As earnings season kicks off, AI investment remains front and center
AI is set to take some of the spotlight away from oil as earnings season kicks off this week.
The stock market has bigger fish to fry this summer than a bump in oil prices.
Oil has been back in the spotlight with Iran tensions flaring back up, but investors are more focused on the start of another crucial quarterly earnings season.
Concerning questions about the artificial-intelligence race have been emerging, as well as the path of inflation and interest rates. That means the U.S. and Iran could keep threatening each other, but it's a risk that's unlikely to hold the stock market's attention for long.
"Oil and Iran do matter," said Rob Almeida, global investment strategist for MFS Investment Management - but they matter in terms of their potential to implement an inflationary supply shock, he noted.
Investors have learned to view such episodes through a single lens - namely, which companies can pass higher costs through to customers and which cannot, Almeida told MarketWatch. "That's what will drive future earnings."
Attention has moved "decisively away from headline geopolitics" and toward structural forces that are reshaping the market, said Almeida. Those factors are most likely to drive equity returns over the next 12 to 18 months.
Corporate earnings season begins again in earnest this week, starting with the big banks and followed up later by major tech companies. The AI capital cycle - one of the largest corporate investment cycles in modern history - will be at the center of it all.
That's because the need for computing power has been pulling capital toward the physical economy, Almeida noted. "Capital intensity," or the cost of the AI buildout, has been higher than expected and places "existing profit assumptions" into question, he said.
Semiconductors and semiconductor equipment, which are closest to the physical bottlenecks of the AI buildout, have been among the sectors benefitting most from the spending boom. The S&P 500 Semiconductors & Semiconductor Equipment Industry Group Index XX:SP500.4530 saw a total return of 109% from the end of 2024 through May 2026, according to Dow Jones Market Data.
Hardware, memory, power equipment, utilities and grid modernization - areas all tied to the data-center buildout needed for AI - are among the other sectors that have benefited as demand has outstripped supply, said Almeida.
Yet over the past month, there has been profit-taking in the "highflying" technology sector, and a rotation into other sectors, said Ross Mayfield, investment strategist at financial-services firm Baird. Small-cap stocks RUT have outperformed their large-cap counterparts, the Dow Jones Industrial Average DJIA has outperformed the Nasdaq Composite COMP, and the best-performing sectors have been industrials XX:SP500.20, financials XX:SP500.40 and healthcare XX:SP500.35.
Such a rotation into cyclical sectors, as well as small-cap leadership, has helped to confirm the bull market, Mayfield said.
This comes as old and new challenges are surfacing. Supply-side pressures and sticky inflation have been driven by labor scarcity, energy constraints and years of infrastructure underinvestment, said Almeida, who expects these factors to keep production costs elevated and interest rates higher for longer.
Samsung Electronics (KR:005930) is one such example of a company facing severe supply-side pressures, with a global shortage of short-term data memory storage expected to persist. Its preliminary second-quarter results showed sales more than doubled and profits increased over 19-fold on a year-over-year basis - but that wasn't enough for investors, as its shares ended down 7.9% last week, according to FactSet.
Samsung's earnings were undeniably strong, but markets are forward-looking and expectations had become even stronger, said Mayfield. The company's results have been "reigniting concerns about how long AI-infrastructure spending and elevated memory-chip pricing can remain at current levels," he said.
Samsung did not immediately respond to a MarketWatch request for comment.
Oil matters, but less than you think
The war in the Middle East reminded investors of the "inherent risk to oil supply disruption and resurgent inflation," said Bill Northey, senior investment director at U.S. Bank Asset Management Group. Inflation, earnings and interest rates will matter the most in the second half of 2026 because they will determine whether recent valuations "remain justified," he noted.
Yet as long as earnings keep rising and hitting high expectations, investors can look through many other risks, Northey said.
As seen in the first half of the year, war in the Middle East is "not the same headwind to the stock market as it was in the 1970s" during the Arab oil embargo, said Baird's Mayfield.
The U.S. is now less reliant on energy imports than it was back then. It's now a major producer of both natural gas and crude oil, while the Strategic Petroleum Reserve, its national crude stockpiles, was created in 1975 in response to shortages driven by the oil embargo.
The stock market initially fell as oil prices spiked after the U.S. and Israel attacked Iran on Feb. 28, but the move lower was short-lived. So far this year, the Dow Jones Industrial Index is up 9.5%, near its record high, while the Nasdaq is up 13.1%, and the S&P 500 SPX is 10.7% higher. U.S. oil prices (CL00) (CL.1) are back down to $71 a barrel after topping $119 intraday on March 9.
"A renewed and sustained war would almost certainly be a risk-off event," said Mayfield - one that would keep investors away from stocks and other riskier investments. But at its lowest point this year, the S&P 500 fell 9.1% on March 30 from its previous high on Jan. 27, according to Dow Jones Market Data. That's far from the 20% drop that classifiees a bear market, Mayfield pointed out.
Earnings focus
This week's earning are likely to keep investors focused on AI-related capital spending, according to MFS's Almeida. It has been a key driver of the U.S. economy and the recent broadening of the rally in stocks.
Investors also will want to see how AI spending is showing up in the cost of goods sold by companies far from Silicon Valley, and whether those firms have the pricing power to pass those higher input costs through to customers, Almeida said.
A company can generate genuine AI efficiencies in one part of its business, but also be harmed at the same time by AI-driven input inflation in another, Almeida noted, and there is very little cushion in valuations to absorb earnings disappointments.
With such uncertainty, diversity will likely be key for investors.
'History shows that long-term investors are generally rewarded for maintaining discipline through periods of uncertainty, rather than trying to time headlines.'Bill Northey, U.S. Bank Asset Management
At this point, the safest strategy for investors is to stay diversified and invested across equities, fixed income and real assets - and take measured "tactical allocations around the edge" in sectors or companies that have durable growth potential, said U.S. Bank Asset Management's Northey.
"History shows that long-term investors are generally rewarded for maintaining discipline through periods of uncertainty, rather than trying to time headlines," said Northey.
-Myra P. Saefong
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July 12, 2026 09:00 ET (13:00 GMT)
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