The single most important issue for the stock market today is determining whether the Artificial Intelligence (AI) revolution will deliver on its promises of boosting productivity and reducing costs.
Remember, since Chat-GPT was unveiled by OpenAI in November 2022, AI-related stocks have accounted for 75% of market gains, 80% of market profits, and 95% of capital expenditures. In this context, the entire bull market is effectively one gigantic bet on AI.
The Bears and Doomers have been proclaiming for months that AI-related stocks are in a gigantic bubble and that it’s only a matter of time before this bubble bursts and a systemic crash hits.
To be clear, there are some valid issues related to AI technology. The most salient at the time of my writing are:
- AI “hallucinates”, i.e. claims false/fictitious information as fact. All Large Language Models (LLMs) suffer from this with hallucination rates ranging from 15% to 52%. Unless the user is an expert on the subject matter, he or she has no way of knowing whether the information LLM is presenting is correct or not.
- AI suffers from “hive mind” or homogenous thinking. Researchers at Stanford performed a study through which they asked multiple AI models open ended queries (questions that do not have a single correct answer) 26,000 times. They discovered that:
- An AI model would answer the same answer to an open-ended query every time.
- Different AI models ended up coming up with the same solutions.
However, all technological revolutions have hiccups during their developmental phases. Railroads didn’t work perfectly right away, nor automobiles, or the internet. And it’s unclear whether the above issues for AI are in fact built into the technology or if these kinks will eventually be worked out.
What is clear, right now, is that the AI revolution is currently translating to higher profits. And until this trend reverses, it is unlikely that a bear market will hit.
First and foremost, profits are increasing. This year, 2026, S&P 500 profits are on track to grow 23%. As Warren Pies notes, since 1995 there have been six instances in which corporate profits grew by over 20%. All but one of them saw the S&P 500 rise by double digits. The one outlier was 2018, when the Fed aggressively tightened monetary policy resulting in a mini-bear market into year-end.
Warren also notes that profit margins are increasing. As I write this, they currently stand at 14.5% and are expected to increase to 16.7% in 2027.
Will the AI story eventually prove to be a dud? It’s possible, but right now, this bull market is being driven by fundamentals, not speculation. Yes, there are pockets of extreme froth in the stock market, but there are always profits of froth during bull markets as “hot money” flows in and out of momentum/ growth stocks.
As investors, our job is to make money, not philosophize about what should happen in the markets based on how we believe the world should work. In this context, we need to ride this bull market for as long as possible.
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Best Regards
Graham Summers, MBA
Chief Market Strategist
Phoenix Capital Research
