The U.S. stock market continued to defy gravity and power higher through the first six months of 2026 up 10% despite war, surging oil prices, and higher interest rates. This follows the more than 23% annualized return from 2023 to 2025. The 2nd quarter 2026 S&P 500 market performance was the best quarter of the past six years, exhibiting yet another sharp V-shape recovery. War induced the decline earlier this year, almost identical in size to the tariff driven slide of 2025. The encouraging factor in 2026 is how many different sectors, industries, and companies are contributing to returns. During the previous three years, the S&P 500 was led by some of the largest U.S. companies, specifically nicknamed “The Mag Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). In 2026, The Mag Seven have actually detracted from overall performance as they (as a group) have underperformed the S&P 500. The good news is that because we have a disciplined approach based on diversification and long-term investing, your assets have flourished in both environments.
Looking deeper into the broadening stock market performance, the first half of 2026 saw U.S. small and mid-cap stocks outperform large. In fact, small cap stocks had their best first half of a year in 35 years. Emerging market stocks are besting the S&P 500 too. Technology is once again the best performing sector of the U.S. market followed by a long-time laggard, energy, undoubtedly thanks to the conflict in the Middle East. Interestingly, technology was not led by the Mag 7, but instead by semiconductor stocks – specifically related to memory chips and the continued obsession with artificial intelligence. The moral to the story is that diversification matters again, as we have always maintained.
As we continue to dive into the differences of stock market leadership in 2026 compared with the past three years, think of the current stock beneficiaries being the companies benefiting from the spending on AI. In previous years, Mag Seven stock prices rocketed higher because of investment spending (writing the checks). Right now, the stocks that are soaring are the ones cashing the checks. As we are still in the very early stages of the AI buildout, I expect The Mag Seven’s investments to come to fruition and their stock prices should follow.
The biggest reason for stock market strength has been the corporate earnings upside surprise. Coming into 2026, S&P 500 profits were expected to rise approximately 14%. After Q1 results were announced, earnings actually increased more than 25% year over year (see chart below). Note the difference between the purple diamond – expectations – and the top of the blue line – actual earnings. The next few quarters look solid as well, however expectations are now raised too. Surprisingly enough, the market is trading at a cheaper valuation today than it was six months ago. There are no guarantees that the market continues to rise, however, it is hard to envision a major market catastrophe in the midst of double-digit earnings growth. One can never predict the short-term effect of any geopolitical shock, but to sit out of the market expecting a negative event has been a losing trade for a long time.
Many make the comparison of today’s market to the internet bubble popping. I cannot stress enough how this is not the late 1990s. The easiest distinction is that today’s companies have revenue and profits which lead to cash flow and less debt (see chart below).
Fixed income has been a challenging asset class in 2026 due to rising interest rates. Yields on the 10-year treasury bond have increased about 0.30%. Two-year yields are up more, as it was widely anticipated the Federal Reserve would cut rates in 2026. That seems very unlikely now, hence the increase in yields. The good news is that credit quality (balance sheets and cash flow) remains very strong. Rates have increased due to the war, higher oil prices, and thus higher inflation expectations. And yes, stronger economic growth too. We have seen some relief in rates since Middle East tension has moderated, but with no final resolution there is the potential for a reacceleration in yields. I think it is prudent to maintain our extended duration on bonds and believe that yields will be anchored within a reasonably tight range unless something unforeseen takes place.
We have a new chairman of the Federal Reserve and while Chairman Warsh seems up to the task, the way he communicates will be different than previous chairmen. Under former leadership, the Federal Reserve had been extremely transparent, leaving little room for misinterpretation. Chairman Warsh does not believe in as much open communication. This has the potential to create uncertainty; we know the market hates uncertainty.
