The recent rally in the stock market is not solely driven by artificial intelligence, as stronger earnings and favorable economic indicators suggest a more sustainable upward trend. Last week saw both the S&P 500 and Nasdaq Composite reach record closing highs, marking significant milestones in 2025. On Monday, stock prices continued their ascent, buoyed by hopes for a trade breakthrough following an upcoming meeting between President Donald Trump and China”s Xi Jinping.
While the prospect of a trade deal is promising, some investors express concerns that the market may be becoming overvalued. Historically, it is uncommon for the S&P 500 and Nasdaq to experience increases of 15% and 20%, respectively, during the third year of a bull market, particularly with unresolved tariff issues and a potential saturation in artificial intelligence spending.
This week, the earnings reports from the so-called “Magnificent Seven” technology companies are anticipated to be critical. The third-quarter earnings season has already shown encouraging results, with approximately one-third of the companies in the S&P 500 having reported. Notably, 86% of these companies exceeded profit expectations, a significant increase compared to the historical median of 73% over the past two decades, according to Dennis DeBusschere of 22V Research. Additionally, 83% of companies exceeded sales forecasts, compared to a median of 63%.
According to Adam Parker, President of Trivariate Research, while skepticism about the market”s strength is rising, the earnings results thus far in 2025 have consistently surprised on the upside. Parker highlights that the consensus earnings per share estimate for the S&P 500 has increased to $269, up from $263 at the start of the quarter, indicating a healthy outlook.
Technology, communications services, and financial firms, which dominate the index, are reporting strong results. Parker points out that it is rare for market-level estimates to rise over an 18-month period, as companies are not merely adjusting expectations downward but are actually delivering stronger-than-expected results. This week will see earnings from major players such as Alphabet, Amazon.com, Meta Platforms, Microsoft, and Apple.
Analysts at SpearPoint Management suggest that the current market setup is favorable, especially for companies like Microsoft, Meta, and Amazon, which have lagged recently. The consistent growth in revenue from cloud computing services, coupled with increased advertising spending and significant investments in AI, signals strong confidence in its ongoing development. They note that the conversation around AI is evolving from “will AI happen?” to “how profitable will it be?”
However, investors should remain cautious of potential market fluctuations. Although high expectations surround the earnings reports from the Magnificent Seven, the exact catalysts for a market selloff or rapid increase are difficult to pinpoint, as DeBusschere warns. Other tech companies benefiting from AI will also be under scrutiny, as their earnings growth is critical for validating the broader impact of AI across industries.
Parker also cautions that a shift in market dynamics could occur, potentially leading to a “growth scare” before the year”s end, as the correlation between various sectors and the AI trend remains significant. Nevertheless, market analysts believe that the U.S. economy is not close to facing a crisis stemming from overcapacity in data centers, with the end of the AI investment cycle still far off.
Overall, the financial landscape appears resilient, with strong earnings reported across multiple sectors and a robust economic backdrop, suggesting that while the Magnificent Seven are pivotal this week, the market”s stability does not rest solely on these tech giants.
