Nasdaq Hits New High: Has AI Investment Entered a Bubble Phase? Q2 Earnings May Be an Important Juncture for Validating Fundamentals.

CICC recently released a research report interpreting this issue, establishing a fundamental tone for the nature of the current rally in U.S. stocks—AI has not yet reached a typical "bubble" stage.

The firm argues that we have not yet entered a "bubble" phase, analyzing the primary drivers of the gains from an industry perspective and the significant increase in AI capital expenditure by the five major cloud providers.

Based on the reported first-quarter results of the S&P 500, earnings growth for the quarter reached 28%, a new high since the 32% recorded in the fourth quarter of 2021. Among sectors, AI-related communication services (51%) and information technology (48%) led the growth, with semiconductors and equipment (99%) growing the fastest.

The magnitude of S&P 500 earnings surprises rose from 6.5% in the fourth quarter of 2025 to 19%, and the proportion of companies beating expectations increased from 75.1% to 85%. Within this, the information technology sector had the highest proportion of companies beating estimates (96%), with an earnings surprise magnitude of 11%.

Tech stocks' contribution to earnings reached 67%. The five major cloud providers, including Microsoft ( MSFT ), Amazon ( AMZN ), Google ( GOOGL ), Oracle ( ORCL) and Meta ( META) contributed 40% of the overall earnings growth.

Specifically, growth in semiconductors and hardware/software was primarily driven by revenue, reflecting how large-scale investments in the AI infrastructure layer are continuously being converted into upstream orders and revenue; the media and entertainment sector, including Google and Meta, relied more on margin expansion, driven by improved advertising effectiveness following algorithm optimization and enhanced platform operational efficiency.

In terms of AI capital expenditure, the five major cloud providers' first-quarter Capex grew 91% year-on-year to $148 billion, driving the overall S&P 500 Capex up 36% year-on-year to $381 billion. Regarding specific allocations, Capex for leading companies in the U.S. AI industry chain could increase by 70% to $730 billion by 2026, with infrastructure-layer data centers and supporting construction still dominating in scale.

Overall, the rally in tech stocks cannot be judged simply by whether there is a bubble; rather, it is necessary to first distinguish the current stage: an industry growing upward with participants increasing investment in trend is not a bubble; a bubble only occurs when investment becomes frantically overheated, far exceeding real demand and the market's capacity.

Rising stock prices, high valuations, and capital clustering in leading companies are not bubbles in themselves; a true bubble is when prices become completely decoupled from actual performance and fundamental support.

Reviewing the year-to-date performance, from an industry perspective, the rally has been primarily led by segments such as storage and optical modules, while the gains in chip stocks have lagged relatively, and cloud service providers have even underperformed the S&P 500 index.

This indicates that the AI rally has not receded, but the current focus of market pricing has shifted from pure capital expenditure expansion to a phase more sensitive to order certainty, earnings delivery, cash flow pressure, and return on investment.

Based on this, the second-quarter results in mid-July may become a critical juncture for validating the next round of market trends and directional shifts, especially for sectors with elevated valuations, which require higher certainty in earnings delivery for support.

CICC stated that in addition to AI earnings realization, focus should also be placed on U.S. liquidity (Fed policy and Treasury yields, large IPOs) and the rotation among different growth sectors.

In the base case, the AI industrial trend continues, and valuations for cloud providers and chipmakers have not yet reached the high end of their ranges, allowing for internal rotation within the technology sector; the current stalemate in Iran could also "force" the market to increase its positioning within the tech sector.

If the situation eases, it will certainly help sustain valuations and liquidity in the technology sector, but the market might also rotate toward non-ferrous cyclicals and broad AI investment areas, similar to the end of last year and the beginning of this year.

In a pessimistic scenario, an escalation in Iran and rising tightening expectations could bring short-term pullback pressure to tech stocks with high valuations, but these are merely excuses sought by the market at peak levels; fundamentals remain the key factor.

Wall Street currently widely predicts that the S&P 500 index will continue to rise this year: Goldman Sachs and JPMorgan forecast the S&P 500 will reach 7,600 by year-end; Citi expects 7,700; Morgan Stanley expects 7,800; and Deutsche Bank predicts 8,000, one of the highest targets among major Wall Street banks.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.