Shifting gears to the IPO market. I have received many questions regarding the SpaceX IPO. I suspect there will be a sufficient amount of interest in the OpenAI and Anthropic IPO’s as well. I do not want to discourage anyone from investing in them. I want to explain why we do not. We have a disciplined process that makes these companies almost impossible to meet our criteria of revenue growth, earnings growth, free cash flow generation, and reasonable valuation. Elon Musk is undoubtedly the most renowned engineer and entrepreneur of our lifetime. There is no orderly fundamental math to invest in those companies at current valuations if you have an investment process with our criteria. Investing in SpaceX at these prices is purely betting on the jockey and not the horse. Sometimes this works, but it is not what we do. If you want to purchase any of these please direct me to do so.
So where do we go from here?
I expect the back half of 2026 to potentially be just as volatile as the first. Assuming we don’t get a negative corporate earnings surprise or a slowdown in capital spending, I think the stock market will end the year higher. Over the long-term, stock prices follow earnings. If earnings continue increasing, we will remain constructive. In conjunction with earnings, corporate profit margins on the overall market have risen to near all-time highs. This is an encouraging development. I think we are beginning to see the positive effects of AI. Many companies are becoming more efficient and productive. We are just scratching the surface. Still, some companies, specifically the Mag 7, have increased their capital expenditure budgets and are investing more into their businesses. Some companies are issuing stock and debt to raise even more capital to invest. This is a change in their business models which had been asset light and free cash flow generating machines. I believe their investments will pay off.
In the short term it is difficult to predict how the market will act from week to week. We are still dealing with uncertainties related to war and inflation. There are a lot of competing data to scrutinize. Apple is raising prices on certain devices due to a shortage of memory chips yet gas prices have dropped. What will the net effect of such data and other be to the consumer? The K-shaped economy has not changed. The high-end consumer, the upward arm of the K, is still supporting the economy. The jobs market remains tight. I am not in the camp that believes there will be major unemployment due to AI advancements. Human capital will always be in demand.
We will stay the course and remain diversified while leaning into technology investing and the AI trade, especially on any weakness. Your portfolio has participated in the market upswing. We will not overreact to short-term market gyrations because we have a long-term strategy built on asset allocation and cash flow planning – customized for you.
Lastly, we want to thank you for your confidence and the trust you have placed in us. Best wishes for a Happy 4th of July. Stay safe.
Insights
Quarterly Review: Q2 2026
The U.S. stock market continued to defy gravity and power higher through the first six months of 2026 up 10% despite war, surging oil prices, and higher interest rates. This follows the more than 23% annualized return from 2023 to 2025. The 2nd quarter 2026 S&P 500 market performance was the best quarter of the past six years, exhibiting yet another sharp V-shape recovery. War induced the decline earlier this year, almost identical in size to the tariff driven slide of 2025. The encouraging factor in 2026 is how many different sectors, industries, and companies are contributing to returns. During the previous three years, the S&P 500 was led by some of the largest U.S. companies, specifically nicknamed “The Mag Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). In 2026, The Mag Seven have actually detracted from overall performance as they (as a group) have underperformed the S&P 500. The good news is that because we have a disciplined approach based on diversification and long-term investing, your assets have flourished in both environments.
Looking deeper into the broadening stock market performance, the first half of 2026 saw U.S. small and mid-cap stocks outperform large. In fact, small cap stocks had their best first half of a year in 35 years. Emerging market stocks are besting the S&P 500 too. Technology is once again the best performing sector of the U.S. market followed by a long-time laggard, energy, undoubtedly thanks to the conflict in the Middle East. Interestingly, technology was not led by the Mag 7, but instead by semiconductor stocks – specifically related to memory chips and the continued obsession with artificial intelligence. The moral to the story is that diversification matters again, as we have always maintained.
As we continue to dive into the differences of stock market leadership in 2026 compared with the past three years, think of the current stock beneficiaries being the companies benefiting from the spending on AI. In previous years, Mag Seven stock prices rocketed higher because of investment spending (writing the checks). Right now, the stocks that are soaring are the ones cashing the checks. As we are still in the very early stages of the AI buildout, I expect The Mag Seven’s investments to come to fruition and their stock prices should follow.
