Markets test AI rally as earnings and Fed signals loom

The Nasdaq and S&P 500 closed at more than one-week lows on June 23 after a sharp semiconductor selloff, a reminder that the AI-led rally is now being judged against debt-funded spending and the Federal Reserve’s next move. The Philadelphia SE Semiconductor index fell 7.9%, and the S&P 500 information technology sector index dropped 3.7%, even though the S&P 500 is still up more than 8% this year and the Nasdaq Composite about 11%.

At the center of the market is an extraordinary spending binge. JPMorgan estimates that five companies, including Microsoft, Alphabet and Amazon, will spend about $730 billion in combined capital expenditures in 2026. That scale has helped drive chipmakers, cloud providers and data-center names higher, but Nicolas Janvier of Columbia Threadneedle said the market has already priced in continued capital spending, which means those companies now have to prove the money is turning into revenue and profit. Alphabet has already leaned into the buildout: its investor relations page says the company proposed an $80 billion equity capital raise on June 1, then upsized and priced it at $84.75 billion on June 3.

Valuations leave little room for disappointment. Goldman Sachs said in April that the S&P 500 was trading at roughly 21 times earnings, close to its five-year average and below the 22 times reached in January, while forecasting 12% earnings-per-share growth in 2026 and 10% in 2027. That leaves the market leaning heavily on a clean sequence of results from the largest technology companies, especially if investors keep asking whether AI spending can deliver enough profit to justify the buildout.

The policy backdrop is just as important. Kevin Warsh took the oath of office as Federal Reserve chairman on May 22 after Donald J. Trump nominated him on March 4 and the Senate confirmed him on May 12. The Federal Open Market Committee then held the federal funds target range at 3.50% to 3.75% on June 17 in a unanimous 12-0 vote. For index-fund investors, the stakes are plain: if earnings cool, AI returns lag or the Fed turns less accommodating, the same megacap names that have carried the benchmarks higher could pull them back down just as quickly.