Big Tech and the AI investment wave will dominate this earnings season again, if Wall Street is right. But non-tech stocks like banks are set for their best quarter since the pandemic -- and that could prove to be crucial catalysts for the broader market.
That's the baseline view of Morgan Stanley's Mike Wilson, the bank's chief U.S. equity strategist, heading into second-quarter earnings season: Tech giants and their massive spending on artificial intelligence have powered the lion's share of market gains this year -- indeed since the launch of OpenAI's ChatGPT in late 2022.
In the past month, though, there are been a rotation away from tech, led by gains in the industrial, financial, and healthcare sectors. And that move suggests investors are open to non-tech stocks heading into a traditionally difficult third quarter and the uncertainty tied to the midterm elections in early November.
"We expect the broadening to continue driven by earnings resiliency from the median stock," in the S&P 1500, wrote Wilson in a note published Monday.
The index, which combines the standard S&P 500 with mid-cap and small capex trackers, has risen just over 11% this year, compared with 10.7% for the benchmark. It has also outpaced the S&P 500 by more than a half-point since mid-May.
"The median S&P 1500 company is now delivering double-digit earnings growth -- the strongest since the post-Covid recovery," said Wilson. "While earnings revisions breadth is undergoing its typical July pause, our preferred cyclical exposures, discretionary and transports, continue to show relative strength."
Then add to that the strength of the economy, which remains solid. Key activity readings from the Institute for Supply Management show manufacturing activity increased 9% year on year in the second quarter. Gains for the far larger services sector were up 6%.
The Atlanta Fed's GDPNow tracker, on the other hand, shows economic growth slowed in the second quarter -- to about 1.3% from 2.1% for the first three months of the year.
But, when paired with the enormous levels of capital spending and a resilient jobs market, those figures are still seen as bullish in the eyes of Wall Street experts.
One is Savita Subramanian, Bank of America's head of U.S. equity and quantitative strategy.
"Expectations are high, but we see no signs of earnings momentum rolling over," sai Subramanian. "Tech and energy continued to drive estimates higher ahead of reporting, guidance and revision trends are near post-Covid highs, both ISM PMI surveys are in expansionary territory, and early reporters started strong."
Morgan Stanley's Wilson sees a host of issues dominating the earnings season, which revs up on Tuesday with reports from JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, and Wells Fargo, including AI investment, consumer spending, and the industrial demand outlook.
AI adoption, however, might be the one to watch.
About 40% of companies that are incorporating AI into their work are seeing at least one quantifiable impact, up from j21% in the first quarter of last year, according to Wilson.
And a quarter of the S&P 500 companies see at least one measurable benefit from the new technology, up from 14% a year ago.
"These trends support our broadening thesis as companies increasingly demonstrate tangible AI-driven benefits and productivity gains across a wider set of industries," Wilson said.
That, in some ways, creates a layer of complexity into a market that has been deeply reliant on monolithic gains, powered by the AI development trade, for much of the past three years.
That's even more true now that investors are starting to build in forecasts for Federal Reserve rate hikes, Treasury yields are holding at multiyear peaks, and the war in Iran is stoking inflation worries that could take both rates and yields even higher over the back half of the year.
That helps explain why the gap between single-stock volatility and VIX volatility is trading at the widest levels of all time -- a point made by Brian Leonard at Keeley Gabelli Funds.
"It's necessary to start looking through the market and identifying the winners and losers because not every sector will benefit equally from the current environment," said Leonard, a portfolio manager. "Even within sectors, it will depend on the individual company."
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 13, 2026 13:18 ET (17:18 GMT)
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