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Executive Summary

• Mega-cap earnings exposed a widening gap between AI monetization winners and capital-intensive laggards, driving sharp stock-level divergence while keeping index-level damage contained.
• Inflation data reaccelerated at the producer level even as productivity surged, reinforcing a “growth without labor inflation” backdrop that complicates the timing of future Fed cuts. New Fed pick and inflation data stoke worst precious metals decline in years.
• AI-driven capital spending continued to ripple through energy, industrials, and materials, confirming that data center demand is reshaping earnings visibility well beyond technology.

Mega-Cap Earnings: AI Monetization vs. AI Spending

This week’s market action was dominated by mega-cap earnings, but the real story was not beats or misses—it was how the market judged the quality of growth tied to artificial intelligence. Early in the week, leadership from Meta Platforms, Alphabet, Apple, and Microsoft pushed the S&P 500 to an intraday high of 7,002 Wednesday and Dow to within 500 points of 50,000, even as small- and mid-cap stocks lagged. Communication services led on Monday, rising 1.5%, powered by Meta’s 2.1% gain after Rothschild & Co Redburn upgraded the stock to Buy and lifted its price target to $900. Alphabet also added 1.6%, reflecting continued confidence in AI-driven advertising and cloud demand.

That optimism met its first real test after earnings. Meta ultimately passed with flying colors, rallying more than 10% on Thursday after delivering upside revenue guidance and demonstrating tangible AI monetization through improved ad targeting, Reels engagement, and accelerating campaign performance. Management acknowledged elevated capital spending but convinced investors that returns are materializing now, not years down the road. Microsoft, by contrast, became the cautionary example. Despite beating earnings estimates, shares fell nearly 10% in one session as Azure growth failed to impress and heavy AI capital expenditures raised concerns about diminishing near-term returns. Investors were left questioning the growth-to-spending ratio and whether Copilot’s 15 million paid seats are sufficient to justify the scale of investment.

The divergence extended across software and semiconductors. ServiceNow fell nearly 10% despite strong results, dragged down by broader skepticism toward enterprise software valuations in a rising cost environment. Meanwhile, hardware-linked AI beneficiaries surged. Seagate jumped over 19% in a single session as gross margin expansion and disciplined capital spending validated the durability of data storage demand. Texas Instruments surged nearly 10% on evidence that industrial, data center, and inventory cycles are aligning favorably, prompting Wall Street upgrades. Semiconductor sentiment was further buoyed by reports that China approved purchases of Nvidia’s H200 chips, while Digitimes suggested Nvidia may shift 2028 chip production toward Intel, sending both stocks higher midweek.

Tesla added another layer of complexity. The company beat earnings but unsettled investors with a $20 billion 2026 capital expenditure plan tied to its pivot toward AI, robotics, and autonomous systems. Shares initially sold off before rebounding sharply on reports that SpaceX may explore a merger involving Tesla or xAI.

Investment Implication: Markets are no longer rewarding AI exposure indiscriminately; capital is flowing toward companies that can demonstrate measurable revenue acceleration and margin leverage today, while firms with large but opaque AI spending programs face valuation compression – both themes I’ve been hitting home in my weekly wrap ups for months.

Inflation, Productivity, and the Federal Reserve’s Narrow Path

Macro data this week reinforced a constructive economic backdrop, even as it complicated the policy outlook. The Federal Reserve held rates steady at its January meeting, a widely expected outcome, with Chair Powell emphasizing that decisions will remain meeting-by-meeting. While the Fed provided no surprises, the economic data released throughout the week sent mixed signals that explain why policymakers remain patient.

On the inflation front, December producer prices came in hotter than expected. Headline PPI rose 0.5% month-over-month versus a 0.2% consensus, while core PPI increased 0.6% against expectations of 0.3%. Year-over-year readings remained elevated at 3.0% and 3.2%, respectively, reviving concerns about cost pass-through and potential margin pressure for wholesalers and retailers. These figures contributed to Friday’s risk-off tone, with the S&P 500, Nasdaq, and Dow all down roughly 1% intraday.

At the same time, productivity data continued to deliver what may be the most market-friendly macro combination possible. Revised Q3 productivity held at a robust 4.9%, while unit labor costs remained down 1.9%. This rare pairing supports corporate margins without stoking wage-driven inflation and helps explain why equity markets have remained resilient despite hotter inflation prints. Labor market data reinforced that view, with weekly initial claims at 209,000 and continuing claims declining to 1.827 million, levels consistent with steady consumer spending rather than economic stress.

