What's Driving the Stock Market (Hint: It's Not Gas Prices)
I don’t often write stock market commentary in this space, for a few reasons. For one, there are already plenty of great voices out there who discuss market mechanics. Second, I think the stock market is highly unpredictable and I can add more value discussing financial planning topics such as taxes, estate planning, Social Security, and behavioral aspects of finance. I also tend to be of the mindset that most people are best off establishing a broadly diversified, low-cost, mostly passive portfolio and not fiddling too much with their investments.
I also think stock market commentary can have a negative impact on investor performance if it prompts you to jump in and out of investments. But I feel compelled to discuss current stock market trends. The reason is that I am hearing a lot of confusion from people about what is happening in markets. Moreover, I’ve been reading a lot of stock market commentary that I think misses the mark.
What I’ve been hearing from investors is some version of “I don’t get why the stock market is going up.” People see high gas prices, a so-so labor market, low consumer confidence, and vast geopolitical uncertainty. Against this backdrop, it’s hard to understand how the stock market is so close to all-time highs.
What I’ve been reading and hearing from many market commentators reflects these same concerns. One traditional way of looking at the stock market is to view it through the lens of the underlying economy. How strong is the labor market? Where are gas prices? What political risks does the economy face? While these factors inevitably affect the economy and the stock market over time, I don’t think these are relevant questions in today’s stock market.
Instead, I think today’s stock market is primarily driven by the artificial intelligence (AI) build-out. Any commentary that does not place this front and center as the fundamental driver of the stock market—positive or negative—is missing the point. We’re in the midst of a massive “capex cycle” (”capex” is shorthand for “capital expenditures”), which means that companies are spending their free cash flow at a record pace to build the AI infrastructure. Previous capex booms include the railroads in the late 1800s and the telecom/internet boom of the late 1990s.
The internet boom in the 1990s is probably more instructive. U.S. telecom carriers tripled capex from 1996 to 2000, laying enough fiber to meet decades of demand. Market bullishness led to massive overcapacity financed primarily with debt, and forecast demand proved overly optimistic. This ultimately led to some investor carnage, as the bubble burst and many individual stocks fell by 90 percent or more.
Image created with ChatGPT
What’s happening today looks quite different from the internet boom. Most important, the companies making AI investments are still highly profitable. Most of the infrastructure is being financed by free cash flow. Although we’re starting to see some bond issuance, most of the buildout to date has been paid for from profits.
This AI capex boom is both the risk and the reward. Right now, investors are largely being rewarded, and there is nothing irrational about it. I wrote an article in August last year asking whether the stock market was scary. Quoting myself: “As of the most recent earnings report, S&P 500 earnings are at an all-time high. In other words, the companies that comprise the index have never been more profitable, and the stock market has never been higher. It’s an oversimplification of how the stock market is valued, but it is instructive.”
Earnings growth has continued almost unabated since I wrote that. In the first quarter of 2026, analysts expected 12 percent year-over-year earnings growth. What came to fruition was far more impressive than even the most optimistic market analyst expected. Actual earnings growth turned out to be about 28 percent—a historically fast pace of growth.
One of the oldest sayings in investment management is that the stock market is not the economy. The day-to-day noise of gas prices, employment data, and geopolitical risk matters less than where corporate earnings are headed. For better or worse, current markets are focused on this AI buildout.
The next time you hear someone ask why the stock market keeps climbing despite all the bad news, the answer isn't that stock investors are ignoring reality. They're watching a different movie. Whether the AI buildout ultimately justifies today's valuations remains to be seen—there will be winners and losers, and the story is far from over. But for now, the earnings are real, the cash flows are real, and the market is reflecting that. A broadly diversified, low-cost portfolio likely remains the right foundation for most people, regardless how this story ends.
This article was originally published in The Berkshire Eagle.