The De-rating Investors Should Welcome

Markets have cycled through the same concerns all year: valuation fears, AI skepticism, geopolitical shocks, and questions about inflation and central bank policy.

Few of these worries have left a lasting mark on markets, yet the debate resets every few weeks.

Equity markets have traded in a range since mid-May, leaving us focused on two questions for the rest of the year: what creates the next leg higher, and where can investors find themes that transcend the worry cycle?

The data keeps answering the first question.

The Citigroup Global Economic Surprise Index (CESI) measures whether macro data beats or misses consensus forecasts, remains firmly positive at 21.9, indicating economic data improvement

That momentum has held through periods of elevated geopolitical tension, including the ongoing Middle East conflict.

The economic story remains strong in the U.S. and solid across other regions.

Bottom line: Equity markets have priced in more uncertainty than the macro backdrop currently warrants. When fundamentals improve faster than sentiment, long-term investors may find attractive entry points into solid fundamental stories.

This is the biggest week of the second quarter U.S. equities reporting season, with about a third of S&P 500 market cap reporting.

Combined with 31% already in the books, roughly two-thirds of U.S. large cap market value will have reported by Friday.

Expectations were high entering the quarter, and results have thus far exceeded them, with earnings surprising by +17% in aggregate1.

Q2 S&P 500 EPS growth has jumped to 36% year over year, driven primarily by one-time investment market-ups at a single mega-cap Tech company. Excluding that one-time gain, growth is tracking 24% year over year, up 2% since the start of the month.

Investors continue to question whether AI spending is sustainable and whether it converts into revenue growth. The companies writing the checks offer some reassurance.

One of the largest hyperscalers raised its 2026 capital expenditure (capex) forecast last week, indicating spending could rise significantly again in 2027, and tied the increase to accelerating demand. Our read is that the AI build-out is broadening rather than slowing.

Focus now shifts to the remaining hyperscalers reporting this week. Following that capex guidance increase, hyperscaler stocks have underperformed, implying lowered expectations for this round of reports.

The bar may now sit lower than it did a few weeks ago, and that raises the importance of guidance and management commentary echoing the same confidence in persistent demand.

Bottom Line: Investors continue to worry about AI spending, while companies continue to report AI-fueled earnings growth. So far, fundamentals are winning the debate by surprising positively. We continue to prefer companies with strong fundamentals and clear earnings drivers.

Against a backdrop of cautious sentiment, we look for themes less correlated to the market’s worry cycle. Cybersecurity and data security stand out. Companies cannot afford to cut security spending when operational resilience is at stake, when reputation depends on how well they protect data, and when the right protection is critical to continued growth.

The budget data supports this view. 88% of companies plan to increase cybersecurity budgets over the next 12 months, and nearly half are growing budgets by double digits, with 37% increasing spend by 10% to 25% and another 8% by more than 25%. Only 2% of companies expect to cut security spending at all2.

That is the core of the investment case. AI expands the vulnerability and the security requirement at the same time, which makes cybersecurity spending unusually durable across market cycles.

Bottom line: AI is expanding both vulnerabilities and security requirements, making cybersecurity one of the most durable areas of enterprise spending. With 88% of companies increasing security budgets, we think cybersecurity spending will be resilient to the market’s recurring cycle of worries.