• Mega-cap tech earnings validate massive AI capital expenditure growth
• Market enters late-cycle phase amid extreme profit concentration risk
• Hold high-quality assets while maintaining strategic cash optionality

Stocks continued their record run this week, fuelled by a series of impressive earnings beats from large-cap tech.

The past six weeks have been breathtaking… the S&P 500 surging more than 13%.

However, it is important to recognize that this is not a flash in the pan—it is the continuation of a much larger, structural trend.

For example, if we zoom out to a ~16-year weekly view, the S&P 500 has maintained a compounding annual growth rate (CAGR) of 11.8% exclusive of dividends.

Periods of this magnitude are exceptionally rare.

To understand just how rare, it"s helpful to look at the post-WWII landscape through an 80-year lens.

History shows us that we have witnessed three generational booms over the last eight decades, each remarkably similar in duration.

However, these surges are invariably punctuated by long stretches of "dead money"—grinding decades where real returns (i.e. those adjusted for inflation) remain flat to negative as the market digests the excesses of the previous run (i.e., misallocation of capital resulting in the boom and bust cycle).

The current cycle is now roughly 17 years and counting.

It could easily run another 3+ years or more. Or it may be all finished by next year?

I don"t pretend to guess.

And whilst it"s true we can say the long-term average total return for the Index is ~10%… it"s also largely determined by when you entered.

For example, buying the Index in the late 60s and/or late 90s would not have produced favourable results.

I wonder what we will be saying in "2036"?

From mine, it would be foolish to predict some kind of "imminent crash" (as many fear mongers like to do) purely because valuations are extended.

But…

It is reasonable to suggest we are firmly in the "late-cycle" phase.

In a market this extended, the best course of action is rarely binary (e.g., all-in or all-out).

For example, as regular readers will know, I continue to maintain a ~65% long exposure (with no short positions).

This cautiously positive stance has seen my portfolio rise 6.32% YTD — slightly ahead of the S&P 500 5.31% gain.

My investment strategy remains focused on high-quality businesses that generate significant free cash flow and consistently high returns on capital invested.

For example, I recently used pockets of market weakness to add to positions in Microsoft (~$380) and UnitedHealth (~$260).

Similarly, my position in Alphabet—which I added to last year at ~16x forward earnings (~$155)—and Amazon —continue to provide the fundamental floor for my performance.

I expect these positions to do well in the years ahead.

However, even with that exposure, we must confront a difficult question:

Is the market right to simply look past ongoing geopolitical conflicts and rising crude oil prices?

To find the fragility in this run, we have to invert our bullish thesis.

If this momentum were to fail, the path would likely be paved by a sudden compression in record-high profit margins or a "depreciation shock" as the massive AI capital expenditure begins to weigh on balance sheets without a secondary wave of revenue to support it.

Investors are wise to exercise caution regarding supply chain disruptions and regional blockades.

But there is an equal and opposite reality:

Would the market be right to ignore growth in corporate earnings that is beginning to look genuinely historic?

We are witnessing one of the largest upward revisions in corporate profits on record outside of a post-recession recovery.

Even war in the Middle East has done nothing to derail this fundamental momentum.

Before we accept this rally as undeniable proof of a healthy economy, we need to challenge the assumptions holding it up.

Below, I"ll break down the five forces driving this market and what they tell us about the durability of this run.

But first, let"s look at the large-cap tech earnings that provided the fuel for this week"s surge.

Mega-Cap Tech Delivers in Spades

The bullish thesis received its most significant validation yet this week as five of the Magnificent Seven reported Q1 2026 results.

In most cases numbers were not just beats; they were an emphatic statement on the payoffs of the massive AI capital expenditure cycle we"ve seen over the last ~18 months.

Company	Revenue	Growth (YoY)	Key Highlight
Meta (META)	$56.31B	+33%	Fastest growth since 2021; AI focus strengthening core ads; $14.3B Scale AI investment.
Alphabet (GOOG)	$109.9B	+22%	Cloud revenue topped $20B for the first time (up 63%); with overall Revenue growing 22%.
Microsoft (MSFT)	$77.7B	+18%	Azure growth hit 40%; Commercial backlog surged to $392B.
Amazon (AMZN)	$181.5B	+17%	AWS growth accelerated to 28%; Record 13.1% operating margin.
Apple (AAPL)	$143.8B	+16%	iPhone revenue grew 23%; Services hit a $30B quarterly record.

