Commencing the Quarter – Q2'26

It was the best of times, it was the worst of times…

Across sectors, our analysis of off-cycle reporters reveals that management teams describe an economy split in two, with the gap widening. On one side, an insatiable AI and infrastructure buildout continues to power durable, in some cases multi-year, strength; on the other, a consumer under mounting pressure is adjusting to on-the-ground realities by seeking value and trading down across nearly everything rate-sensitive or discretionary. In response, we are seeing companies react to this by refining their messaging around one central fault line: AI vs. everything else.

That tension is on full display in the equity markets, where U.S. equities posted their strongest quarter since the COVID recovery, with Tech doing most of the heavy lifting, amid record-low consumer sentiment, persistent inflation, and higher-for-longer interest rates. The strain is heaviest at the Bottom-of-the-K, but management teams increasingly describe value-seeking as beginning to work its way up the income ladder rather than staying contained to those who can least afford the squeeze.

Against this backdrop, the debate around pricing vs. volume has moved to center stage. The conversation has shifted from whether companies can pass costs through to how much they can pass before volume is harmed, and Q&A is increasingly focused on elasticity and volume trade-offs. Thus far, approaches have varied depending on customer composition and where companies sit on the value chain. Some point to surgical pricing in select parts of the portfolio to protect margin, while others stress balancing volume growth and profitability without sacrificing either. Value-oriented retailers, by contrast, are leaning the other way, aiming to be first to lower prices and last to raise them.

Portfolio optimization is the other defining theme, as management teams reframe spin-offs, M&A, and restructurings as a means of de-risking cyclical exposure while setting up for profitable growth. Off-cycle reporters described completed spinoffs as positioning both entities as more focused, acquisitions that shift the mix toward higher-margin, less-discretionary, and disciplined M&A anchored to strong balance sheets, clear return thresholds, and AI relevance.

Importantly, companies are not broadly pulling back on investment. Capital allocation remains intact, most notably the AI Capex Supercycle, with hyperscalers expected to represent roughly half of total S&P 500 capex in Q2’26, approaching 60% by Q4’27. AI infrastructure providers see the clearest path ahead, while service companies remain more nuanced on whether AI reduces costs, drives revenue, or poses an existential threat. The priority for management teams entering the Q2’26 earnings season should be executing a disciplined, credible narrative for investors. Communicate durable growth where AI demand is real, measured guidance where visibility is limited, and a clear line of sight from strategy to value.

Key themes from our analysis:

• Macro & Outlook commentary was broadly in line with last quarter, as early reporters signal durable earnings support from AI, infrastructure, and strategic actions, while elevated rates, geopolitical uncertainty, and limited second-half visibility serve as a hedge to full-year optimism
• Demand remains bifurcated, with companies signaling strength in AI infrastructure and value-oriented retail, while rate-sensitive, big-ticket, and discretionary purchases continue to be met by a consumer still reeling from recent inflationary effects
• Pricing actions and subsequent effect on consumers are quickly becoming a central area of focus during Q&A, as analysts dig deeper to understand volume tradeoffs and elasticity
• Consumer health remains in focus, with early commentary suggesting that companies are walking a tighter line between value, traffic, and margin, as Bottom-K consumers continue feel building inflationary pressure
• The AI Capex Supercycle continues to power the infrastructure providers, but service companies are still sorting out whether AI cuts costs, drives revenue, or is an existential threat
• Portfolio optimization and cleanup are common focus areas among off-cycle reporters, with companies framing spin-offs, M&A, and restructurings as limiting cyclical exposure while setting the company up for future profitable growth