Investors came into July expecting a familiar stock market setup leaning on resilient earnings and AI spending, along with a seasonal stretch favoring equities.
Though Morgan Stanley doesn’t feel that setup has gone away, it warns of a much narrower margin for error.
There’s a major $1.2 trillion question hanging over Big Tech’s AI buildout. If hyperscalers continue bumping capex, the market’s leadership can look a lot more justified. If they slow down, that pressure would spread well beyond chip stocks.
Investors have to contend with this amid a rally that’s still powered by optimism but increasingly vulnerable to one weak signal from earnings, the Fed, or geopolitics.
Morgan Stanley’s $1.2 trillion question for the stock market
Morgan Stanley said AI spending is one of the stock market’s biggest supports, according to a report from Business Insider. The rally continues benefiting as Wall Street repeatedly raises capex estimates for Big Tech, reinforcing the view that the AI trade remains durable.
Moreover, Morgan Stanley’s base case is still aggressive.
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The bank currently expects AI investment to jump from nearly $800 billion in 2026 to roughly $1.2 trillion in 2027, a scale that will continue feeding into demand for chips, data centers, cloud infrastructure, and power.
However, the big risk emerges if Q2 earnings show hesitation.
Morgan Stanley’s Andrew Sheets warned that some major AI spenders have underperformed of late, Business Insider noted. This makes investors a lot less patient with heavy capex and uncertain returns.
Nevertheless, AI spending has powered the market’s earnings story, which is why it’s arguably the biggest factor driving the rally.
FactSet data back up those claims as analysts continue growing more bullish on earnings during the quarter. S&P 500 Q2 2026 profits are now expected to rise 23.3%, up from 18.8% on March 31, spearheaded by the AI-heavy Information Technology sector, which is expected to grow earnings 63.3%, versus 48.6% earlier.
Additionally, tech earnings estimates jumped 9.9% to $223.6 billion, helped by Micron, Nvidia, Apple, and Sandisk.
Wall Street price targets for S&P 500
According to the Associated Press, the S&P 500 closed at 7,543.64, up 10.2% year to date, while MarketWatch shows a 20.1% gain over the past year at the time of writing.
