step down” after 2026. Many analysts, including those from SEMI and Deloitte, point to 2027 as a critical inflection point or “reality check” for the sector: If the transition to “Agentic AI”– systems capable of autonomous action — fails to deliver productivity gains that justify the trillions in capital expenditure, the industry could face a sharp contraction.
There is already a notable shift underway where equity gains in 2025 have been concentrated in AI infrastructure companies that include semiconductors, data center operators, technology hardware providers and power companies. However, companies across multiple industries that are realizing AI-embedded revenue growth are seeing bullish fund flows into their stocks. What are termed “AI Platform” stocks, which include providers of database and development tools, are outperforming and are forecast to continue to do so as corporate AI adoption increases.
This is called the “applications and efficiency” phase of the AI trade. The biggest shift forecasted for 2026 is the rise of AI Agents — systems that don’t just answer questions but actually execute work. Instead of selling a $20/month subscription, companies will charge for “task completion.” Analysts estimate the “Agent Economy” could add $1 trillion to the global economy by 2030 as agents take over IT remediation, supply chain rerouting and customer service.
While there is clearly a highly vocal debate about the risk-reward of the current growth rate of the future growth trajectory for the AI infrastructure layer, there is rising analyst confidence surrounding margin expansion and earnings prospects from AI-derived productivity gains among companies in all 11 market sectors that will contribute to strong economic growth in 2026.
In short, and with a parting shot, the AI trade looks very sustainable, but with the whole discussion about the vulnerabilities of OpenAI over their leverage, concentrated dependency, burn rate and circular financing concerns, most Wall Street strategists warn of a potential “AI air pocket” in 2026. Something to think about and closely monitor.
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