Why US Equity Returns Are Broadening Beyond AI Stocks

Aug 26

2 min read

The Current Market Landscape

Despite a volatile July, the S&P 500 is hovering near all-time highs in August 2026. This resilience is driven not just by artificial intelligence (AI) hype, but by an exceptionally strong second-quarter earnings season. With 92% of Q2 earnings reported, 64% of companies have beaten estimates by more than one standard deviation. This robust performance has pushed 2027 consensus earnings projections to an impressive 390–400 EPS.

AI Skepticism and Market Discernment

Interestingly, tech and AI companies that beat earnings estimates underperformed the S&P 500 immediately after reporting. Tuteja views this skepticism as a healthy sign of market "discernment." Investors are no longer buying AI blindly; they are carefully evaluating specific sub-sectors like memory and liquid cooling. This selective approach makes the overarching AI rally more sustainable in the long term.

The "Broadening Out" Trade

The market is actively rotating beyond the mega-cap tech stocks. The median stock's earnings grew 14% year-over-year—the largest jump since the post-COVID recovery. Consequently, the equal-weight S&P 500 has outperformed the standard index by roughly 300 basis points this year. This broadening is driven by three factors:

Reduced Uncertainty: Early-year fears regarding private credit and AI disruption have cooled.
Strong Fundamentals: Previously overlooked sectors, such as software and healthcare, are proving their fundamental strength.
Active De-risking: Investors are actively reallocating capital away from the extreme daily price swings of pure-play AI stocks.

Volatility and Macroeconomic Headwinds

Overall market volatility has dropped, with the VIX falling from 21 to 15. In the AI space, volatility is dampening as companies secure long-term revenue agreements and initiate share buybacks. However, Tuteja notes that implied correlation at the index level has hit all-time lows, making broad S&P 500 options a highly cost-effective way to hedge.

On the macroeconomic front, Tuteja is closely watching rising oil prices and a heavy global supply of back-end bonds—driven by US tech capital expenditures, European defense funding, and Japanese fiscal policies. To navigate this, institutional clients are increasingly utilizing ETFs to hedge against geopolitical and macro risks.

Top Trade Idea: Consumer Experiences

Tuteja’s standout trade recommendation is "consumer experiences," which includes theaters, live sports, theme parks, and concerts. Consumer spending in this category surged from 1% of the broader services category in Q1 2025 to 6% by Q1 2026. Trading at an attractive 17 P/E ratio, the sector is under-owned, undervalued, and critically immune to the AI disruption fears plaguing other industries.

Looking Ahead: The Fed and Jackson Hole

Moving forward, the market is hyper-focused on the upcoming Jackson Hole summit, where new Federal Reserve Chairman Warsh is expected to outline his policy framework. Because Warsh famously avoids traditional forward guidance, his remarks will be heavily scrutinized. Tuteja warns that if the Fed signals a hawkish shift toward rate hikes, the current market "broadening" could collapse, forcing investors to retreat back into the safety of the AI trade.