The market was most disappointed with Meta.

The company said that "internet disruptions in Iran" weighed on user growth – their investment in AI is yet to produce new revenue streams. However, CEO Zuckerberg said the investment has strengthened the company"s core advertising business.

These results suggest that the "perfect storm" of AI infrastructure investment is finally translating into tangible top-line acceleration.

Alphabet and Microsoft alone are reporting a combined cloud backlog of over $850 billion.

When we see revenue from products built on GenAI models growing 800% YoY at Google, the market"s refusal to sell off on geopolitical news starts to look less like complacency and more like a rational response to fundamental strength.

Historical Rise in Profits

Prior to the updates to large-cap tech earnings this week – global 12‑month forward profits have surged by roughly 12% in just a few months.

That is a massive injection of fundamental capital into the system.

It would be easy to chalk the market"s resilience up to investor complacency, but the data suggests otherwise.

Analysis of recent earnings-call transcripts shows that executives are acutely aware of the global conflicts; mentions of war have spiked dramatically.

Management teams are not ignoring the risks; they are choosing to manage through them.

Yet, for business managers, the prevailing attitude is that this too shall pass.

They point out that their industries have survived recessions, pandemics, and previous conflicts.

For the most part, they feel this conflict won"t be any different.

They have confidence in their ability to withstand the fallout, and right now, the market is aggressively rewarding that confidence with higher valuations.

But Can a Rising Tide Lift All Boats?

According to FactSet (April 26) — 84% of companies are topping earnings estimates, well above the historical average.

In aggregate, earnings are beating expectations by a wide margin. Note – these numbers exclude the mega-cap tech earnings this week.

• Earnings Scorecard: For Q1 2026 (with 28% of S&P 500 companies reporting actual results), 84% of S&P 500 companies have reported a positive EPS surprise and 81% of S&P 500 companies has reported a positive revenue surprise.
• Earnings Growth: For Q1 2026, the blended (year-over-year) earnings growth rate for the S&P 500 is 15.1%. If 15.1% is the actual growth rate for the quarter, it will mark the sixth-straight quarter of double-digit (year-over-year) earnings growth reported by the index.
• Earnings Revisions: On March 31, the estimated (year-over-year) earnings growth rate for the S&P 500 for Q1 2026 was also 13.1%. Nine sectors are reporting higher earnings today (compared to March 31) due to positive EPS surprises and upward revisions to EPS estimates.
• Earnings Guidance: For Q2 2026, 11 S&P 500 companies have issued negative EPS guidance and 9 S&P 500 companies have issued positive EPS guidance. • Valuation: The forward 12-month P/E ratio for the S&P 500 is 20.9. This P/E ratio is above the 5-year average (19.9) and above the 10-year average (18.9).

The headline numbers are clearly outstanding.

However, as I outlined here – when you examine the sheer concentration risk, the picture becomes far less reassuring.

This boom in profits is not a rising tide lifting all boats.

It is intensely concentrated on the technology sector and the massive capital expenditure buildout required for AI infrastructure (estimated to top $700B this year).

In fact, close to 98% of this year"s extraordinary profit upgrade can be explained by just three sectors: Semiconductors, IT Hardware, and Energy.

This lack of redundancy introduces inherent risks. Therefore, investors need to ask:

• How much higher the semiconductor sector can go? and
• What happens when (not if) capital spending on AI infrastructure merely slows down to a normal pace?

If 98% of the earnings growth is tied to a handful of themes, the broader market has a small buffer against any shock (or missed expectations).

The Margin Expansion Trap

Momentum is a powerful force and it"s generally a poor bet going against it in the near-term.

Prices will often go far further (and lower) than you expect.

However, for the current record momentum to continue, profit margins are the critical variable.

Right now, US profit margins are scaling to new (all-time) highs – as this 80-year chart shows:

The natural tendency of the US economy is to expand (e.g. with real GDP averaging growth of around 2-3% each year) – which naturally pulls corporate earnings up with it.

