Investors can't stop believing

Who cares about war, oil prices, interest rates or an AI bubble? Investors apparently do not — for now at least — sending stocks back to record highs.

Why it matters: High stock prices are critical to keeping funds flowing to the AI buildout.

• A significant erosion of investors' confidence in stocks would be a big risk to the AI flywheel of financial flows, capital expenditures and industrial activity driving the U.S. economy.

Catch up quick: Some analysts and investors had worried that the markets were beginning to deflate, as the S&P 500 failed to advance in June or July.

• Previously high-flying chip stocks hit an air pocket in early June.
• The slump then spread to hyperscalers, with the Mag 7 stocks becoming the Lag 7.

The latest: In the last four sessions, however, stocks have jumped almost 6%, led by massive gains from some of those same tech giants after Microsoft, Amazon and Alphabet each reported their quarterly results.

• The S&P 500 rose 1.8% Tuesday, notching a new all-time closing high of 7736.52.
• Tech shares led the way on Tuesday, as retail favorite Palantir Technologies soared 29.5% after its second-quarter results showed strong sales of its AI software platform to corporate clients.
• Palantir's ability to profitably sell AI services appeared to help reinvigorate the AI trade, with semiconductor stocks and makers of other IT hardware that data centers need jumping.
• American producers of components called transceivers — used to connect fiber optic cables that carry data — also rose after reports that the Trump administration was considering banning similar products from Chinese competitors on security grounds.

Context: The revival of tech momentum adds to the strength of so-called "cyclical" sectors of the stock market — such as industrial companies, financial firms and energy stocks — that have largely kept the S&P 500 from falling too much throughout the recent soft patch.

• Energy shares — the benchmark index's biggest riser so far this year, up more than 30% — have of course been lifted by the Iran-related surge in oil prices.
• But industrial stocks have also risen amid growing proof that cash from the AI boom — driven by an expectation of almost $800 billion of capital expenditures by hyperscalers this year, according to FactSet data — is working its way deep into the industrial tissue of the U.S. economy.
• The S&P 500 industrials are up 20% year-to-date. If there at year end, it would be the best performance for the industrial sector since 2019.

The big picture: Indeed, the economy is looking hot by a number of measures, from surging capital goods orders, to expanding manufacturing activity, to growing demand for bank loans from bigger companies.

• And corporate profits look, technically speaking, nutso high.

Caveat: You often hear Wall Street analysts describe this phenomenon as a "broadening out" of the AI boom, which has a nice, soothing ring to it.

• Doesn't "broadening out" sound sort of like the "broad diversification" investors are supposed to seek out for market safety?

Yes, but: With AI now driving results at companies well beyond the tech sector, a skeptic might say that the market is actually more concentrated, rather than diversified, in terms of risk.

• In other words, more and more of the U.S. economy seems to be reliant on this one gigantic gravy train to keep chugging. So far, it has.

Bottom line: The AI boom continues to roll, with more of the economy exposed to both the upside, and the risk, associated with one of the largest investment booms in American history.