Artificial intelligence has been the driving force behind one of history’s most thrilling and sustained market rallies. But as we transition into 2026, many market strategists–including those at major institutions–believe the ride is about to get a lot bumpier for AI stocks, particularly during the first two quarters.
Investors will be tested in the first half of 2026, even though the long-term foundation of AI is solid. This core problem is a classic conundrum of the market: high expectations versus uneven pace in real-world implementation. This powerful mix indicates that the sector will likely experience a period with elevated volatility before finding its footing in the second half of the year.
1. The Earnings Test vs. the Value Test
Current earnings are not used to determine the current value of high-flying AI stocks. Instead, they are based on future profits that seem very optimistic. This has led to a “growth deficit.”
Investors will be focused on the ability of companies to deliver on their lofty predictions in 2026. The market could react quickly and severely if key AI players fail to meet earnings expectations or provide softer guidance, even if it is only slightly. Analysts note that, while capital expenditures (CapEx) for building AI infrastructure remain strong, actual productivity gains for the entire economy have yet to materialize.
- The risk: Any sign of a slowdown or delay in business adoption by the major cloud providers (hyperscalers) could cause a significant pullback. This would prove that the market has priced perfection too early.
2. The pressure of ‘Creative Destruction.’
Right now, the AI revolution is being led by a few dominant Big Tech companies and chipmakers. The AI cycle of innovation is disruptive by nature, which works in both directions. This rally’s technology is also lowering entry barriers for smaller, agile competitors.
We expect to see a rapid rise in 2026 of startups and new entrants offering superior AI models or niche solutions.
As new companies take market share, this “creative destruction” will reduce the profitability of current market leaders.
- The Volatility Drive: When an established company announces a breakthrough or signs a big deal with a competitor, the stock price can fall dramatically. The constant cycle of competition and innovation will cause volatility to remain high, as investors attempt to predict long-term winners.
3. Lingering Macroeconomic Headwinds
A rocky first half is not just due to the tech sector. Other economic factors will also play a role.
- Uneven Growth: AI can be a powerful tool for productivity. However, it is not the only factor that will affect growth. Other factors, such as persistent inflation, a softening of the labor market, and other factors, like persistent volatility, are also expected to have an impact. This means high-end consumers, tech-driven industries, and others will benefit while others lag.
- Central Bank policy: Sticky inflation, even as growth is modest, could force the Fed’s interest rate to remain higher than investors expect.
The Investor Takeaway
Investors will be better off focusing on stock selection rather than buying the entire AI stocks trend trade in 2026. The long-term outlook for AI’s transformative potential remains positive, but focusing on companies that are able to demonstrate tangible revenue growth through their AI investments will help you navigate the early-year chop.
- Disclaimer: This information is provided for informational purposes and does not constitute investment advice.
Read more: To get a better understanding of the economic trends that influence AI, take a look at this JPMorgan Chase Global Economic Outlook for 2026.
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