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Strong Fundamentals But There is Only So Much of an Increase in Yields and Oil Investors Will Accept

Published on July 23, 2026

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Dennis DeBusschere

Kevin Brocks

Sophia Wang

DAILY STRATEGY – There is only so much of an increase in UST Yields and oil prices investors will accept. Our call that fundamentals would support for AI Capex beneficiaries, benefiting the Price Momentum factor, is playing out so far in 2Q EPS season (covered below). The economic demand backdrop remains firm (HERE), which should favor Non-AI related Cyclicals as well. A move above 4.7% on the US 10yr yield, a level Peter Williams views as more obviously restrictive for economic growth, and $100 oil will likely lead to a risk-off move.

Further, our Fed sentiment model, which reads and objectively scores all Fed communications, shows that since Warsh’s first FOMC in June, FOMC members (including Warsh) have become more concerned about inflation and more constructive on the labor market. This helps explain fed funds’ futures sensitivity to oil prices – there’s less tolerance for the passthrough to core inflation from oil. Just as Waller indicated last week.

On to the Fundamentals…

Market to Market Our Call on Price Momentum Benefitting from Strong Fundamentals. So far, so good. Investors we surveyed expect the level of Hyperscaler capex in 2027 (median $1.1T) will support the AI buildout beneficiaries, which are highly represented in the Price Momentum basket (HERE). As Dauvin Peterson, head of 22V Data Infrastructure/Commodities research, highlighted (HERE), “Prior statements reaffirmed for 2027 capex (a significant increase) without additional detail and 2026 capex was raised 8% at the mid-point to $195–205B. To that end, Google’s earnings last night support the Price Momentum basket. Our expectation is that the rest of the Hyperscalers reports reinforce that $1.1T in AI capex for 2027, that investors suggest would be a support for companies benefitting from the AI buildout, will be met or exceeded.

With Google’s free cash flow turning negative, and some debate around the sustainability of that, the central question remains on the VALUE CREATION resulting from companies employing AI tools. It’s still early in reporting season, but the comments from GOOG on strong AI demand and the high level of margin sentiment and margin results for companies that have reported points to AI value creation. FYI, margin estimates are higher for AI users (ex-Tech too) than non-AI users. The practical implication of margin expansion related to AI tools, assuming it continues, is high demand for AI tools and increased odds of a high ROI for Hyperscalers AI capex investments. I.e. the Cash flows to Semis as an example (the other side of GOOG capex) will continue.

Quickly on ServiceNow – ServiceNow (NOW) reported and is up premarket. The last two EPS reports for NOW led to sharp declines. The point is that services companies using AI tools to expand margins/productivity are interesting to look at now. Our high AI usage service basket has stopped underperforming over the last 3 months (chart on page 4). More to come on this.

Charts…

Inflation is the major concern of FOMC members. July rate hike odds are now 38%.

The Fed’s labor market sentiment has “caught up” to hard data.

AI ROI will be in focus, along with the other Hyperscaler capex plans, this earnings season. NTM margin estimates are much higher for AI users across most sectors (not just Tech). That should be given the benefit of the doubt. We will be tracking what AI users are saying during 2Q.

The practical implication of margin expansion related to AI tools, assuming that continues, is high demand for AI tools and increased odds of a high ROI for Hyperscalers AI capex investments. I.e. the Cash flows to Semis as an example (the other side of GOOG capex) will continue.

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