Market Review: Quarter 2 2026

The four most dangerous words in investing are: This time it's different.
-Sir John Templeton

The second quarter of 2026 was a rollercoaster ride, driven by the diverse forces of war, artificial intelligence and fears of inflation. Before this quarter, reasonable people could disagree whether an asset bubble was starting to form, but now we believe the signs are more obvious, and we'll discuss those below. The good news, though, is that the evidence of exuberance has been limited to certain sectors of the economy and is not pervasive throughout all industries or asset classes. In short, in our view there are still good investments to be made.

While the second quarter was a rollercoaster, its trajectory was mostly upward. While the U.S. stock market (as represented by the S&P 500 Index) dropped 4% in the first quarter, it was up 15% in the second. That great return hides the fact that the gains were uneven. For example, the median stock in the S&P 500 was up about 6%, but almost anything semiconductor-related took off like a rocket ship. Advanced Micro Devices more than doubled in the quarter. Intel and Micron Technologies tripled. There is evidence that AI will increase demand for their products. Yet we think bringing forward years of potential (but uncertain) future growth and having that uncertain growth reflected in today's stock price says more about the moment we are living through than what those companies may actually be worth.

Source: Bloomberg data as of 06/30/2026. Graphic is shown for illustrative purposes only and should not be considered a recommendation to buy or sell any security. Securities do not necessarily represent those sold, purchased or recommended for client accounts.

A second piece of evidence that a bubble may be forming is the hot IPO market. The historic public launch of SpaceX on June 11th was the largest IPO in history, and its introductory price gave the company a market capitalization of almost $2 trillion. As it appreciated later that week, it surpassed Amazon and Microsoft in size, becoming the fourth largest company in the world. The problem is, unlike any company anywhere near its size, it has no earnings, only large losses.

We appreciate that investors can see a bright future ahead for SpaceX and are willing to look through today's losses, but we would warn that such optimism is often present closer to a market top, and not at more reasonable valuations. Stay tuned, because later this year two large AI companies will also come public - OpenAI (ChatGPT) and Anthropic (Claude). Each should have similar lofty valuations. It is said that history doesn't repeat itself, but it often rhymes. A hot IPO market is one of the signs that have accompanied market excesses since the end of World War II.

While we see signs of excess in some parts of the market, it's important to point out there are other sectors that look attractive. Numerous industries have been ignored as enormous amounts of capital have flowed towards technology. Among them, healthcare appears among the most attractive to us. Pharmaceutical companies have languished as AI companies have soared. The irony here is that AI should help drug companies uncover promising new molecules faster and more efficiently than ever before. Likewise, companies in finance and consumer staples have also underperformed and could be likely recipients of the market's favor should the AI juggernaut slow.

All this talk of excessive prices in the technology sector should not obscure the positive news that corporate earnings are strong and have been growing this year, both within technology and in many other sectors of the economy. At the beginning of 2026, the estimate for earnings growth for the S&P 500 Index was about 14%. Six months later, it is now nearly 24%. While that leap is directly traceable to AI spending, it is not solely benefiting technology companies. Industries as diverse as energy, construction, retail and financial services are reporting unexpected profit growth, some directly from AI benefits; others simply from the general strength of the economy, which has created more demand than expected.

Looking ahead to the second half, we have three main concerns that could counteract the strong earnings growth. First, we suspect the Iran War is not completely over, and that negotiations may ebb and flow in ways that can add volatility to the markets. Second, and more importantly to asset prices of all types, we are concerned that the new Federal Reserve Chair Kevin Warsh is not quite as dovish as the President thinks. At his debut press conference in mid-June, he mentioned "price stability" numerous times. Now that he has been confirmed by the Senate, he is insulated from the administration's pressures and very well may focus on establishing an inflation-fighting reputation in his first few quarters as Fed Chair. If that's the case, higher interest rates could be a headwind in the second half.

Finally, AI has contributed mightily to the current economy. We are concerned about two issues that could slow its expected growth. First, public opposition to data centers is growing quickly and reminds us of the pushback against fracking in local communities a decade ago. Second, while it's general knowledge that data centers require enormous amounts of electricity, no project has been cancelled or postponed, at least explicitly, because of a lack of power. It is not difficult to imagine that happening, and then analysts will likely start revising AI growth estimates downwards, at least in the near term.

International markets also had a strong second quarter, continuing a trend that began in 2025 when international stocks outpaced U.S. equities by roughly 14 percentage points for the full year. The MSCI EAFE Index, which tracks developed markets in Europe and Asia, was up 11% for the quarter. Emerging markets have been even more striking, led by South Korea, where the semiconductor boom has fueled exceptional returns. The relative strength of international stocks this year is a reminder that diversification beyond the United States has rewarded patient investors, though we note that much of the international outperformance is concentrated in the same AI and semiconductor themes driving U.S. markets.

In fixed income markets, US Treasury yields have remained elevated despite the recent pullback in energy prices. After tracking oil higher through most of the Middle East conflict, bond yields have been slow to move lower, in large part due to shifting policy dynamics at the US Federal Reserve. The FOMC held rates steady at its June meeting, but the more consequential developments signaled a shift toward a more hawkish posture and guidance-light communication style. The Committee's rate projections turned more hawkish, with the median path now pointing to no cuts in 2026. For fixed income investors, we view the implications as twofold. The hawkish posture argues for potentially higher rates on the horizon, with markets now pricing in at least one hike this year, while reduced guidance likely widens the range of outcomes around each meeting, potentially leading to higher yield volatility.

We share the Fed's concern, and in our view inflation risk remains underappreciated even as energy prices have retreated. The decline in oil reduces some of the near-term inflation impulse, but it does little to address more persistent drivers we see ahead, including domestic fiscal largesse, the drift toward deglobalization, and the prospect of further tariffs. Against that backdrop, we find TIPS (Treasury Inflation Protected Securities) increasingly appealing as a hedge. Real yields are now elevated relative to recent history, while market-implied inflation expectations have slipped below their post-COVID averages, leaving inflation protection relatively inexpensive in our view.

In the alternative asset space, with the successful launch of SpaceX into public markets the venture capital market is flush with the prospects of increased liquidity and a potential swath of exits. With the prospects of a few more mega-IPOs coming over the rest of the year with Anthropic and OpenAI, we aren't overly optimistic that there will be a rush of other VC related exits as these companies suck the proverbial oxygen out of the room. What we are excited about is the potential for the capital related to these mega-IPOs to slowly work its way back into the VC ecosystem and get reinvested into other new and interesting companies. This process may take longer than most anticipate as we'll have to wait for lock periods to end, investors patiently working their way out of concentrated positions, and capital to be recommitted to venture capital managers. While this process will take time, it will be exciting to watch new businesses emerge through the VC lifecycle.

Clearly there are a lot of crosscurrents in the market right now. We are seeing signs of an asset bubble forming in technology related stocks, yet other sectors remain attractive, earnings growth has been strong, and the economy remains solid. With mid-term elections approaching, we suspect these crosscurrents will persist and may in fact grow as the second half progresses.

As always, we would like to thank you for your confidence in us - it is not something we take lightly. We look forward to reporting back to you in the fall.

Information as of 06/30/2026. Source: Bloomberg.

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Many factors affect the performance of investments at any time, and past results are not necessarily indicative of, nor do they guarantee, any future results. No assurance can be given that the investment objectives will be achieved or that losses will not be sustained.

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