Fundamentals First: How We’re Staying Sure Footed

Matt Freund, CFA, Michael Kassab, CFA, Jake Hyatt

Summary Points:

• During the second quarter, growth stocks rallied, led by tech firms benefiting from the AI infrastructure buildout.
• Our base case for the second half of the year is for falling inflation, stable employment and GDP growth, and healthy corporate earnings.
• Calamos Growth Fund (CGRIX) maintains its focus on companies with quality fundamentals and strong growth prospects, supported by thematic tailwinds. AI beneficiaries remain well represented, but we are closely watching for indications of waning upside.

2026 has been a sharp reminder of how quickly Wall Street narratives can change. The year opened with broad equity optimism, as stable GDP growth, declining energy prices, and pending rate cuts created a positive backdrop for investors. There was also continued excitement over the AI theme, with a spotlight on companies at the center of severe supply-demand imbalances in critical AI components.

Then came Iran. Energy prices surged, inflation followed, and expectations of rate cuts under a new Fed chair quickly flipped to fears of rate hikes. The broad equity indices gave back most of their prior six-month gains through March, but as the first quarter closed, ceasefire talks began, and the signal to markets was clear: The rally could resume.

Growth stocks rebounded sharply in the second quarter, with the S&P 500 Growth Index returning over 21%. The technology sector led once again, as it has for years, but with a notable departure from prior cycles. The Magnificent 7 took a back seat to the newer cohort of tech firms profiting from the AI infrastructure buildout.

On the macro front, energy prices have retraced to pre-war levels as the ceasefire broadly holds, despite periodic flare-ups. That should push inflation in the right direction and cool any talk of rate hikes in the back half of the year. We expect stable employment and GDP growth to keep corporate earnings on a solid footing.

S&P 500 earnings are projected to grow roughly 24% and 17% in 2026 and 2027, respectively. This is remarkably strong by historical standards, given we are already coming off a couple of years of robust profit growth. Keep in mind that these are not broad, early-cycle rebound numbers you might expect after an earnings recession. Instead, they reflect a continued surge in profitability for many of the world's leading AI companies, including those well represented in the Calamos Growth Fund.

The largest hyperscalers are on pace to spend more than $750 billion in capital expenditures this year, representing roughly a two-thirds increase over 2025. If anything, the demand signal is still firming, with 2027 estimates being revised higher, not lower, toward a trillion dollars. We estimate the direct beneficiaries of that investment will account for roughly half of all S&P 500 earnings growth this year and next. Looking beyond those beneficiaries and energy, the rest of the index is growing earnings at a far more ordinary high-single-digit pace. When a single theme drives half of an index's earnings growth, we believe leaning into that theme aligns with our growth focus, but we are also prepared to move quickly if the trade shows signs of exhaustion.

Our preference is to own both hyperscalers and the companies providing them with essential AI components. These suppliers have become genuine bottlenecks to expanding compute capacity, which means their growth is constrained by supply rather than demand. This allows them to price accordingly. Nowhere has this been more evident than in memory and storage. High-bandwidth memory (the DRAM that sits beside every AI accelerator) is effectively sold out into 2027. What were long treated as low-multiple, deeply cyclical industries have been fundamentally repriced on the view that the current supply constraint is structural and long-lasting. We believe the bull case is real, but so are the risks, given this industry's long record of enormous ups and downs.

As is usually the case, there is no shortage of things to worry about. Valuations are elevated relative to history, the Fed's hawkish turn may prove more durable than expected, and geopolitical tensions could work their way back into the headlines. We would also note that the current rally has compressed US equity market breadth to one of its narrowest readings since the dot-com era. Market history teaches that leadership can rotate quickly in narrow markets, and we have no intention of overstaying our welcome in any one trade.

Successful growth investing requires the ability to see beyond the wall of worry while still taking the risks seriously. We believe our approach does exactly that, as we continue to favor high-quality growth companies, with an eye toward active risk management, in what remains a very narrow market.