War and AI doubts have fueled an unprecedented divergence between stock prices and earnings estimatesWar and AI doubts have fueled an unprecedented divergence between stock prices and earnings estimates

We’re experiencing an unprecedented divergence between the S&P 500’s earnings estimates and the performance of the benchmark US stock index, driven by skittishness about the return of oil shipments through the Strait of Hormuz and the long-term ROI for the hundreds of billions in AI capex.

• Over the three months ended March 27, analysts have ratcheted up their projected bottom-line results for the largest US publicly traded companies by 8%. Over the same time, those stocks are down 8%. 
• Stocks have never been down this much when earnings estimates have risen by this much, based on data going back to Q2 1990.
• The closest such episodes to the present environment were in mid-2010 amid fears of a double-dip recession following the financial crisis, and in 2018 following ashort-lived blowup in volatility markets.
• In some respects, the current market situation is similar to 2025. The Q1 peak in stocks came when Walmart, a major component in momentum indexes, issued a poor full-year outlook and once high-flying stocks got clobbered. It started as a momentum-centric rather than tariff-centric sell-off.
• This time around, the difference is that many parts of the AI trade (especially the megacaps) didn’t have any momentum coming into this. A theme that investors had already been souring on is continuing to unwind.

The world in which these earnings estimates are realized is incompatible with a long-lived oil disruption that sparks a US economic downturn. Oil price spikes are infamously a drag on other parts of consumers’ spending; accordingly, durables and household personal products are the worst two industry groups in the S&P 500 since the end of February.

The Takeaway

For some time now, investors have been of the view that 2026 earnings don’t really matter for the hyperscalers, and they have more creeping doubts on whether this capex binge will prove worth it in the long run — or whether the most meaningful impact on these companies will be the destruction of their free cash flow generation amid these aggressive build-outs. And Nvidia’s fate has been tied to the perception of its biggest customers lately.

The war started off as a major rotation trade. Three major trades that had been tumbling — software vs. semiconductors, US stocks vs. the rest of world, and the Magnificent 7 vs. S&P 500 equal weight — all enjoyed some nascent reversals in the early days of the war. Of those three, Mag 7 versus equal weight is the only one that’s given up all of that rebound and then some.