S&P 500 Gains Threatened by AI Spending and Inflation

The S&P 500 has risen 10.8% in 2026, but a recent decline now threatens its four-year streak of double-digit annual gains. Market volatility is currently driven by a combination of high inflation, steady interest rates, the results of the U.S. midterm elections, and massive corporate spending on artificial intelligence.

Financial indicators suggest significant risk, as the cyclically adjusted price-to-earnings (CAPE) ratio surpassed 40 earlier this year. This level has historically been seen only prior to the 1929 and 2000 market crashes. While tech giants like Amazon and Alphabet are more established than companies from the dot-com era, their aggressive AI spending has rendered them free-cash-flow negative.

External pressures including high oil prices and the Iran war further complicate the market outlook. However, some observers suggest a potential crash may be less severe than historical precedents because economists and investors have applied lessons learned from previous financial crises.