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The S&P 500 has traded around 7 580, up 11.02% year to date. The Nasdaq Composite has traded around 27 086, up 16.57% year to date. The Dow Jones Industrial Average has traded around 51 078, up a more modest 6.27%. The divergence matters. The strongest gains have come from technology, communication services, artificial intelligence (AI) infrastructure, cloud computing, chips, and data centre-related businesses.

S&P 500 companies have come through one of the strongest first quarter reporting seasons in years. Earnings per share rose 28.6% year-on-year, the strongest quarterly expansion since late 2021. That makes the rally more than a valuation story. Investors have not simply paid higher prices for the same earnings. The earnings base itself has expanded sharply.

The earnings beats were also exceptional. Around 85% of S&P 500 companies beat Wall Street’s earnings expectations. In aggregate, earnings came in 16.7% above estimates, far ahead of the five-year average surprise of 7.3%. Even after a strong run in equities and high analyst expectations, corporate America still delivered profits materially ahead of forecast.

Margins explain much of the market’s resilience. Net profit margins for S&P 500 firms expanded to 14.8%, around 250 basis points above the five-year rolling baseline. Inflation has hurt households and smaller firms more visibly, but large listed companies have used scale, pricing power, automation, cost control, and steady demand to defend profitability.

Full-year S&P 500 earnings per share forecasts have been revised upward to around $337.50, implying annual earnings growth of about 22.6% and supporting year end index targets near 8 000.

A second major driver is the AI capital spending cycle. The largest technology firms are executing one of the largest infrastructure investment programmes in corporate history. Their spending is going into data centres, chips, servers, networking equipment, cloud capacity, power systems, cooling technology, and the physical infrastructure required to support AI at scale.

The largest technology companies are projected to deploy around $725 billion in capital expenditure, an 83% increase from previous budgets. That investment is feeding directly into hardware manufacturers, chipmakers, cloud platforms, data centre operators, and companies supplying the infrastructure layer of the AI economy.

The information technology sector has posted year-on-year earnings growth of 54.3%. Firms exposed to data centre demand, new chip architecture, and constrained global hardware capacity have seen forward earnings estimates revised sharply higher.

The third driver is a supportive policy framework. Monetary policy remains tight, but fiscal and corporate policy remain favourable to American firms. Tax treatment, investment incentives, industrial policy, defence spending, energy production, and domestic manufacturing support have all helped protect corporate profitability.

The Federal Reserve is still trying to contain inflation through restrictive rates. But Washington has not imposed an economy-wide profit squeeze on the corporate sector. Large companies continue to operate inside a policy environment that supports investment, rewards scale, and protects strategic industries.

The fourth driver is resilient domestic demand. First-quarter real GDP growth was revised down to 1.6% annualised, partly because of weaker inventories. But underlying domestic demand remained stronger at around 2.4%. The headline growth number softened, but household and business spending remained strong enough to support corporate revenues.

Markets have of course been sensitive to the risk that conflict in the Middle East could keep energy prices high, lift inflation expectations, and damage global trade flows. Optimism around a possible 60-day ceasefire extension and the reopening of critical shipping lanes has eased immediate energy market fears, letting investors return their focus to earnings, margins, and AI-linked investment. But markets surged even through some of the worst doom-mongering reporting on the Iran war.

American markets have done well this year because corporate America has delivered the profits required to justify higher equity prices. Earnings growth has accelerated. Margins have expanded. AI capital spending has created a real infrastructure boom. Policy conditions have remained supportive. Domestic demand has held up. And geopolitical risk has eased enough to stop oil from dominating the market narrative.

But what are the risks?

To a significant extent the rally has been concentrated around AI, and that creates risk. If AI spending slows, if Iran and China keep the United States pinned down in Hormuz, if earnings revisions turn down, if margins compress, or if bond yields rise, the market will become more vulnerable. But for now, the commercial facts are stronger than the macro fears.