With just a few days left in the third quarter, the past three months have not been good for many investors. The artificial intelligence-driven bounce in the stock market during the second quarter largely ran out of steam, and bonds broadly posted losses against a backdrop rife with challenges. Still, the Morningstar US Total Market Index is up roughly 14% in 2026 and nearly 17% over the past 12 months.
We’ll have full third-quarter coverage and kick off our fourth-quarter outlooks later this week. After a relatively quiet couple of weeks on the market-driving news front, the action could pick up again soon. This Friday will bring the September jobs report, and earnings—which have been the primary catalyst for stocks’ gains in 2026—will soon start hitting the tape.
In this week’s Markets Brief:
- Talk of an AI bubble in the stock market has been overtaken by fears that the boom is inflating corporate earnings. Goldman Sachs analysts weigh in on whether that’s the case.
- Some say the massive surge in AI-related debt issuance has driven higher government bond yields, as corporate borrowers compete with governments for investors’ money. In a research note this week, Pimco casts doubt on that theory.
- As we’ve reported, investors may be surprised to discover a hefty slug of technology names in their value-stock ETFs. Once again, the AI stock boom is behind it. This past week, Morningstar Indexes underwent a quarterly reconstitution, and we take a look at how the latest changes highlight the continued blurring of what investors might think of as growth and value stocks.
A Different AI Bubble to Worry About
It’s looking like it’s going to be another solid earnings season, with S&P 500 earnings expected to be up 26% for the third quarter, according to FactSet. That would follow a gangbusters 51% increase for the second quarter and 26% growth for the past four quarters. “The recent strength of S&P 500 earnings growth has raised investor concerns that the market is in an earnings bubble,” Goldman Sachs portfolio strategy research analysts wrote in a recent note.
Their takeaway: We aren’t quite in an earnings bubble. A bubble is something that eventually “pops” or collapses.
“While there are indeed factors contributing to ’overearning’ today, our base case is for S&P 500 earnings growth to decelerate, not collapse, in coming years,” the Goldman analysts wrote.
In other words, earnings are indeed likely getting an unsustainable boost from AI this year, but that shouldn’t all go away. Goldman is forecasting 11% earnings growth in both 2027 and 2028.
That said, the analysts note that there will likely be an earnings slowdown ahead. Three key factors that are boosting earnings today will later contribute to deceleration: “1) AI capex spending, 2) semiconductor margin expansion, and 3) earnings from private investment gains,” according to the Goldman note.
Specifically, one element is that “Hyperscaler depreciation expenses will continue to increase as capex growth decelerates, further dampening the boost of AI investment spending to S&P 500 earnings growth,” the Goldman analysts wrote.
However, there’s a caveat.
“Hyperscaler capex has consistently surprised relative to consensus estimates during the last few years, and the potential for additional surprises going forward creates a wide range of potential S&P 500 earnings outcomes,” they added.
Rising Bond Yields: A ‘Crowding Out’ vs. the AI Growth Story
Bonds are in the spotlight again, with the yield on the 30-year Treasury soaring to its highest level in more than two decades. Beyond inflation and ballooning fiscal deficits, many analysts point to massive corporate debt issuance to finance artificial intelligence infrastructure as a key factor. The idea is that AI debt is “crowding out” Treasuries. In other words, hyperscaler tech firms are issuing so much debt that interest rates on government debt must climb higher to attract investors.
Not everyone agrees with this exact take. Pimco multi-asset credit strategist Lotfi Karoui argues that while AI borrowing is likely pushing interest rates higher, that upward pressure isn’t due to any “crowding out” phenomenon. Rather, he says, a capital expenditure cycle this massive would be expected to put upward pressure on yields, regardless of whether that buildout was financed through borrowed or existing cash.
“As hyperscalers ramp up spending and compete for labor, power, and construction capacity, the AI capex boom shifts desired investment upward,” he explains. “Unless desired saving rises commensurately, equilibrium real rates must increase until desired saving rises, some investment is crowded out, or both.”
Foreign investment and exchange-rate movements may also help fill the gap.
To test the theory, Karoui analyzed six surprise AI debt deals over the past year to determine whether they had a significant impact on the bond market. In nearly every case, he found that these AI issuance deals did not produce a meaningful change in yields, term premia, or swap spreads.
“The evidence that surprise AI debt issuance is pushing Treasury yields higher is weak,” Karoui concludes. “The AI capex boom may well lift equilibrium real rates through the saving-investment channel, but the narrower claim that AI bond supply is directly crowding out Treasuries is hard to find in the data.”
The Blurring Line Between Value and Growth Stocks
The boundary between growth and value has gotten fuzzier, as evidenced by this year’s reconstitution of the major indexes. As we wrote last month, the blurring of growth versus value is was perhaps most visible in the Russell indexes’ latest reconstitutions. Amazon.com AMZN, which FTSE Russell partially categorized as a value stock for the first time in 2025, was moved almost entirely into value this year and now amounts to some 6% of the Russell 1000 Value Index.
The Morningstar US Total Market Index just went through its own quarterly reconstitution, and while overall changes weren’t consequential at the market level, some key companies shifted from value to growth and vice versa.
AI investment has supercharged earnings growth for tech hardware suppliers and energized their stocks. As a result, Intel INTC and Applied Materials AMAT have moved decisively into Morningstar growth indexes from value. Meanwhile, uncertainty about AI’s impact on software businesses has dented that industry’s growth prospects and weighed on its stocks. September’s reconstitution moved Uber UBER and Intuit INTU into Morningstar’s value indexes, and shifted Adobe ADBE from large-cap growth to value.
Morningstar Market Indexes uses a style-sorting methodology designed to create a gradual recategorization of stocks that avoids sharp swings between the value and growth sides of the fence. As part of this process, Morningstar assigns stocks to style categories depending on their relation to stocks of a similar size.
“You can be the fastest person on your high school track team, but if you’re racing Usain Bolt, you’re slow,” says Alex Poukchanski, director of analytics at Morningstar Indexes.
Dell DELL, for instance, was categorized as a value stock in the Morningstar large-cap index and the narrower mega-cap index in June. September’s reconstitution split Dell 50/50 between the large-cap growth and large-cap value indexes after its ranking among large caps improved across growth metrics. However, Dell remains in the mega-cap value index because of its relatively modest growth compared with other mega-caps like Nvidia NVDA and Broadcom AVGO.