However, it is exceedingly rare for profit margins to widen this impressively and stay there.

Why?

Capitalism is fiercely competitive (a very good thing!)

When you build a "honey pot" with high margins — it will naturally attract competition.

This eventually forces those margins back to a historical average.

That natural (mean) reversion appears to be temporarily suspended.

The current bullish thesis relies on the assumption that these record margins can keep growing indefinitely.

They won"t.

And from mine, given how late we are in the current expansion cycle – asking the market for 20% more earnings growth could be a tall ask.

Anatomy of a Market Melt-Up

Whilst there are certainly some parallels — comparisons to the 1999 dot-com bubble tend to be exaggerated.

It is extremely rare for a market as large and central to the global economy as the US stock market to become wildly overextended.

But there are similarities we cannot ignore…

Then, as now, stocks already looked expensive after a long run.

For example, from May 1983 to May 2000, the S&P had posted an incredible 14.5% CAGR:

The dot.com bubble is a great example of how far things can run whilst still over-valued.

A revolutionary new technology (the internet then, AI now) captured the world"s imagination.

In both eras, the market suffered a brief moment of existential dread—the collapse of the Long-Term Capital Management hedge fund in 1998, and the sudden escalation of Middle East conflict today.

And in both cases, the worst-case scenario was avoided, leading to a massive sigh of relief and a subsequent surge in equities.

From Bloomberg Opinion"s John Authers:

A melt-up doesn"t just happen because of earnings; it requires fuel in the form of liquidity and sentiment.

Liquidity is in abundance and sentiment remains strong.

Despite widespread concerns about hidden risks in private credit, the broader credit markets remain incredibly accommodating.

Credit spreads—the premium companies pay to borrow over safe government bonds—are hovering near their tightest levels since the Global Financial Crisis.

In other words, credit markets don"t see large amounts of (default) risk.

As a result, the bears have gone back into hibernation.

This creates a psychological trap for investors: the fear of missing out.

During the late 1990s, value-oriented managers (like Warren Buffett) who sat out the tech bubble looked like geniuses by 2002.

But it required sitting this out for at least 2-3 years (something many fund managers find difficult to do).

For example, in July 1999, Buffett gave his famous Sun Valley speech, where he warned tech moguls that their valuations were unsustainable, comparing the internet boom to the early days of automobiles and aviation—industries that transformed the world but destroyed most investors" capital.

By late 1999, the media began calling him a "dinosaur."

The most famous example was the December 1999 Barron"s cover story titled "What"s Wrong, Warren?" which suggested he had lost his touch.

He was mocked for his famous "Aesop"s Fables" analogy about "pumpkins and mice," where he explained that investors were like Cinderella at the ball, staying at the party despite knowing the clock would eventually strike midnight.

But the reality is many of fund managers lost their clients (and maybe their jobs?) long before the bubble popped because they refused to participate in the madness.

A melt-up generates its own gravity, and while it"s happening, it is incredibly difficult and painful to sit (mostly) on the sidelines.

Putting it All Together

One of the mistakes the Fed made in 1999 was to pour gas on a raging speculative fire.

27 years ago they added more liquidity to the system.

This only exaggerated the misallocation of capital.

Today, the Fed are considering rate cuts into a market that is already priced for perfection, and surging on tech-driven momentum.

The lessons today are not unlike ~30 years ago.

When leadership narrows, margins stretch, and sentiment turns euphoric, the market becomes highly dependent on (near) perfect conditions.

We must distinguish between a durable economic foundation and a liquidity-driven melt-up.

Because when the music eventually stops (or as Warren put it – "when the clock strikes midnight") – the difference will be everything.

That said, we should maintain exposure to very high quality (free cash generating) companies.

For example, Buffett is happy owning stocks like Apple, American Express, Coca-Cola, Chevron and Bank of America.

These are great companies to own if acquired at reasonable valuations.

They will weather most storms.

However, ~35% of Berkshire"s portfolio sits in cash and/or cash equivalents like short-term bills (~$374B).

This gives Berkshire "optionality" to wait for when businesses are more attractively priced.

And if that takes another two or three years – so be it.

Regards
Adrian Tout