The biggest reason for stock market strength has been the corporate earnings upside surprise. Coming into 2026, S&P 500 profits were expected to rise approximately 14%. After Q1 results were announced, earnings actually increased more than 25% year over year (see chart below). Note the difference between the purple diamond – expectations – and the top of the blue line – actual earnings. The next few quarters look solid as well, however expectations are now raised too. Surprisingly enough, the market is trading at a cheaper valuation today than it was six months ago. There are no guarantees that the market continues to rise, however, it is hard to envision a major market catastrophe in the midst of double-digit earnings growth. One can never predict the short-term effect of any geopolitical shock, but to sit out of the market expecting a negative event has been a losing trade for a long time.
Many make the comparison of today’s market to the internet bubble popping. I cannot stress enough how this is not the late 1990s. The easiest distinction is that today’s companies have revenue and profits which lead to cash flow and less debt (see chart below).
Fixed income has been a challenging asset class in 2026 due to rising interest rates. Yields on the 10-year treasury bond have increased about 0.30%. Two-year yields are up more, as it was widely anticipated the Federal Reserve would cut rates in 2026. That seems very unlikely now, hence the increase in yields. The good news is that credit quality (balance sheets and cash flow) remains very strong. Rates have increased due to the war, higher oil prices, and thus higher inflation expectations. And yes, stronger economic growth too. We have seen some relief in rates since Middle East tension has moderated, but with no final resolution there is the potential for a reacceleration in yields. I think it is prudent to maintain our extended duration on bonds and believe that yields will be anchored within a reasonably tight range unless something unforeseen takes place.
We have a new chairman of the Federal Reserve and while Chairman Warsh seems up to the task, the way he communicates will be different than previous chairmen. Under former leadership, the Federal Reserve had been extremely transparent, leaving little room for misinterpretation. Chairman Warsh does not believe in as much open communication. This has the potential to create uncertainty; we know the market hates uncertainty.
Shifting gears to the IPO market. I have received many questions regarding the SpaceX IPO. I suspect there will be a sufficient amount of interest in the OpenAI and Anthropic IPO’s as well. I do not want to discourage anyone from investing in them. I want to explain why we do not. We have a disciplined process that makes these companies almost impossible to meet our criteria of revenue growth, earnings growth, free cash flow generation, and reasonable valuation. Elon Musk is undoubtedly the most renowned engineer and entrepreneur of our lifetime. There is no orderly fundamental math to invest in those companies at current valuations if you have an investment process with our criteria. Investing in SpaceX at these prices is purely betting on the jockey and not the horse. Sometimes this works, but it is not what we do. If you want to purchase any of these please direct me to do so.
So where do we go from here?
I expect the back half of 2026 to potentially be just as volatile as the first. Assuming we don’t get a negative corporate earnings surprise or a slowdown in capital spending, I think the stock market will end the year higher. Over the long-term, stock prices follow earnings. If earnings continue increasing, we will remain constructive. In conjunction with earnings, corporate profit margins on the overall market have risen to near all-time highs. This is an encouraging development. I think we are beginning to see the positive effects of AI. Many companies are becoming more efficient and productive. We are just scratching the surface. Still, some companies, specifically the Mag 7, have increased their capital expenditure budgets and are investing more into their businesses. Some companies are issuing stock and debt to raise even more capital to invest. This is a change in their business models which had been asset light and free cash flow generating machines. I believe their investments will pay off.
In the short term it is difficult to predict how the market will act from week to week. We are still dealing with uncertainties related to war and inflation. There are a lot of competing data to scrutinize. Apple is raising prices on certain devices due to a shortage of memory chips yet gas prices have dropped. What will the net effect of such data and other be to the consumer? The K-shaped economy has not changed. The high-end consumer, the upward arm of the K, is still supporting the economy. The jobs market remains tight. I am not in the camp that believes there will be major unemployment due to AI advancements. Human capital will always be in demand.
We will stay the course and remain diversified while leaning into technology investing and the AI trade, especially on any weakness. Your portfolio has participated in the market upswing. We will not overreact to short-term market gyrations because we have a long-term strategy built on asset allocation and cash flow planning – customized for you.
Lastly, we want to thank you for your confidence and the trust you have placed in us. Best wishes for a Happy 4th of July. Stay safe.