The Investment Impact of AI

As 2026 has progressed, investor attention has repeatedly shifted, but ultimately returned to the fundamental driver of long-term stock returns: corporate earnings.  Despite periods of geopolitical uncertainty, persistent inflation concerns, rising long-term interest rates, and shifting expectations for monetary policy, corporate earnings have remained resilient and continued to exceed expectations.

Importantly though, the opportunity set extends well beyond the handful of mega-cap companies that dominate the headlines. The race to deploy AI capabilities has sparked a wave of capital spending across industries, benefiting not only the companies supplying the chips, memory, energy, and digital infrastructure that power the AI ecosystem, but also businesses across non-technology sectors that stand to realize meaningful productivity gains as AI adoption accelerates. 

This generational investment cycle is translating into a significant uptick in the market’s earnings power, providing a fundamental underpinning for the continued strength of global markets.

At the beginning of 2026, we posed two questions that we think help to define the durability of the AI investment cycle as it relates to the market as a whole, and continue to monitor these as the narrative evolves throughout the year:

1. Will the unprecedented capital investment across hyperscalers, data centers, and AI infrastructure ultimately generate attractive returns?

Capital spending so far in 2026 has not slowed. It has further accelerated, with the largest hyperscalers continuing to commit hundreds of billions of dollars toward AI infrastructure. That spending, however, has come at the expense of near-term free cash flow. Rather than penalizing this investment, investors have largely accepted lower free cash flow today in exchange for confidence that AI will become a foundational technology for future growth.

Perhaps more important, market leadership has broadened beyond those hyperscalers. Investors have increasingly looked to the companies supplying the AI ecosystem, including semiconductors, networking equipment, memory, power generation infrastructure companies, and data centers, i.e. the “picks and shovels” of AI. Unlike the hyperscalers, whose massive capital investments are weighing on near term free cash flow, these companies are realizing immediate benefits through inflecting revenue growth, earnings, and growing backlogs. As a result, they became some of the market’s strongest performers during the year.

It’s still too early to know whether AI spending will ultimately generate attractive long-term returns, but even if part of today’s demand proves cyclical, the companies supplying the AI ecosystem are benefiting from it greatly and that is being reflected in the market’s overall earnings picture.

2. Will the proliferation of AI ultimately commoditize the technology ecosystem and erode durable competitive advantages?

As capabilities become more widespread, the risk remains that differentiation narrows and excess capacity weighs on the profitability of the market. During the first quarter, we asked whether AI could ultimately undermine its own economics. While this question remains largely unanswered, investors are becoming increasingly selective in identifying the likely winners and losers.

While AI has the potential to drive significant productivity gains, it also raises the possibility that value accrues unevenly and that AI-driven services become commoditized. Additionally, companies with proprietary data, differentiated products, strong distribution, and entrenched customer bases appear better positioned to defend their competitive advantages.

Taken together, 2026 has been a continuation of the evolution in the AI narrative. Markets remain enthusiastic, albeit with pockets of caution, about the long-term opportunity, while investor focus is increasingly moving toward measurable earnings and cash flows, and identifying where value is actually being created, not just hypothesized, across the AI ecosystem.

For equity portfolios, 2026 has reinforced two core principles of our investment philosophy: diversification and patience. Investors have been consistently reminded that volatility is a normal part of investing in equities. Markets have been able to process geopolitical conflict, rising commodity prices, rising interest rates, and rapidly changing expectations, both optimistic and cautious, around AI.

Yet despite the day-to-day noise, corporate earnings continued to provide the foundation for long-term returns. 

The inclusion of value stocks, small- and mid-cap stocks, and international equities alongside the core of U.S. large-cap equities, has boosted portfolios. These shifts reinforce the importance of maintaining exposure across investment styles, sectors, and geographies.

The bond market is repricing the interest-rate outlook in light of persistent inflation, shifting expectations for monetary policy, growing fiscal deficits, and heavy issuance across both government and corporate borrowers. Treasury yields have moved higher across the curve, reflecting these pressures.

That provides an important margin of safety in today’s environment, and “bond math” is working in investors’ favor again in a way it wasn’t during the ultra-low-rate environment of the previous decade.

PUBLISHED SEPTEMBER 2026