Jackson Jambalaya

The 2^nd Quarter did not disappoint for drama or trauma. On 13 April the U.S. initiated a three Carrier Strike Force blockade of the Iranian blockade of the Strait of Hormuz. Less than two months later, the U.S. began on again off again ceasefires which continue still. All that sound and fury did little to deter the stock market which with Kevlar flair rallied 16% to its best quarterly gain in 6 years. Why? Big time earnings, that’s why.

The 2^nd Quarter rally was an earnings growth story. Analysts expected S&P 500 earnings for the 1^st quarter to grow 13% but reported numbers coming out after 3/31 shocked to the upside +27%. The quarter’s best sectors were Technology +49% and Industrials +18.3%. This corroborates the historic capex boom now underway building AI data centers and related power plants – over $650 billion this year with another $trillion expected in 2027. Those numbers will make it the biggest capex boom in U.S. history. For fifty years the footprint of computing has been shrinking from giant rooms to what fits in your pocket. Now it is exploding to 150 acre plots.

The promoters of AI promise a radical transformation of the U.S. and global economies and are putting up billions to make it happen. But the urgency of the race is challenged by capacity differentials between sectors across the economy. The industrial and utility sectors are designed for 3 to 5% growth and are hard pressed to meet the demand for 30% more electricity by 2028. Such conditions stress supply chains creating bottlenecks where scarce critical components can command premium pricing power.   The biggest winner has been the semiconductor (chip) industry which saw 52% year over year growth in revenue. But the boom also extends deep into the industrial sector which is experiencing a huge revival supplying everything from turbines, to generators, to transformers and HVAC systems. The six month stock gains are impressive: Generac +107%, Comfort Systems USA +97%, Caterpillar +78%, and GE Vernova +73%.

Another bottleneck to the hyper-scaler ambitions is the complex 50 state regulatory regimes that oversee electricity production, transmission and distribution. That will be a tough fix. But it must be fixed before rising resistance at the local and state levels derails the AI locomotive. Some intriguing policy ideas are being floated by think tanks across the country. Stay tuned on that important issue. 

But the most astounding bottleneck in the AI supply chain is memory chips, which are critical to load and manipulate the complex AI models. The top performing stocks in the S&P 500 for the year ending 6/30/26 were all memory companies, SanDisk +4,913%, Western Digital +900%, Micron Technology +838% and Seagate Technology +574%. 

Trailing way behind in this technology ticker tape parade has been software. A decade ago the tagline, “infinitely scalable at zero marginal cost” made software the darling of many institutional investors. Now investors fear AI’s coding capability will disrupt ‘Software as a Service’ (SAAS) business models. The software ETF (IGV) dropped 18.8% for the 12 months ending 6/30/26. 

This is a unique and dynamic period in American history, but then really, that’s been the case for 250 years. Is this a great country or what?

This post was authored by Ashby Foote. 

The Bigger Pie Forum sponsored this post.