Tech-led rally in the S&P 500 will resume, Capital Economics says

Investing.com -- Capital Economics expects the tech-driven rise in the S&P 500 to regain momentum, arguing in a note Tuesday that the index is set for a stronger 2026 despite what it calls a “rocky start” to the year.

The firm’s analyst Thomas Mathews said the market has faced “sharp falls amid geopolitical tensions and wavering confidence in the AI narrative,” with tech sectors coming under “particular pressure.”

He believes the recent pullback reflects “nerves about AI capex volumes” and concerns about the disruptive effects of the technology.

But the analyst noted that the latest earnings season has been “quite positive,” with several large firms reporting “very rapid earnings growth” and giving upbeat guidance.

The firm highlighted that the median year-on-year earnings-per-share growth among reporting tech companies is in double digits.

Capital Economics argued that the rally remains supported by fundamentals, saying the gains since 2023 have been driven by “rapid growth in earnings (and expected earnings),” unlike the dot-com era when valuations contributed more.

Meanwhile, expectations for earnings are “not yet excessively lofty,” Mathews wrote, adding that forward EPS could rise from roughly $310 now to $330 by the end of this year.

While identifying risks from valuations, AI-related disruption, capital-expenditure uncertainty, China and geopolitical tensions, the firm believes these challenges “won’t derail it for too long.”

Capital Economics reiterated its end-2026 forecast for the S&P 500 to reach 8,000 and said it is “not time to throw in the towel yet.”

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