Equities update at mid-year: What drove the recent rally and what’s next?

The U.S. equity market's sustained rally over the past three years—driven by resilient GDP growth, robust corporate earnings, and explosive AI-related capital expenditure—has created a uniquely interdependent cycle where macro, micro, and technological forces reinforce one another. Eloise Goulder identifies the triad of macro resilience, earnings growth (with the S&P 500’s profits doubling since 2019), and AI CapEx—now exceeding $700 billion annually, or over 2% of U.S. GDP—as the core drivers. This has been amplified by a 2.5x surge in trading volumes, fueled by retail investors, quant funds, thematic ETFs, and dark pool activity. Yet, the rally carries risks: extreme concentration (top 10 stocks now 40% of the S&P 500), rising inflation from geopolitical tensions, unemployment concerns due to AI automation, and unsustainable government debt levels. John Schlegel and Drew Tyler offer a tactical outlook, noting strong Q1 earnings and a positive growth backdrop, but caution that near-term volatility could emerge from late-June deleveraging, seasonal shifts, and potential AI ROI concerns. They highlight opportunities in underweighted regions like Europe and non-AI cyclicals if Middle East tensions ease, suggesting a potential rotation beyond the current tech-heavy rally.