Is the AI Boom Running out of Steam?

AI stocks have delivered stratospheric returns in the past few years. But is this rally sustainable in 2026?

In today’s newsletter, we will take a look at some of the developments of leading Magnificent 7 stocks, as well as other AI players, and examine whether equities have room to run further or are running out of steam.

Is the AI Boom Running out of Steam?

AI stocks have been some of the top performing assets since the 2020s, as leading companies in this space have been able to revolutionize a variety of industries and massively disrupt hiring and productivity trends.

As we approach 2026, many investors have begun to express concerns over the growth sustainability of AI companies, just when many leading US tech companies have announced new investment plans.

Magnificent 7 stocks have been some of the main drivers of the S&P 500, as these companies have been very quick to adapt AI offerings. However, AI has had a massive impact on multiple industries in the United States, and there are plenty of AI leaders in areas like finance and software that are shaking up the industry and investing massively in AI this year.

AI Catalysts in the Equity Markets

The S&P 500’s five year rally has been significantly driven by recent developments in tech companies, which have turned to new AI ventures in recent years.

The Magnificent 7 stocks include a group of US tech stocks that offer investors ample exposure to technology and AI developments. These companies have been able to massively capitalize on favorable trends in the AI industry, allowing them to rise to make up 35% of the S&P 500 Index. 

These 7 stocks returned by 875.5% from 2015 to 2025, well ahead of the return of the S&P 500.

However, 2026 looks like a different picture. Leading M7 stocks have been extremely volatile recently, as investors express heightened concerns over the outlook for these companies’ newly announced AI investments.

While the economic impact and growth of AI appear very clear, it is also evident that some leading AI stocks may be in for a reality check this year.

Growth of AI Investments

Any suspicions that AI was merely a short-term fad have been clearly debunked in recent years. 2022 was merely the beginning of a new cycle that will see both larger and even smaller companies increasingly embrace AI to stay relevant this decade.

Microsoft, Amazon, Alphabet, and Meta collectively plan to invest $650 billion in AI in 2026, a move that indicates companies are far from abandoning AI in any capacity in the future.

Capital expenditure from tech companies has recently risen to a decade high, as many S&P 500 giants have been doubling down on AI investments.

Even with rates rising and economic conditions becoming harsher, leading tech companies have been ramping up new investments to stay ahead of their competition.

This is not only a relevant trend for larger tech companies, as many smaller companies have also followed suit to embrace innovation and even lower their labor costs.

A recent survey from McKinsey found that the majority of US companies have now begun to embrace AI in their operations.

We have clearly hit the point where the use of Artificial Intelligence in business operations has become a norm for virtually all companies.

AI Themes to Monitor

While many of the Magnificent 7 stocks are well-positioned to be clear victors in the AI race, there are still plenty of AI-themed investments to consider. It may be best to consider some of these alternatives to M7 stocks, as these companies may be saner bets based on valuation and growth potential.

The semiconductor industry is the backbone of the AI explosion, as giants in this industry have been powering the growth of this industry by enabling companies to implement AI in their operations. The growth of the semiconductor industry reached 22% last year, and Deloitte projects it will grow by 26% this year. While all eyes are on the leading giant Nvidia Corporation, other players like Micron and Broadcom have also been ramping up investments in this environment.

AI also has endless applications in software and data analytics, and there are plenty of players in this area to monitor. Snowflake has recently partnered with OpenAi to help companies bring in new AI agents and other tools based on their enterprise data. Oracle has also recently announced its plans to raise $50 billion to fund data center expansion, while Adobe has ramped up marketing spending by 30% to stay relevant in the AI era.

AI has also had a massive impact on the financial services industry, allowing fintech players to compete with traditional banks by offering AI-powered services. Companies like Pagaya and Upstart have implemented AI in their lending and underwriting processes, significantly disrupting traditional banking. Affirm’s buy now, pay later AI model has also been a major disruptor within finance.

While M7 stocks have hogged a lot of the spotlight and have ambitious capex plans this year, they will also be under strong scrutiny from the market this year. Selective shopping within alternative industries can be a key way to maintain exposure to AI stocks and lower your risks.

Sustainability of the Bull Run

While AI will have a clear and revolutionary impact on the economy throughout this decade, there are many reasons to be a bit more cautious now, particularly as it relates to equity investments.

The massive rise of many US growth stocks, largely driven by AI initiatives, has caused many observers to be more cautious because of valuation concerns.

IT stocks in the United States now trade at a massive premium to the broader markets, following their massive bull run between 2023 and 2025.

US tech companies are trading at around 40x earnings, and may be more volatile in upcoming quarters if financial results are weaker.

MIT has released many groundbreaking studies on this topic, including one that shows that initial generative AI implementations are failing at 95% of companies. This is yet another reason to take a wait and see with AI-focused equities, which seem to have priced in the absolute best.

As always, selective shopping within markets based on valuation and proven metrics is often the best approach to navigating equity markets. Leading M7 stock may be in for a reality check, while other smaller AI peers may surprise to the upside.