Other economic indicators painted a nuanced picture. Durable goods orders surged 5.3% in November, far exceeding expectations, while nondefense capital goods orders excluding aircraft rose 0.7%, signaling healthy business investment. Conversely, January consumer confidence dropped sharply to 84.5 from a revised 94.2, falling below levels seen during the COVID period and highlighting growing anxiety around both current conditions and future expectations. The November trade deficit widened significantly to $56.8 billion, likely weighing on Q4 GDP estimates even as strong import demand hints at underlying economic momentum.

The second half of Friday’s session saw stocks stabilize after President Trump announced his pick for the next Chair of the Federal Reserve. Former Fed Governor Kevin Warsh was selected for the role. Warsh has historically taken a more hawkish stance on inflation and balance sheet excesses, and some strategists believe his appointment signals a firmer approach to inflation discipline, which helped steady sentiment into the close.

That shift, combined with sticky inflation, forced a reassessment of crowded trades — particularly in precious metals. Silver, one of the strongest performers in recent months, corrected sharply, falling 27% to $83.42. Gold also pulled back meaningfully, declining about 9% to $4,868. These moves weren’t about broken fundamentals, but positioning, profit-taking, and shifting expectations around rate cuts.

Investment Implication: Elevated producer inflation argues for caution on near-term rate cut expectations, but strong productivity and stable labor conditions continue to support earnings growth. This is my main theme for 2026 and why I’m so bullish on equities long-term. AI investment and adoption may continue to provide productivity gains. Cathie Wood of Ark Invest recently predicted (Big Ideas 2026 Recap) this combination can drive GDP growth above 7% and expecting AI spending will move from $500 billion (up 2.5x pre-Chat GPT levels) to $1.4 trillion/year by 2030.

AI Infrastructure Demand Spills Into Energy, Industrials, and Materials

One of the most important developments this week was confirmation that AI-driven demand is no longer confined to technology alone. It is increasingly reshaping earnings visibility across energy, industrials, and materials. Energy stocks outperformed midweek as crude oil prices rose, settling at $63.16 per barrel on Wednesday and climbing to $65.38 by Thursday amid escalating geopolitical tensions between the U.S. and Iran. Natural gas prices surged above $6 per million BTUs earlier in the week due to extreme winter weather, boosting sentiment across the complex.

Industrials provided some of the clearest evidence of structural demand. Caterpillar received multiple price target increases after reporting strong results driven by power generator sales for data centers, with Bank of America citing record backlog visibility. GE Vernova delivered a quarterly blowout but traded lower as investors digested the scale of future power demand, much of it tied to data centers but also to broader global electrification trends. Lam Research reported it has more semiconductor equipment demand than it can currently handle, benefiting directly from memory and storage buildouts tied to AI workloads.

Materials experienced volatility but remain structurally supported. Gold and silver hit record highs early in the week before sharply reversing on Friday following hotter inflation data and shifting Fed leadership headlines. Copper and mining names like Freeport-McMoRan and Newmont posted gains earlier in the week as geopolitical uncertainty and infrastructure demand reinforced the long-term supply-demand imbalance.

Outside of traditional cyclicals, infrastructure-linked tech-adjacent firms also stood out. Corning surged after Meta committed up to $6 billion for fiber-optic data center cabling through 2030, reinforcing how AI workloads are driving physical network investment. Eaton announced plans to spin off its vehicle and e-mobility business, unlocking value while sharpening focus on power management solutions increasingly critical to data center expansion.

Investment Implication: AI infrastructure spending is creating multi-year visibility across energy, industrial, and materials sectors, favoring companies positioned at the intersection of power generation, electrification, and data center buildout rather than pure-cycle exposure.

Chart of the Week

Energy has been a major performer in January. The chart below shows a number of positive technical developments. A multi-year breakout this month in price. Relative strength versus the S&P 500 broke a multi-month downtrend of underperformance and is now outperforming the S&P 500. New highs versus lows trending higher around recent months. Finally, the percentage of companies within the XLE ETF are all, 100% of components, trending above their 200-day exponential moving average with a notable break above 60% in November.

Source: StockCharts, Ryan Puplava, CMT® CTS™ CES™

Bottom Line

This week reinforced a key message for investors: markets are transitioning from broad AI enthusiasm to a more disciplined phase where earnings quality, capital efficiency, and macro resilience matter more than narratives. Mega-cap leadership remains essential for index-level stability, but selectivity is rising across sectors. As productivity supports growth and inflation remains uneven, portfolios should emphasize companies with clear monetization paths, balance sheet strength, and direct exposure to the real economy underpinning the AI buildout.

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