The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jon Sindreu

LONDON, July 1 (Reuters Breakingviews) - Conventional wisdom holds that the current bull market is all about artificial intelligence. Look closer, though, and U.S. fiscal spending is mostly responsible. If investors' gains are down to a "large deficit model", rather than large language models, it means the boom is vulnerable to any tightening of Uncle Sam's budget.

Last Thursday, the Commerce Department's ​Bureau of Economic Analysis said the U.S. economy grew at an annualised rate of 2.1% in the first quarter, significantly upgrading the earlier 1.6% estimate. The net profit margin of non-financial American corporations was revised up from 15.6% to 15.8%, edging back toward near-record levels. Earnings are ostensibly being driven by hyperscalers pouring money into artificial intelligence and data centres: investment in equipment and intellectual property grew 15.8% and 13.8%, respectively.

This feeds into a popular narrative about a supposed spending loop, in which technology companies' huge capital expenditures fatten each other's profit. Some investors rightly worry that AI's boost to earnings, stock markets and GDP could come crashing down if adoption slows.

Yet there's nothing inherently suspicious about circular revenue and earnings. In fact, as 20th century economists Jerome Levy and Michał Kalecki noted, it's always the case that one person's income is another's expense. The revenues underpinning economy-wide profits largely come from the money spent by businesses themselves - be it in wages, capex or dividends. There are only really two ways in which money enters from outside this loop. The first is if a country exports more than it imports, and the second is if the government spends more than it taxes. Right now, the latter is doing the heavy lifting.

Just look at U.S. national accounts, where we can parse out the different factors - deficit spending, private investment, household savings - that together determine the overall level of corporate profit. On net, the private sector only accounts for a third of current earnings, a Breakingviews analysis suggests, with the rest tracing back to federal spending. While the budget deficit had been narrowing since 2024, acting as a small drag on profit growth, it widened again in the first quarter, hitting 6.4% of GDP.

And despite all the AI capex, private investment is just 2.7% of GDP versus a historical average of 3%. One reason is that net corporate profits depend not on headline output but on what remains after depreciation, which has risen too. Another is that capex is weak outside of tech and green power, in part because hybrid work has led office construction to plummet.

Granted, expectations of AI-driven productivity gains can still push valuations higher, boosting animal spirits and consumer spending. Still, it's notable that the S&P 500's trailing price-earnings ratio of 28 is roughly where it was in late 2024, meaning that the index’s 35% gain since then is fully explained by profit growth.

The optimistic take is that government deficits could be a more durable market foundation than speculative capex, which was the main engine behind the dotcom bubble. Indeed, Uncle Sam is effectively putting a floor under equities, and has little incentive to remove it. The pessimistic take, however, is that budget deficits are at historically unprecedented levels outside of recessions and wars. If that proves unsustainable, so might the stock market boom.

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CONTEXT NEWS

U.S. gross domestic product expanded at a 2.1% annualised rate in the first quarter of 2026, the Commerce Department's ​Bureau of Economic Analysis said in its third estimate of first-quarter GDP on June 25. GDP ‌was previously reported to have advanced at a 1.6% pace, and economists polled by Reuters had expected it to remain unrevised at a 1.6% rate.