Artificial intelligence-related shares have been responsible for more than 80% of the S&P 500’s gains in 2026, raising concerns among some investors about whether the rally has become too concentrated. Strategists at Jefferies, however, argue that the strength of the move remains supported by fundamentals rather than excessive speculation.
The firm’s quantitative strategy team said returns across its AI stock basket continue to be driven largely by earnings growth instead of expanding valuation multiples, which they believe makes the trend “sustainable.” Without AI-linked companies, the S&P 500 would have gained only around 2% so far this year.
Strong Earnings Momentum Continues Across AI Sector
Jefferies noted that forward earnings forecasts for its AI basket in 2026 have risen by more than 30% since the middle of 2025. Analyst consensus currently points to a compound annual earnings-per-share growth rate of 38.5% for 2026 through 2027, far above the 11.9% projected for sectors outside artificial intelligence.
Even with that growth profile, the AI basket trades at roughly 25 times forward earnings, below its historical one-standard-deviation level. Its PEG ratio also stands at just 0.6 times.
“AI is the cheapest sector to own in the U.S.,” on a PEG basis, the team led by Desh Peramunetilleke wrote.
Not All AI Segments Are Performing Equally
Performance across the AI landscape has varied considerably this year, according to Jefferies. Stocks tied to AI servers, optical technologies and memory products have generated the strongest returns, while hyperscalers and semiconductor designers have lagged behind other AI-related groups.
The analysts said memory and compute-focused companies currently appear the most attractive from a valuation standpoint based on PEG ratios. Meanwhile, semiconductor equipment makers and chip design companies are viewed as comparatively expensive.
Earnings Season Offers Additional Confidence
Jefferies said the latest earnings season further reinforced the positive case for AI-related equities. Approximately 86% of companies exceeded profit expectations, marking the highest earnings beat rate seen since the post-pandemic period and improving from 75% in the previous quarter. Revenue surprises also strengthened, with 82% of companies beating forecasts.
Despite those strong numbers, the firm noted that positive earnings surprises did not consistently translate into outperformance across the broader market. Outside AI and a limited number of sectors, companies generally saw muted share-price reactions following earnings beats, while firms missing expectations faced sharp declines, reflecting elevated market expectations.
“On a more positive note, beats were followed by upgrades, suggesting earnings risks are low despite the geopolitical uncertainty,” the strategists added.
Geopolitical Risks Remain a Key Concern
Analysis conducted through the AlphaSense platform covering roughly 330 earnings calls showed that management teams remain broadly optimistic, with positive sentiment reaching 95%. Analyst sentiment also improved, with 58% of earnings calls reflecting a positive tone compared with 48% in the fourth quarter of 2025.
At the same time, companies increasingly pointed to geopolitical tensions involving the United States and Iran as a growing risk factor. Around 44% of businesses referenced the conflict negatively, highlighting concerns around supply chain disruption and softer consumer demand.
Broader Market Growth Remains Subdued Outside AI
Jefferies also highlighted the growing divide between AI-driven sectors and the rest of the market. Aggregate earnings revisions for the S&P 500 over the past three months total roughly 6%, but fall to just 0.3% once AI and commodity-related sectors are removed from the calculation.
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