What the First-Quarter Earnings Season Is Really Telling Us About 2026

The first-quarter earnings season has propelled the stock market to new highs. The S&P 500 index is up almost 10% this year and has roared back from March lows tied to the United States' conflict in Iran and the closure of the Strait of Hormuz.

Even as cracks appear in consumer sentiment and inflation begins to rise again, it is clear that the market cares about one thing today: artificial intelligence (AI). If usage, revenue, and (importantly) profits associated with the AI build-out keep growing, the market is liable to go higher in 2026. Here's why.

Everything comes down to AI

Even if it isn't the entire economy, AI has an outsize impact on the S&P 500. Most of the top 25 largest companies in the world by market cap are tied to AI in some way, whether through the supply chain, infrastructure development, or consumer and enterprise services.

S&P 500 earnings have kept soaring due to growth in AI spending and the profits it generates. For example, Alphabet's operating income grew 30% year over year in Q1 to $40 billion. Multiply this across many other AI megacaps, and you can see why the S&P 500 got its mojo back in May. Nvidia just posted 85% revenue growth to $81.6 billion.

To track this spending momentum, investors need to monitor the upcoming SpaceX initial public offering and rumored offerings from OpenAI and Anthropic, the two biggest AI start-ups. SpaceX is planning to raise $75 billion in funding for its own AI ambitions, and the other two will likely raise funds on a similar scale. This spending can flow through the AI supply chain, keeping the earnings growth party going.

Image source: Getty Images.

Consumer spending cracks?

Market optimism about AI is at an all-time high right now, and for good reason. However, at the end of the day, consumers will need to keep paying for these services and/or sustain the digital advertising and retail economies, the other large components of the S&P 500 index.

Right now, consumer sentiment is lower than at the peak of the inflation scare in 2022, likely due to a reacceleration of inflation this year and rising gasoline and food prices. If consumer wallets keep getting drained, it is hard to envision rapid growth in spending on AI services over the next decade, which will be needed to get a positive return on investment from the hundreds of billions being spent on infrastructure compute.

Investors who are ultrabullish on AI stocks should keep this in mind when focusing on the long term. However, for 2026, the stock market will be driven by the projected $700 billion in spending from the big compute infrastructure providers, helping them unlock the massive backlog of data center demand for the AI labs like OpenAI and Anthropic. This will drive profits higher for big tech and other AI-related stocks in 2026, regardless of consumer spending health.

What will determine stock returns in 2026 does not matter to your portfolio

Smart investors understand the importance of AI in 2026, but also recognize that it is not the most important factor in driving long-term returns in the stock market. What truly matters is compounding your wealth over decades, allowing compound interest to do its work.

AI momentum may drive the stock market to new heights by the end of 2026. But it is also possible that spending will peak sometime in the near future, leading to a crash in AI stocks reminiscent of the dot-com bubble of 2000, if AI usage among individuals does not grow as analysts expect.

There is no need to rack your brain to guess where the market is headed in 2026. If you keep your eyes on the long term and buy and hold high-quality stocks -- AI or not -- then the stock prices will take care of themselves.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.