The rose 9.3% ytd through July 2. Can it rise another 10.2% over the rest of this year to achieve our S&P 500 target of 8250? We still think so. Consider the following:
1. FOMO vs FEMO
Is it time to underweight the ? It is as if you believe the AI trade is a bubble about to burst. We think it has been losing some air already, so it’s less likely to burst. We are sticking with our recommendation to market-weight the sector.
Investors are suffering from AI fatigue. They aren’t convinced that the huge investments in AI infrastructure will earn a good rate of return. They are worried about the possibility of excess capacity and increasing competition among AI providers, including the ones from China. They are unsettled by the decline in token prices, though the impact of that on providers’ revenues might be offset by greater usage. The rapid pace of technological innovation also increases the risk that today’s expensive state-of-the-art semiconductors (including memory chips) will be made obsolete by the next wave of innovation.
Nevertheless, we don’t buy the bubble stories that compare the current bull market in stocks to the tech bubble of the late 1990s, which was followed by the Great Tech Wreck (GTW) of the early 2000s. The current forward P/E of the S&P 500 Information Technology sector is 22.2, not much above the S&P 500’s 20.4 (chart). Just before the GTW, the former peaked at 55.0 and the latter did so at 25.0.
The late 1990s melt-up was led by the forward P/E of the S&P 500 Information Technology sector (chart). It was driven by FOMO (fear of missing out). The current bull market is driven by FEMO (fabulous earnings momentum)
In the past, irrational exuberance was a FOMO-driven phenomenon that inflated valuation multiples. Can irrational exuberance also affect FEMO? Surprisingly strong earnings during the Q1-2026 earnings reporting season led analysts to raise their long-term earnings growth (LTEG) expectations for the S&P 500 companies collectively to a record 25.5% per year over the next 3-5 years last week (chart). That was driven by a surge in the Tech sector’s LTEG to an off-the-charts 43.5% reading last week!
The bubble this time might be in analysts’ expectations for the forward profit margin of the S&P 500 Semiconductors industry, which we calculate from their revenue and earnings estimates (chart). The industry’s aggregate forward profit margin rose to a record 50.3% last week (chart). In the past, the industry was viewed as highly cyclical, with recurring booms followed by busts.
The industry’s analysts might be irrational in believing that it is now a secular grower capable of maintaining its extraordinary profit margin and earnings growth rate. Investors certainly have their doubts, given that they are paying a forward P/E of only 18.4 currently. That reduces the risk of a FOMO-led bubble.
2. More FEMO
Meanwhile, S&P 500 forward earnings rose to yet another record high at the end of June (chart). Industry analysts now collectively project that S&P 500 EPS will be up 26.1% this year and 17.8% next year! They are currently expecting $402.96 next year.
If the S&P 500’s forward EPS converges to $400 by the end of this year, a 20.0 forward P/E would put the S&P 500 at 8000. We are aiming for 8250, which is the highest on the Street; but it may be too low if the 2027 consensus earnings estimate continues to rise (chart)!
There’s a lot of FEMO in industry analysts’ estimates of S&P 500 earnings growth for the remaining three quarters of 2026 (chart). They all exceed 20.0% y/y and are rising!
The percent of S&P 500 companies with positive three-month changes in forward earnings is at a new cyclical high of 86.2% (chart)!
3. Rotation
We anticipated June’s swoon in the S&P 500, but predicted that it would be a rotation rather than a correction. The rotation actually started at the beginning of the year but was interrupted by Gulf War III. It now seems to be resuming, as the once again is outperforming the one weighted by market capitalization (chart).
The rotation is also broadening the stock market rally, as evidenced by the new highs in the (chart).
Recent record highs in the have been confirmed by record highs in the (chart). That’s a bullish signal according to Dow Theory. Investors experiencing AI fatigue are finding comfort in companies with more conventional business models.
The stocks collectively outperformed in recent days but continue to lag the Impressive-493 so far this year (chart).
4. Sentiment
The two Bull-Bear Ratios we monitor are not too bullish currently (chart). From a contrarian perspective, this suggests there is more upside in the current rally.
5. Interest rates
The FOMC turned hawkish last month, which contributed to June’s stock market swoon. Nevertheless, Treasury yields should remain relatively stable during the second half of this year (charts).
6. Some winners
Finally, let’s have a look at some of the areas of the stock market that have done well recently and should continue to do so over the rest of this year.
During the first half of this year, there was a lot of rotation in the Information Technology sector, away from software stocks and the Mag-7 toward semiconductor stocks (chart). The second half of the year might show more of the same, though semiconductors may be starting to experience a short pullback.
Cybersecurity is breaking out of the recent morass experienced by software stocks (chart).
In the , banks are performing very well (chart).
In the , both and Pharmaceuticals are breaking out (chart).
continue to power ahead thanks to the huge demand for AI infrastructure and ongoing onshoring of manufacturing (chart).
