2026 Investment Outlook Part One: AI Trends and the Equity Markets - 1st Source

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What this video’s about

In the first episode of our three-part 2026 investment outlook, Paul Gifford, Chief Investment Officer at 1st Source Bank, sits down with Rob Romano, Director of Research, to explore key trends shaping the equity markets.

From record-high profit margins to the growing impact of artificial intelligence, the conversation covers earnings performance, market valuations, and where to find opportunities when the S&P 500 feels overheated.

Strong earnings and high margins are setting the pace

The last three years have been rewarding for equity investors, and corporate fundamentals remain strong. Rob notes that we’ve now seen:

  • Four consecutive quarters of double-digit year-over-year earnings growth
  • Five straight quarters with profit margins above 12%

These results aren’t just luck. Companies continue to control costs while exploring new ways to boost productivity. One major contributor is artificial intelligence.

AI is lifting productivity, but the market may be overestimating the short-term payoff

From warehouse logistics to enterprise data, AI is starting to deliver measurable efficiencies. Amazon now uses over one million robots in its distribution centers, and firms like C.H. Robinson are applying AI agents to optimize freight and logistics.

But Rob offers a measured perspective. “We believe in AI long term,” he says, “but acknowledge the market may be ahead of itself.” A recent $300 billion data center deal between OpenAI and Oracle illustrates the concern. Large-scale AI infrastructure consumes massive energy, and search queries powered by AI use ten times more electricity than traditional ones.

As history has shown, the real gains from new technology often arrive in later waves, after the infrastructure settles and the hype dies down.

Tax policy is adding momentum to equity markets

Market trends in 2026 will also be shaped by policy. The recently passed “one big beautiful bill” includes:

  • Immediate expensing of research and development
  • Accelerated depreciation of capital investments

These measures help reduce effective tax rates for businesses, which supports higher earnings and creates a tailwind for equity prices.

Market concentration is high: diversification is essential

While equity markets have performed well, Rob cautions that valuations in the S&P 500 remain elevated. The top ten companies now account for 40% of the index’s total value. That level of concentration increases risk and makes diversification even more critical.

More balanced opportunities can be found in:

  • Equal-weighted S&P indexes
  • Mid-cap and small-cap stocks
  • International equities
  • Dividend-paying companies
  • Value-oriented sectors

Rob adds, “We’re actively looking beyond the top-heavy parts of the market.”

Conclusion

Corporate profits are strong, AI is driving productivity, and tax policy is offering a tailwind.  But market concentration and elevated valuations require a thoughtful approach. This outlook calls for selectivity and balance.

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