* Massive AI capital spending a critical theme for rest of

year

* Investors banking on strong US corporate earnings

* Fed rate decisions, midterm elections also loom

By Lewis Krauskopf

NEW YORK, June 30 (Reuters) - The U.S. stock market faces a

gauntlet of tests to keep its rally going in the second half of

2026, from the sustainability of AI spending to a high corporate

earnings bar and the outlook for interest rates under a Federal

Reserve with a new chairman.

The benchmark S&P 500 has climbed more than 8% so far

this year, extending its bull run well over three years, while

the technology-heavy Nasdaq Composite has increased by

11%. But investors have shown signs of unease recently, with

those indexes pulling back in June.

Here are major questions facing U.S. stock investors in the

second half of the year:

CAN THE AI SPENDING THEME KEEP DRIVING THE MARKET?

Massive spending on AI infrastructure has been at the heart

of the market's rally, bolstering profit estimates for a wealth

of companies. Five companies including Microsoft ( MSFT ),

Alphabet and Amazon ( AMZN ) are forecasting combined

capital expenditures of about $730 billion this year, according

to JPMorgan.

"It is certainly priced in to the market that the level of

capex that we're seeing will continue for the foreseeable

future," said Nicolas Janvier, head of North American equities

at Columbia Threadneedle Investments.

Some investors are wary that hyperscalers need to show

sufficient returns on their spending. In the meantime, AI-driven

optimism has sparked sharp gains in semiconductor shares, while

also driving other tech stocks, industrials and energy shares

tied to the buildout and powering of data centers.

"The risk from the market's perspective is the technicals

are so crowded within those trades that anything that starts to

sow some seeds of doubt in the narrative and you are at a

somewhat vulnerable position," said Garrett Melson, portfolio

strategist with Natixis Investment Managers Solutions.

WILL U.S. COMPANIES MEET LOFTY PROFIT HOPES?

A robust first quarter for U.S. corporate results has driven

equity performance and profits are expected to stay strong going

forward, with S&P 500 earnings expected to rise by over 26% in

2026, according to LSEG IBES.

"The main question is delivery of the earnings that are

expected out of the S&P 500, but also the tech sector," said

David Bianco, Americas chief investment officer at DWS. "That's

one of those things that there can't be any excuses."

Tech and AI-related earnings are not the only expected

stellar results. All 11 S&P 500 sectors are projected to post

higher earnings in 2026, with Janvier pointing to solid consumer

spending even as "AI gets all the headlines."

CAN THE MARKET DIGEST THE MEGA IPOS?

The recent IPO of SpaceX is expected to be followed in

coming months by AI bellwethers Anthropic and OpenAI, creating a

wave of hot new companies for potential buy-in by investors.

Taken together, the mega IPOs could create a significant

amount of equity issuance for the market to absorb. The cycle is

also being watched for a sign of market froth.

"It's this test of risk appetite and liquidity, just how

much dry powder is out there," Bianco said.

HOW DOES A NEWLY LED FED HANDLE INFLATION?

Kevin Warsh is the newly installed chairman of the U.S. Federal

Reserve, and the start of his era has already caught investors

off guard with a hawkish first meeting that raised prospects for

near-term interest rate hikes as policymakers focus on

controlling inflation.

The path for interest rates stands to influence Treasury

yields, with rumbles in the bond market earlier this year

already leading to bouts of equity selling. Higher rates

translate into higher borrowing costs and also could pressure

equities by making bonds more competitive investments.

"Valuations, I think, are justifiable," said Noah

Weisberger, chief U.S. equity strategist at BCA Research. "But

that doesn't mean the market's not vulnerable to a re-rating of

interest rates."

WILL MIDTERM ELECTIONS MATTER FOR STOCKS?

The midterm elections in Congress have largely taken a back

seat for markets this year, but politics-related volatility

could ramp up as the November elections near.

Midterm years on average have the deepest intra-year market

drawdowns of any in the four-year election cycles, averaging 18%

declines for the S&P 500, while third quarters of midterm years

have turned in negative average performance, according to CFRA

data since 1945.

"Midterm years certainly are open to a little bit of turmoil

leading up to the elections," Melson of Natixis Investment

Managers Solutions said.