US equities closed the second quarter with numbers that would normally belong to an early-cycle recovery. The S&P 500 gained 14.9% during the quarter, the Nasdaq rose 21.4% and the Dow added 13%, according to Reuters. All three recorded their strongest quarter since 2020 despite war in the Middle East and a Federal Reserve that has kept its policy rate at 3.5% to 3.75%.
The rally creates a harder second-half setup than the headline performance suggests. Investors now need earnings to validate valuations, particularly in technology, while the cost of capital remains high enough to punish companies whose AI spending does not produce measurable returns.
AI capex is the market’s largest forward commitment
Microsoft (MSFT), Alphabet (GOOGL) and Amazon (AMZN) are among the companies driving an extraordinary infrastructure cycle. Reuters estimates that major technology groups are planning hundreds of billions of dollars of capital expenditure, much of it tied to data centres, accelerators and power infrastructure.
That spending supports Nvidia (NVDA), Broadcom (AVGO), memory suppliers and data-centre operators in the near term. The second-half question is whether cloud and software revenue rises quickly enough to justify the depreciation, electricity and financing costs that follow the construction boom.
Earnings breadth matters more from here
Consensus forecasts point to strong full-year S&P 500 earnings growth across all 11 sectors rather than technology alone. That is important because index-level gains become more robust when financials, industrials, healthcare and consumer companies participate.
The first half still contained heavy concentration in AI-linked names. A broader earnings cycle would allow the index to advance without requiring ever-higher valuation multiples for the same handful of companies. If earnings breadth disappoints, the market becomes more dependent on the largest technology stocks continuing to surprise.
The Fed is not providing an easy-money tailwind
The Federal Reserve held rates at 3.5% to 3.75% in June, citing elevated inflation and the energy shock from the Middle East conflict. The committee was unanimous at that meeting. That removes the simple narrative that equities are rallying because investors expect immediate monetary easing.
Higher policy rates raise discount rates and make cash-generating value stocks more competitive with long-duration growth. They also raise financing costs for speculative companies. The market has overcome that drag so far because earnings and AI investment have been strong enough to compensate.
A strong quarter raises the burden of proof
The second half begins with fewer obvious bargains and higher expectations. Geopolitics, the midterm election cycle and the Fed can all create volatility, but the decisive variable remains corporate profit growth. Stocks do not need every AI project to succeed; they do need enough of them to produce revenue that can be traced through income statements.
After a 14.9% quarterly gain in the S&P 500 and 21.4% in the Nasdaq, the market has already paid for a meaningful amount of good news. The next six months are about delivery.