The AI cycle is still ongoing, and the focus of the 2Q26 earnings season is shifting to hyperscaler returns on capex and monetization evidence

Overview

This report centers on the 2Q26 U.S. earnings season, with core themes including the AI cycle, hyperscaler capex, AI monetization, momentum factor unwind, and S&P 500 earnings growth. The report argues that the AI cycle is not over, market attention to capex has not diminished, but there is greater emphasis on seeing more direct monetization evidence, including cloud services, advertising, enterprise software, compute sales, and cloud migration driven by AI security demand.

Core views

The core views are: first, hyperscaler fundamentals remain resilient, and increased external financing does not equate to operating deterioration; second, AI capex may still be revised higher, but investors need clearer ROIC, earnings guidance, and a free cash flow inflection point; third, momentum trading looks healthier in the short term after retreating from extremely crowded levels, but medium-term volatility may persist; fourth, 2Q26 earnings growth appears strong, but contributions are highly concentrated, with technology, Nvidia, Micron, and the energy sector as the main sources; fifth, semiconductor demand visibility extends beyond CY27, but supply chain, power, and pressure in some end-demand segments remain constraints.

Analysis framework

The report uses a top-down U.S. equity strategy framework, combining S&P 500 consensus expectations, sector earnings contributions, hyperscaler capex paths, fund flows, and momentum-factor crowding to assess risk/reward and sector rotation during the earnings season.

Methodology notes

• equity_strategyearnings_season_setup

  Earnings season earnings validation

  By analyzing earnings growth, revenue growth, beat rates, EPS revisions, and earnings dates for key companies, the report assesses the degree to which the 2Q26 earnings season confirms market trends.

• factor_strategymomentum_crowding_unwind

  Momentum crowding unwind

  The report links upstream assets such as AI hardware and memory to the momentum factor, arguing that crowding has eased but has not fully cleared, and that subsequent rotation may move toward hyperscalers and quality growth.

• capex_cycleAI_capex_monetization_framework

  AI capex and monetization

  It analyzes the relationship among capex, debt and equity financing, operating cash flow, revenue growth, margins, and the free cash flow inflection point to judge whether AI data center investment can be converted into sustainable earnings.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hyperscalers / AI midstream

  The report’s more favored medium-term risk/reward direction

  Strengths

  Strong fundamental resilience; AI monetization paths include cloud, advertising, enterprise software, and compute sales; operating cash flow is still expected to remain strong.

  Weaknesses

  Capex pressure is rising, and recovery in free cash flow may not become clearer until 2027 or even after 2028.

  Comparison

  Compared with upstream AI hardware, risk/reward is more attractive after valuation and investor positioning improve.

  Risks

  Insufficient returns on capex, debt and equity financing pressure, supply-demand imbalance in AI infrastructure, and uncertainty around end-market margins.

• AI hardware / semiconductors / memory

  The core vehicle for upstream AI and momentum trading

  Strengths

  AI demand is strengthening, hyperscalers and AI labs are constrained by capacity, and Blackwell/Rubin, AVGO’s AI revenue path, and rising memory demand can extend demand visibility.

  Weaknesses

  Recent pullback of about 15%, momentum crowding has not fully cleared, and consumer and client markets remain fairly differentiated.

  Comparison

  Fundamentals remain constructive, but compared with hyperscalers, volatility from crowding and supply constraints is higher.

  Risks

  Supply chains and power unable to keep up, a slowdown in the capex curve, increased AI equity supply, and efficiency breakthroughs reducing hardware demand.

• Software and cybersecurity

  A long-term beneficiary direction of AI security and cloud migration

  Strengths

  Rising AI security costs may accelerate enterprise and public-sector workload migration to cloud platforms, and cybersecurity is being re-emphasized as a long-term theme.

  Weaknesses

  Some software names have been pressured by concerns over AI substitution, and the pace of revenue realization still needs verification.

  Comparison

  The report mentions selective opportunities in software, especially cybersecurity, which has regained thematic value after AI-related disruption.

  Risks

  Delayed budget cycles, AI-native competition, and higher performance requirements after valuation expansion.

• Energy

  An important contributing sector to 2Q26 earnings growth

  Strengths

  Oil prices have risen due to the Iran conflict, and upstream earnings leverage at Chevron and Exxon, together with downstream recovery, supports stronger quarterly performance.

