The third quarter’s market strength was driven by what we call the AI Race to Dominance, the strategic imperative for the world’s largest companies to invest aggressively in artificial intelligence amid a global competition for technological leadership. This race is reshaping global capital flows, fueling growth, and concentrating market power in a handful of dominant U.S. technology firms.
The S&P 500 rose 8.1% in Q3, defying the typical late-summer lull and marking more than 90 days without even a 3% pullback, one of the calmest stretches in decades. This rare calm underscores how strongly investors believe that AI’s potential to reshape industries and unlock new productivity outweighs near-term concerns around inflation, interest rates, or geopolitics. We share that optimism but balance it with the understanding that every period of rapid innovation also brings new risks and volatility along the way.
“Bet-the-Company” Spending
For technology leaders such as Google, Meta, and Oracle, the AI race has become existential. Each is operating with a “bet-the-company” mentality that dwarfs prior technology cycles. As Meta CEO Mark Zuckerberg recently put it:
“If we end up misspending a couple hundred billion dollars, that’s unfortunate. But the bigger risk is being too slow… on what I think will be the most important technology enabling the most innovation and value creation in history.”
That conviction is visible in the data. Combined capital expenditures among major cloud and AI hyperscalers are projected to surge from $154 billion in 2023 to $368 billion in 2025, and to over $430 billion by 2026. This represents a historic, non-cyclical investment wave that is reshaping both corporate priorities and market dynamics.
Technology’s Expanding Dominance
Technology’s weight in the S&P 500 has now climbed above 30%, compared to less than 15% two decades ago. The ten largest U.S. companies now represent nearly one-quarter of global public equity market value. This concentration explains much of Q3’s performance and rewarded our decision earlier in the year to lean into U.S. Growth stocks (+9.8%) while trimming international exposure (+4.6%).
However, such dominance leaves little margin for error. While optimism is supported by strong profit growth and fortress-like balance sheets, it also demands vigilance. The market’s sharp reaction to Meta’s metaverse investments, a 77% share decline from 2021 to 2022 after capital spending of roughly $30 billion annually, serves as a stark reminder that even visionary initiatives can be punished if results disappoint or the narrative shifts.
An MIT study recently found that 95% of AI pilot programs have yet to deliver measurable returns, despite more than $40 billion in cumulative investment. As the AI build-out accelerates, investors will increasingly look for tangible productivity gains to justify continued large-scale spending. Recognizing when the cycle shifts and positioning effectively on the other side of it will be essential in a market this concentrated.
Supportive Backdrop and Outlook
The broader environment remains constructive in the near term. The Federal Reserve has begun cutting rates again and signaled additional easing in late 2025 and 2026, while the recently passed tax bill is expected to boost consumer spending in the first half of 2026. In addition, AI continues to lift corporate profit expectations, with S&P 500 earnings growth projected at 13% for 2026. Together, these factors reinforce a “buy-the-dip” mindset among investors.
Even so, we expect volatility to likely rise as markets approach the 2026 midterm elections. Our focus remains clear: participate in the opportunities created by this technological revolution while maintaining diversification, nimbleness, and tactical discipline to navigate the volatility ahead.