Enthusiasm over corporate earnings and the AI revolution has overwhelmed concerns about high oil, inflation, and interest rates. As a result, the S&P 500 posted its best monthly performance since 2020 and hit record highs. That happened against a backdrop of mixed action within the Magnificent Seven and broadly positive macro data, which allowed 10 of 11 sectors to close in the green.

Monthly S&P 500 performance

A strong economy can tolerate higher rates. In that respect, the lowest level of initial jobless claims since 1969 and a 2% GDP expansion in Q1 gave bulls confidence. Business investment was the main growth driver, jumping 10.4% and marking the best showing in three years.

At the core of that investment surge are massive capex programs in AI. Companies continue to spend, and investors are pricing the payoff. They concluded that Alphabet's activity is effective, producing the largest one-day market-cap gain in the company's history and the second-largest ever in the US equity market.

Structure and dynamics of AI investment

By contrast, doubts about Meta Platforms' investment efficacy produced the opposite outcome: the stock plunged by about 9% and wiped roughly $175 billion off its market value. Even if the business is solid, investors will closely scrutinize capex plans to decide where to allocate capital given current fundamentals. Without a clear monetization path, the investment case is at risk.

Earnings season allows investors to overlook some immediate risks. However, a jump in oil prices to a four-year high increases the odds of accelerating inflation. That would force the Fed to keep policy restrictive and undermine global risk appetite, especially since Treasury yields and corporate funding costs for S&P 500 issuers would climb in parallel.

Despite the impressive rise in business investment, consumer spending in the GDP mix disappointed. After all, consumer demand has long been the main engine of US growth.

Earnings season fades, AI euphoria fades — what's left? It will be hard for the broad index to continue the rally if the US economy starts to disappoint, and the Fed is forced to maintain the federal funds rate amid inflation concerns.

Technically, the S&P 500 is in a steady uptrend on the daily chart. The first of the two previously stated targets, $7,200 and $7,300, has been met. The second target remains in view. It makes sense to use pullbacks for buy entries. The $7,100 level acts as support.