To us at Cornerstone, it’s surprising how many investors and pundits keep focusing on one geopolitical crisis or another even as new objective economic and market data emerges. It shows that there’s great opportunity for those willing to see the forest for the trees.
Those who’ve been distracted from the fundamental data may have woken up last week surprised to find the S&P 500 registering new intraday record highs quite often:
Even with this evidence staring investors directly in the face, some remain wary and even skeptical of the market strength. But in our view, the market is rising for the right reasons.
The stocks leading this rally have been semiconductors and AI-exposed industrials and other technology stocks. They’re companies with strong near-term visibility and product scarcity, enabling both extraordinarily good unit volume growth and margin expansion.
In other words, these companies have strong fundamentals to support their gains. They also produce things that are visibly scarce:
- AI compute components and memory
- AI power generation component and products within that supply chain
- Petroleum products and related energy necessities
- Scale computing enterprises
Most importantly, at CFS we argue the U.S. has a surplus of these things relative to the rest of the world. Thus, it should not be a surprise that these types of stocks are leading since the Iran War began:
Most importantly, we think current valuations remain attractive as earnings growth is far exceeding everyone's initial reasonable expectations. Perhaps the best example of this is NVIDIA, with a valuation around 20 times forward P/E. Somehow that’s below consumer staple companies Costco and Walmart.
This fundamental strength and valuation attractiveness is proving not to be an overextension nor a short-term mirage. It’s clear in the astounding earnings numbers, which are exceeding even our extraordinarily bullish outlook at CFS.
As of this writing, 82% of S&P 500 companies reported earnings results and a staggering 87% are soaring past estimates, with a magnitude overall surprise beat of 18.6%:
It’s the largest margin magnitude surprise in more than a decade.
Even more incredible is the Q1 2026 blended earnings growth rate. A week ago it was 15%, and now it’s 27.7%:
Going into this earnings season on March 31, the consensus earnings growth rate expectation was 13.1%. After companies started reporting, the actual growth rate has more than doubled the initial estimate.
The biggest contributor in magnitude of beats is from cyclicals, which are the engines of growth for our economy. And it’s not from clearing a low expectations bar, it’s from staggering demand.
Is there any surprise then that stocks are doing so well this earnings season?
Hopefully the answer is “no.” Let’s now show why those still espousing an AI bubble narrative should begin to find another fear to hang their hats on.
This quarter's fundamental data is only the beginning evidence to suggest the AI bubble crowd has been grossly underestimating this tech boom.
The fact is simple: AI infrastructure profits are now double the S&P 500 growth rate.
The data supports our overall thesis on the massive size of this current opportunity. To help prove this out, let’s unpack three data-rich points.
AI Investment
First is the continued investment from hyperscalers. In 2026 alone, hyperscaler capital expenditures are expected to surge 63%.
As countries race to build the infrastructure needed, realize that the U.S. is home to 43% of the world's 9,493 data centers. Focusing on U.S. hyperscaler spending, $677 billion is expected in 2026, and it goes to $761 billion and $802 billion in 2027 and 2028, respectively:
Those projections show the AI infrastructure opportunity has significant legs. And it doesn't even consider overseas growth. Germany (507 data centers), the United Kingdom (506), and China (369) have room to expand as well.
We’re even beginning to see unexpected AI infrastructure innovations. For example, last week a partnership was announced between NVIDIA, Pulte, and a California startup company called Span. This group will begin testing Span’s “fractional data centers” that are filled with NVIDIA chips alongside some Pulte new construction homes.
The concept is like an air conditioning unit in terms of physical layout. The idea is to leverage unused local electrical capacity pinpointed by the Span smart panels. Expect more of this ahead.
Historical precedent also hints we’re still in the early days of this transformative investment opportunity. Consider that peak investment as a percentage of gross domestic product for past major tech revolutions were much bigger than AI spending to date:
If history is a guide, this investment cycle still has plenty of room to run. It should remain a winning investment theme.
AI Earnings
The bottom lines in recent earnings reports show how AI adopters are generating big financial performance. This proof of profit margin expansion will only further accelerate overall AI adoption.
We're clearly seeing momentum being driven by margin expansion from S&P 500 companies enabling and using AI:
These firms are averaging 16.5% net profit margins, outpacing the 13% seen by companies not currently using AI.
To be clear, bubbles burst when demand doesn’t exist. The opposite is currently happening – AI demand is booming and it will likely lead to more companies integrating AI into bigger areas of their businesses as productivity gains keep materializing. If so, it will create a continuous and virtuous cycle of AI infrastructure demand, and as a result, CapEx spending.
It’s exactly why we’re seeing unprecedented historical year-over-year earnings growth in cyclicals and technology:
AI Growth
The first two reasons together bring us to the third reason to fade AI bear-istas. We know that bubbles happen when profits don't live up to hype. But the AI infrastructure space today is fueling massive operating leverage as sales ramp up based on AI demand.
If you take an equally weighted stock basket of 25 stocks within the AI infrastructure space, its constituents’ earnings are now forecasted to grow by an average of 39.4% next year versus 16.4% for the market overall:
The AI infrastructure basket’s growth is more than double the S&P 500. And that’s even more remarkable when you understand that AI infrastructure stocks’ 2027 growth estimate is on top of the already reported 43.7% blended year-over-year earnings growth rate.
Those who embrace the data and parse through the noise of crisis will benefit from the opportunities ahead.
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