Key Takeaways
\nStock market returns through the rest of the year are likely to be strongly influenced by the infrastructure spending, cloud computing deals, and positive sentiment lifting AI and tech stocks.Some experts warn an increasingly “circular” AI ecosystem\u2014in which companies invest in their own customers\u2014could be vulnerable to a shift in the business environment. Sentiment around AI, and the possibility that the nascent technology may disappoint investors, remains a key risk to AI stocks. <\/p>\n
The U.S. stock market entered the final quarter of the year near record highs, boosted by soaring AI stocks that have become increasingly critical for the market’s performance.<\/p>\n
Most of the best-performing stocks in the S&P 500 this year are directly tied to the AI boom. Data storage companies Seagate Technology (STX<\/a>) and Western Digital (WDC<\/a>) have seen their shares nearly triple in value this year, while Palantir (PLTR<\/a>) and Applovin (APP<\/a>), two software firms that have excelled at translating AI capabilities into revenue, have more than doubled. And despite a rough start to 2025, all of the Magnificent Seven<\/a> stocks are up since the start of the year.\u00a0\n<\/p>\n Why This Matters To You<\/p>\n The artificial intelligence boom has been the primary source of fuel propelling the bull market of the past few years. As such, the performance of most investment portfolios is increasingly tethered to the performance of AI stocks.<\/p>\n The Magnificent Seven account for one-third of the S&P 500, and thus have an outsized influence over the broader market\u2019s performance. And these stocks, experts say, are increasingly tied to AI.\u00a0\n<\/p>\n The Mag 7’s \u201cshare prices are a daily referendum on whether AI is considered hype or reality,\u201d wrote Christopher Gannatti, Global Head of Research at WisdomTree, in a recent blog post. They \u201care priced as if AI is not just a growth driver, but\u00a0the\u00a0growth driver,\u201d Gannatti added.\n<\/p>\n As such, the investments, deals and optimism propelling the AI trade are likely to be pivotal for the entire stock market in the coming months.\u00a0\n<\/p>\n CapEx Likely To Remain in the Spotlight <\/p>\n Massive infrastructure investment from the likes of Microsoft (MSFT<\/a>), Alphabet (GOOG<\/a>), Amazon (AMZN<\/a>) and Meta (META<\/a>) has been a primary source of fuel for the AI rally. Their spending has caused revenue at chipmakers like Nvidia (NVDA<\/a>), Broadcom (AVGO<\/a>) and Micron (MU<\/a>) to explode, and underpinned the narrative that AI demand is insatiable.\n<\/p>\n The hyperscalers will all update investors on their capital expenditure<\/a> plans when they report quarterly results in late October and early November. Alphabet<\/a> and Meta<\/a> each lifted their capex forecasts in their most recent earnings reports, while Microsoft<\/a> and Amazon<\/a> said they would continue to invest heavily in infrastructure throughout the year.\u00a0<\/p>\n Tax changes codified by the One Big, Beautiful Bill, which empowers companies to immediately write off infrastructure investments, could give them reason to lift capex further. Experts note immediate write-offs should boost free cash flow<\/a>, allowing companies to invest even more in AI. Hyperscalers have had a few months to figure out how the bill, which was signed into law by President Donald Trump on July 4, will affect their finances and, thus, investments.\n<\/p>\n Citi analysts on Tuesday estimated that hyperscalers, including Oracle (ORCL<\/a>) and CoreWeave (CRWV<\/a>), will spend $490 billion on infrastructure, up from their prior estimate of $420 billion. \u201cWe expect the major hyperscalers to reflect this incremental spend in guidance discussions during 3Q results,\u201d the analysts wrote.\n<\/p>\n Unexpected increases to capex guidance could reinforce Wall Street\u2019s bullishness on the semiconductor, software, and energy companies benefiting most from the AI buildout.\u00a0\n<\/p>\n Big, Multi-Year Deals Are Gaining More Attention <\/p>\n \u201cWe\u2019re seeing a bit of an evolution\u201d in the drivers of the AI rally, Gannatti told Investopedia.\u00a0\n<\/p>\n \u201cIt kind of started with the hyperscalers\u2014Microsoft, Amazon, Alphabet\u2014saying, \u2018We have a certain amount of cash flow. We\u2019re going to make investments.\u2019\u201d Today, Gannatti says, AI companies are investing in one another, and using those investments to buy goods and services from each other.\u00a0\n<\/p>\n The most notable example of this was announced last month, when OpenAI committed to deploying 10 gigawatts of Nvidia systems to train and run its next-generation models. In return, Nvidia will invest $100 billion<\/a> in OpenAI as capacity comes online, effectively subsidizing the start-up’s infrastructure expenses. \u00a0\n<\/p>\n \u201cSo there\u2019s a bit of circularity,\u201d says Gannatti, who notes there\u2019s a risk to these sorts of deals<\/a>. \u201cNone of these things are guaranteed,\u201d he said, including OpenAI\u2019s commitment to spend $300 billion<\/a> on Oracle\u2019s cloud computing services over the next five years. \u201cIf the business environment changes, the music might need to stop\u2014not necessarily forever, but for a while.\u201d\n<\/p>\n Concerns About an AI Bubble Likely To Persist <\/p>\n Investors have worried about an AI bubble for quite some time, and the rally faces the risk that AI sentiment sours, weighing on investment and depressing stock valuations.\u00a0\n<\/p>\n So far, tech companies have been able to show investors enough benefit from AI to keep Wall Street comfortable with their spending, said Gannatti. \u201cBut you feel like you\u2019re always one earnings cycle away from a negative interpretation of a certain announcement,\u201c the kind of less-than-ideal development that throws cold water on a red-hot market, he added.\u00a0\n<\/p>\n Several events this year have briefly appeared to be this watershed moment. In January, investors caught wind of Chinese start-up DeepSeek<\/a>\u2019s super-efficient reasoning model, briefly calling into question the wisdom of Silicon Valley\u2019s AI spending. And AI stocks swooned over the summer when an MIT study found<\/a> that 95% of corporate generative AI pilot projects failed to deliver any material return on investment. Yet, on every occasion, investors have shaken off the panic and continued to pile into AI stocks.\n<\/p>\n