AI gambling, profit big test, Fed policy: How do three core variables affect the trend of US stocks in the second half of the year?

Notice that the US stock market faces a series of severe tests to maintain its upward momentum in the second half of 2026, from the sustainability of AI spending to high corporate profit thresholds, to the interest rate outlook under the leadership of the new chairman at the Federal Reserve. The benchmark S&P 500 index has risen by over 8% year to date, extending its bull market for over three years, while the tech-heavy Nasdaq Composite Index has risen by 11%. However, investors have recently shown signs of anxiety, with both indices experiencing declines in June. Here are the main issues facing US stock investors in the second half of this year: Can the AI spending theme continue to drive the market? Massive spending on AI infrastructure has been at the core of the market rebound, boosting profit expectations for many companies. According to JPMorgan, five companies including Microsoft, Google parent company Alphabet, and Amazon are expected to spend a total of around $730 billion on capital expenditures this year. Nicholas Janvier, North American stock manager at Columbia Threadneedle Investments, said, "The market has certainly priced in this expectation that the levels of capital expenditure we're seeing now will continue into the foreseeable future." Some investors are cautious about whether mega-data center operators need to show enough return on investment from their spending. At the same time, the optimism driven by AI has caused a surge in semiconductor stocks, as well as other tech, industrial, and energy stocks related to data center construction and power supply. Garrett Nelson, portfolio strategist at Natixis Investment Managers Solutions, said, "From a market perspective, the risk is that these trades are too crowded with technical positions, and any factors that sow seeds of doubt within this narrative will leave you in a somewhat vulnerable position." Can US companies meet high profit expectations? Strong earnings in the first quarter for US companies have boosted the stock market performance, with future profits expected to remain strong. According to data from LSEG IBES, earnings for the S&P 500 index are expected to grow by over 26% in 2026. David Bianco, Chief Investment Officer for the Americas at DWS, said, "The key issue is whether profit expectations for the S&P 500 index and the tech sector can be met. This is one of those things where there can be no excuse." Profits related to technology and AI are not the only sectors expected to perform well. All 11 sectors of the S&P 500 index are expected to record higher profits in 2026, with Janvier noting that, despite "AI dominating all the headlines," consumer spending remains robust. Can the market absorb mega IPOs? Following the recent IPO of SpaceX, it is expected that AI benchmarks companies like Anthropic and OpenAI will follow suit in the coming months, creating a wave of hot new companies for potential investors to buy into. Together, these mega IPOs could create a large amount of stock issuance for the market to absorb. This cycle is being closely watched for signs of market bubbles. Bianco said, "This is a test of risk appetite and liquidity, to see how much sideline money is out there." How will the new leadership at the Federal Reserve deal with inflation? Kevin Wash is the newly appointed Chairman of the Federal Reserve Board, and his tenure has caught investors off guard - his first meeting showed a hawkish stance as policymakers focus on controlling inflation, raising expectations for near-term rate hikes. The path of interest rates is likely to impact bond yields, as earlier this year, bond market volatility led to multiple rounds of stock sell-offs. Higher rates mean higher borrowing costs, which could also put pressure on stocks by making bonds a more competitive investment. Noah Weisberg, Chief US Stock Strategist at BCA Research, said, "I think valuations are reasonable. But that doesn't mean the market isn't going to feel the pain when it comes to repricing the rates." Are midterm elections important for stocks? Midterm elections in Congress have largely taken a back seat in the market this year, but as the November elections approach, political-related volatility could intensify. According to data from CFRA since 1945, in the four-year election cycle, midterm election years have averaged the deepest market pullback within the year, with the S&P 500 index averaging an 18% decline, and the third quarter of midterm election years yielding negative average performance. Melanson of Natixis Investment Managers Solutions said, "With elections looming, there's naturally a bit of volatility in midterm election years before the elections arrive."