Looking Back and Looking Forward
After a not-so-great Q1, the U.S. equity market roared back in Q2. While Q1 saw the S&P 500 fall ~5%, it rose ~15% in Q2, putting it back on par with other major equity markets on a year-to-date basis. However, it was not so much the broad market that rallied in the U.S. but, similar to prior quarters, a small subset of AI-related names that drove the gains, particularly semiconductor stocks.
With a first half gain of ~13% in the S&P 500, and double-digit first-half gains for most major equity markets around the globe, what might the back half of 2026 look like? The upcoming earnings season should tell us a lot about whether earnings growth expectations justify current valuation multiples. AI-related equities, in particular, will be under a microscope, as investors look for any signs of change (positive or negative) in AI demand trends. We don’t expect material change in the near-term, but we do wonder when investors become weary of paying very high multiples for stocks when the longevity of the AI build-out, and ultimately the returns on investment, remain very uncertain.
The price of oil has pulled back significantly from recent highs, but the conflict in the Middle East is certainly not over. Inflation readings remain well above central bank targets, and futures markets are suggesting central banks will hike, not cut, interest rates in several major markets, including the U.S. This will put further pressure on an already stressed consumer.
Given the strong equity returns in the first half of 2026, one might expect the second half will be more challenging. The prospect of “higher-for-longer” inflation and interest rates grinding down the consumer, seasonal weakness typical of the August-October period, and/or U.S. midterm election results later this year could elevate market volatility in the near-term. We remain constructive on markets, but we appreciate that market consolidation in the near-term, or even a market correction, is likely healthy for the long run.
Our Core Model Portfolios
The most notable change we made in Q2 was a significant reduction in precious metals exposure in our capital growth model portfolios. Recall that 2025 was an amazing year for precious metals, with the price of gold rising ~64% and the price of silver rising ~148%. After this dizzying ascent for precious metals as well as equities directly tied to precious metals prices, we judged it prudent to trim our gold-exposed positions and redeployed the proceeds into more attractive areas. Aside from this, we made only small portfolio adjustments to our core models during the quarter, putting us in what we believe is a good position to start the second half of the year.