  Weaknesses

  Growth contribution is driven by commodity prices, and sustainability depends on oil prices and refining margins.

  Comparison

  Although its market-cap share is small, its contribution to 2Q26 S&P 500 earnings growth is significant.

  Risks

  Falling oil prices, easing geopolitics, and downstream margins coming in below expectations.

• Healthcare

  A defensive and low-volatility preferred sector

  Strengths

  AI can improve drug discovery efficiency and reduce costs, high-growth subsectors are attracting retail investor attention, and defensive characteristics plus low positioning are attractive.

  Weaknesses

  2Q is the only sector expected to post negative earnings growth, and after the recent rebound it is more dependent on stock-specific catalysts.

  Comparison

  The report says healthcare remains a preferred low-volatility sector, but the earnings season will be more stock-driven.

  Risks

  Guidance below expectations, insufficient pipeline catalysts, policy disruptions, or reversal in capital rotation.

Key data

• 2Q26 S&P 500 EPS forecast$81.75, about +23% y/yEPS revisions have continued to move higher since the earnings season began.
• 2026E S&P 500 EPS forecast$341.86, about +26% y/yThe annual consensus forecast shown in the report.
• 2027E S&P 500 EPS forecast$404, about +18% y/yThe annual consensus forecast shown in the report.
• 2Q26 revenue growth forecastabout +12% y/yAll sectors are expected to post positive revenue growth.
• AI-related capex forecastapproaching about $870B by the end of 2026Of which hyperscalers are expected to account for about $750B.
• 2027 capex growth forecastGOOGL about +54% to $300B; AMZN about +42% to $300B; META about +42% to $200BFrom internet analyst forecasts cited in the report.
• Debt issuance by the five largest hyperscalersabout $40-50B in 2022 rising to about $190B in 2026The use of proceeds has shifted from mainly buybacks to supporting data center construction.
• Hyperscaler operating cash flow forecaststill expected to exceed $900B in 2027The report believes increased external financing does not indicate weakening operating fundamentals.
• Percentage of companies that have reportedabout 6% of S&P 500 companies have reportedIn the early sample, 100% of companies beat earnings expectations and 87% beat revenue expectations.
• Technology earnings growth forecastabout +64% y/yNvidia and Micron are expected to contribute about 37% of total earnings growth.
• Energy earnings growth forecastabout +122% y/yEnergy accounts for only about 4% of S&P 500 market cap, but is expected to contribute about 23% of y/y earnings growth.

Impact & implications

If hyperscalers raise capex in earnings reports while also providing a more credible path for AI monetization, earnings, and free cash flow, the market may again raise long-term valuations for cloud platforms, data centers, semiconductors, and enterprise software, while prompting capital to rotate from crowded AI hardware momentum trades into quality growth and hyperscalers. Conversely, if spending continues to rise but lacks ROIC and monetization evidence, free cash flow, financing capacity, and valuation pressure may again become market focal points.

Risks

• AI capex continues to rise but lacks sufficient monetization and ROIC evidence.
• Increased debt and equity financing needs lead the market to worry about financing absorption capacity and credit spreads.
• The momentum factor has not fully cleared, and AI hardware and memory-related trades may continue to be volatile.
• Fair-value revaluation of investments in private AI companies may distort EPS quality, making the sustainability of upward revisions harder to judge.
• There is long-term uncertainty around supply-demand balance in the AI infrastructure market, efficiency breakthroughs, and end-market margins.
• The macro backdrop is more volatile, and weakening consumer sentiment and military activity may weigh on some 3Q guidance.

What to watch

• Guidance on AI capex, cloud growth, and AI monetization in Alphabet Inc.'s 7/22 earnings report.
• Capex and AI return commentary in the earnings reports of Microsoft Corp on 7/29, Meta Platforms Inc on 7/29, and Amazon.com Inc on 7/31.
• Demand, supply, and CY27 outlook from Nvidia Corp on 8/26, Broadcom Inc on 9/4, and Micron Technology Inc on 9/23.
• Whether consensus expectations for hyperscaler capex over the next 4-6 quarters continue to be revised upward.
• Whether free cash flow starts to inflect positively from 2027, and whether a more durable recovery is delayed until after 2028.
• Whether subsequent S&P 500 earnings season beat rates, EPS revisions, and growth contributions remain highly concentrated.