Quarterly Q&A | The AI Super-Cycle

Picture a technological revolution rolling through the global economy in real time –the kind that comes along only once every few decades. That is what today’s markets are experiencing with artificial intelligence (AI), and it has put us in what we call a supercycle: a rare, multi-year expansion driven not by ordinary supply and demand, but by a leap in productivity. We are only in year three. History suggests we have room to run – but it has also taught us that discipline about risks matters just as much as enthusiasm about the opportunity. With that backdrop in mind, let’s dig in.

A Supercycle – Still Early Innings

Normal business cycles run seven to eight years and are driven by the ordinary push and pull of supply and demand. Supercycles are different. They are set off by genuine technological revolutions – the industrial buildout of the 1800s, the internet in the 1990s – and they tend to run longer, sometimes nine years or more, because they generate outsized productivity growth. Companies produce more with the same people and infrastructure, corporate profits grow faster than normal, and stock prices post above-average returns for an extended stretch. That is exactly what we have seen since the AI revolution began in earnest three years ago, and by our read we are still in the early-to-middle innings.

If this cycle plays out and isn’t derailed, our long-term view remains that the Dow could reach 100,000, the S&P 500 could reach 15,000, and the Nasdaq – as the most tech-led index – could reach 50,000, by the end of 2030. Those are big numbers, but they are grounded in earnings growth, not speculation. The fundamental backdrop supporting them is genuinely strong: robust AI-driven productivity gains, a fully employed labor market, and standout corporate profit growth last quarter. We expect US economic growth, currently running near 2–3%, to trend higher – potentially toward 4%…well above what we’ve grown accustomed to over the past decade.

The Fed, Rates, and a New Chair

A strong and accelerating economy brings its own challenge: managing inflation. As demand outpaces the supply companies can bring to market prices rise – and that puts pressure on the Fed to act. Kevin Warsh, the new Fed chair, arrives at exactly this moment. European central banks already raised rates a few weeks ago, judging their economies strong enough to absorb it, and we would expect Warsh and the Fed to follow suit gradually – perhaps a single rate hike in the second half of this year. Many investors are not positioned for this, so a Fed move could spark a short-term market correction. Such a move would echo the 1990s, when gradual rate hikes during that decade’s supercycle did not derail either the bull market in stocks or the bond market. We view Warsh as well suited to the moment, given his sensitivity to the cost of living for everyday households.

Is the Bubble Near Its Popping Point? Not Yet – But Get Selective

Every technological revolution produces a bubble of some kind. The real question is not whether we’re in one, but when it might pop. We track six metrics to answer that question, and right now each remains healthy. The clearest signal is valuation relative to growth: Nvidia, for example, grows near 60% annually and trades around 22 times earnings – a reasonable multiple relative to growth. A stock trading at 60 times earnings while only growing 20% a year would be a warning sign – we are not seeing that broadly. Outside the small handful of dominant tech names, the average US stock trades around 17 times earnings, and European equities are cheaper still, around 14–15 times earnings, while also benefiting from the same AI productivity tailwinds.

That said, valuation comfort doesn’t mean uniform performance. The market has entered a more discerning phase within technology itself. Leaders in areas like semiconductors and memory chips continue to perform well, while parts of the software sector – companies like Adobe or Salesforce, whose business models AI may be encroaching on – have underperformed meaningfully. This reinforces the importance of being an active stock picker rather than owning the sector broadly, distinguishing beneficiaries of AI from the potential victims of it.

We would also note that a normal 8–10% correction is overdue. We haven’t had one in some time, and it could well arrive in the back half of this year, tied to one or more of the risks discussed below.

AI as a Tool, Not a Decision-Maker

We believe individuals and companies alike benefit from embracing AI rather than fearing it. At Main Street, tools such as large language models (LLMs) are helping us move faster through parts of our research process – though every output is cross-checked against our Bloomberg systems by a member of our investment policy committee, and AI is not making investment decisions on its own. Companies that embrace AI meaningfully are likely to pull further ahead of those that don’t, and that divergence is already visible across sectors.

Why We Own Individual Foreign Stocks

International exposure remains a cornerstone of your portfolio, and foreign stocks have outperformed the US over the past 18 months. There are several reasons we hold individual foreign equities – companies like Siemens Energy or Taiwan Semiconductor – rather than foreign mutual funds or ETFs. First, currency diversification: the US dollar has fallen more over the past 18 months than at any point since 1981, and holding roughly 40% of the portfolio in non-U.S., non-dollar-denominated stocks helps offset that risk for U.S.-based clients, while helping non-U.S. clients diversify away from their own home currency exposure. Second, individual stocks provide geographic diversification away from any single country’s macroeconomic problems. Third, cost: individual stocks avoid the layered fees of mutual funds, which often charge upwards of 1.5% annually for foreign exposure, and individual positions let us apply our active risk management directly rather than via a fund construction.

Risks We’re Watching

Being a good steward of capital means being honest about what could derail this thesis, not just enjoying the ride. Three risks are top of mind heading into the second half of the year:

Mideast peace talks: A breakdown here could send oil prices sharply higher. Sustained high oil prices – if they were to persist for three or four quarters – could meaningfully slow the global economy and risk tipping markets into a bear market. We are watching this closely.

U.S. midterm elections: A contentious political year, with the current administration pushing to retain control of Congress, could bring bouts of market volatility. An 8–10% correction around this period would not be surprising and should be viewed as normal rather than alarming.

U.S. debt: The federal debt load remains a long-term structural concern which markets have largely shrugged off – until they don’t. A credit rating downgrade, should it occur, could trigger a difficult period for U.S. stocks and the dollar, and may already be a contributing factor in the dollar’s recent decline.

Separately, the Fed raising rates more aggressively than the gradual path we expect could unsettle markets further. We monitor each of these closely and lean on active risk management to navigate them. Gradual rate increases, for context, tend to create opportunity in bonds rather than harm.

Closing Thoughts

We remain constructive on the second half of 2026, grounded in real productivity gains, healthy corporate earnings, and reasonable valuations both in the U.S. and, especially, abroad. As always, our job is to stay invested in the opportunity while staying honest about the risks along the way.

From all of us at Main Street, thank you for your continued trust and confidence. If you have questions about your portfolio, or if something has changed in your financial situation, please don’t hesitate to reach out. And if you know a friend, colleague, or family member who could benefit from this update, we’d welcome the introduction.

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