The global technology sector is entering a crucial phase as the artificial intelligence spending cycle continues to reshape corporate earnings, even as rising bond yields and tighter financial conditions create a fresh challenge for equity valuations.
While strong earnings growth has helped US equities absorb geopolitical tensions and higher borrowing costs so far, Chris Wood of Jefferies said in the latest GREED & fear report that growing questions over how long the AI capital expenditure cycle can continue and whether the massive investments being made will generate adequate returns.
The report, dated October 1, 2026, noted that the IT sector is benefiting disproportionately from the AI-led investment boom.
According to LSEG I/B/E/S data as of September 25, S&P 500 companies are expected to report 30.2% year-on-year earnings growth in the third quarter of 2026, compared with the 16.1% growth forecast a year earlier. IT is expected to record the second-highest earnings growth among sectors.
“The IT sector has the second-highest forecast 3Q26 earnings growth of 65.1%, up from 22.3% last October. All 12 sub-industries in the IT sector have higher forecast earnings than a year ago, with the semiconductor and semiconductor materials & equipment sub-industries having the highest earning growth (131.7% and 68.9%, respectively),” Wood noted.
The numbers underline how deeply AI-related investment has become embedded in the technology earnings cycle. However, the brokerage argued that investors now need to look beyond headline earnings growth and assess whether the enormous spending on AI infrastructure can ultimately deliver sufficient returns.
AI capex remains the key driver for IT sector outlook
The strength of the technology sector has been closely linked to the acceleration in AI-related capital expenditure. Strong earnings have provided investors with a fundamental justification for continuing to hold equities despite a sharp rise in government bond yields and persistent geopolitical uncertainty.
Greed and Fear report pointed out that this earnings momentum was the principal reason US equities had so far managed to withstand those pressures. However, it cautioned that the bond market was approaching levels at which the risks to equities were becoming more significant.
“The stock market has historically done relatively badly going into the mid-terms whereas that has not been the case so far this year, primarily because of the stellar earnings growth driven by the highly earnings-accretive AI capex cycle,” Jefferies said.
The key question for the IT sector, therefore, is increasingly whether the current AI investment cycle can remain durable. Jefferies identified the duration of the AI capex cycle and the adequacy of returns on the massive spending as one of the three dominant issues facing investors.
That creates an important distinction within the technology sector. The current earnings acceleration is being supported by substantial investment in areas such as semiconductors and semiconductor equipment, but the sustainability of that spending will ultimately depend on whether companies deploying capital can generate sufficient economic returns.
The semiconductor industry remains particularly important to the outlook. With forecast third-quarter earnings growth of 131.7%, the segment is significantly ahead of the broader IT sector. Semiconductor materials and equipment companies are also expected to see 68.9% earnings growth, suggesting that the AI investment cycle is feeding through the technology supply chain.
Rising bond yields could test IT valuations
At the same time, the report pointed out that the broader market environment is becoming less supportive. US 10-year and 30-year Treasury yields reached 5.34% and 5.69%, respectively, their highest levels since 2002. The two-year Treasury yield also touched 4.96%, which Jefferies viewed as signalling the possibility of further rate hikes.
The rise in bond yields is particularly relevant for technology stocks because higher rates can increase the discount rate applied to future earnings and cash flows. This could make richly valued growth companies more sensitive to changes in interest-rate expectations, even if their underlying earnings remain strong.
Jefferies noted that the bond-market sell-off had also pushed volatility and credit spreads higher. The MOVE index, which measures US Treasury market volatility, had moved close to levels seen around the launch of the US-Israel attack on Iran, while US high-yield spreads had also started widening.
“The first, and perhaps most important for equities, is the duration of the AI capex cycle and whether there will be adequate returns from the massive spending. The second is the renewed realisation that G7 government bonds are in a structural bear market and what that means,” the report said.
Jefferies’ assessment therefore puts the IT sector at an important crossroads. On one side is an exceptionally strong earnings cycle, led by AI investment. On the other is a bond market that has become significantly more challenging, with yields at levels not seen in more than two decades.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
