Artificial intelligence-linked stocks have accounted for more than 80% of the S&P 500’s gains so far in 2026, prompting debate among investors over whether the rally can continue. However, strategists at Jefferies argue that the advance still appears fundamentally supported rather than excessively speculative.
According to the broker’s quantitative strategy team, gains across its AI-focused stock basket are being driven primarily by earnings expansion instead of valuation multiple inflation, a dynamic the analysts described as “sustainable.” Excluding AI-related shares, the broader S&P 500 would be up only around 2% year-to-date.
Earnings Growth Continues to Drive AI Stocks
Jefferies noted that forward earnings estimates for its AI basket in 2026 have climbed by more than 30% since mid-2025. Consensus analyst forecasts currently point to an earnings-per-share compound annual growth rate of 38.5% for 2026 and 2027, compared with just 11.9% for sectors outside the AI theme.
Despite the strong earnings outlook, the AI basket is trading at approximately 25 times forward earnings, below its historical one-standard-deviation threshold, while its price-to-earnings-growth ratio stands at only 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.
Performance Within AI Sector Remains Uneven
Jefferies highlighted that returns across AI-related industries have varied significantly in 2026. Companies tied to AI servers, optical components and memory technologies have delivered the strongest gains, while hyperscalers and chip designers have underperformed relative to other AI sub-sectors.
The bank added that memory and compute-related stocks currently appear the most attractive from a valuation perspective when measured by PEG ratios. In contrast, semiconductor equipment manufacturers and chip design firms are viewed as relatively expensive.
Earnings Season Reinforces Positive Outlook
The latest earnings season also provided additional support for the AI investment case. Around 86% of companies delivered earnings results above analyst expectations, marking the strongest beat rate since the post-pandemic period and improving from 75% in the previous quarter. Revenue beats also rose to 82%.
However, Jefferies noted that positive earnings surprises did not consistently translate into stronger share price performance across the broader market. Outside AI and a limited number of other sectors, stocks generally failed to outperform following earnings beats, while companies missing expectations were punished heavily, reflecting elevated investor expectations.
“On a more positive note, beats were followed by upgrades, suggesting earnings risks are low despite the geopolitical uncertainty,” the strategists added.
Corporate Sentiment Improves Despite Geopolitical Risks
Using AlphaSense analysis covering approximately 330 earnings calls, Jefferies found that corporate management sentiment remained highly optimistic, with positive commentary reaching 95%. Analyst sentiment also improved, with 58% of calls carrying a positive tone compared with 48% during the fourth quarter of 2025.
At the same time, the ongoing U.S.-Iran conflict emerged as a significant concern for companies, with 44% citing it as a negative factor. Businesses pointed specifically to supply chain disruption risks and softer consumer sentiment as key issues linked to the geopolitical tensions.
Growth Outside AI Remains More Limited
Outside the AI and commodity sectors, earnings momentum across the broader market has been considerably weaker. Jefferies estimated that aggregate S&P 500 earnings revisions over the past three months totalled around 6%, but that figure falls to just 0.3% once AI and commodity-related companies are excluded.