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Despite a 1.0% decline in June, the S&P 500 posted a 15.2% second-quarter gain, its strongest quarterly advance in six years.
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Technology lagged in June, while Health Care, Industrials, and Financials outperformed, signaling a notable shift in market leadership.
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AI infrastructure spending has surpassed $700 billion this year, raising questions about whether unprecedented investment will ultimately justify lofty valuations.
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AI-driven demand for memory components has pushed prices higher, adding inflationary pressure and complicating the Federal Reserve’s policy outlook.
Even though the S&P 500 drifted down by -1.0% in June, the mood remained positive in the wake of a 15.2% second-quarter gain, the best quarter in six years. The major drivers for the quarter were AI and AI infrastructure stocks, as the Tech sector soared. While this trend has often seemed unstoppable, June actually saw a reversal with the Tech Sector falling -3.3%, almost matching Energy’s loss behind the fluctuating news from the Mideast. Industrials led the way in June, followed closely by Health Care, which has largely lagged the market for years. Financials also handsomely outperformed.
A central question for stock investors is the solidity of the AI-driven technology boom. For the biggest players, the hyperscalers, it boils down to whether their massive spending on data centers will prove to be a boon for profitability or a destroyer of value. We know from past technological revolutions, such as the personal computer or the internet, that it’s easier to get the trend right than to predict which companies will be the winners. The recent initial public offering (IPO) hesitation from OpenAI may portend rising investor concerns.
Spending on data centers this year has risen to more than $700 billion, comparable to the cost of constructing 127 state-of-the-art NFL stadiums with retractable roofs. We’ve seen the hyperscaler funding shift from cash flow investing to stock and debt issuance. As spending ramps up, so do the risks. The question of valuation and return on investment (ROI) was finely focused by SpaceX’s June IPO and its exuberant rise to nearly $3 trillion market capitalization on its third day of trading. While SpaceX does have significant revenue ($18.7 billion in 2025), it is far from profitable. This valuation is a perfect illustration of the AI and emerging technology investment conundrum: the challenge of looking beyond today’s enthusiasm for huge investments towards future returns.
AI infrastructure spending has broader implications. The demand for memory has created a worldwide shortage. Suppliers have been raising prices, and these get passed along, as recent buyers of cell phones and laptops may have noticed. This is part of the stickiness of inflation, which is not entirely a story of escalating energy prices. This, in turn, is particularly knotty for the Federal Reserve under new chair Kevin Warsh. Warsh was once expected to champion a steady wave of rate cuts; now, expectations favor a rate hike to try to cool the economy and stubborn inflation.
These uncertainties and challenges are top of mind as we build portfolios. While the investment in data centers involves significant speculation for the AI spenders, it is immediately profitable for the suppliers and builders. Not all of these related companies are excessively expensive, and we believe that owning them selectively is the most prudent way to participate in what is surely a revolutionary technology. However, investors focused only on Tech and Momentum stocks may miss out on a field of successful, profitable companies. Look no further than the June pop in Health Care stocks just as Tech stocks faded to hearten our belief in appropriately diversified portfolios.