June 2026

We considered valuations for the broad U.S. equity market reasonable and thought the exceptional earnings trajectory remained intact. We did expect continued volatility from the AI trade, though.

The earnings generated by the memory bottleneck were exceptional and deservedly generated massive price performance for the first half of the year. But even as the stocks then sold off, we weren’t convinced they would stage a recovery. The gains earlier in the year had just been too exceptional; we wondered what good news hadn’t already been priced in.

We liked other areas of the AI trade a bit more; the hyperscalers in particular. These stocks ran into trouble toward the end of 2025 and never really reclaimed market leadership despite putting up impressive earnings. Questions lingered about their role in the AI buildout, particularly as their once-enviable cash flow disappeared and they turned to capital markets to maintain their spending. While we acknowledged those concerns, we felt valuations accounted for at least some of the risk.
More broadly, we thought earnings and valuations put the rest of the market in a position to grind higher and viewed defensive areas like healthcare as potentially more resilient in a difficult market environment.

Since then

Meh.

Thus far, an O.K. quarter. The Bloomberg 500 Index has moved higher since July 1, with the Bloomberg Magnificent 7 Total Return Index up modestly more, with a nearly 11% return. But the hero of the first half of the year, memory stocks, are still down nearly 5% since July 1. In fact, it’s been other areas (energy, for example) or software stocks — which we thought had been unfairly penalized by AI displacement fears earlier this year — that have had a strong third quarter.

This wasn’t an earnings issue. In fact, earnings have been strong across the board, particularly within the AI trade. But some AI fatigue seems to have entered the investor psyche, with real questions around the durability of spending shifting investor sentiment. Meanwhile, the ongoing conflict in Iran was arguably a macro support for the energy trade, and software benefited from low expectations.

September 2026

We have more modest expectations for the back half of the year.

We still see valuation opportunities in select areas — members of the Mag 7, for example, and select software stocks — but are less enthused about the broader AI trade, which seemed to borrow from future returns with its blowout performance earlier this year.

Other sectors of the market, like financials, consumer discretionary, materials, or communication services, actually boast attractive valuations. Some of that is a Big Tech effect, with companies like Meta, Alphabet, and Amazon embedded in sectors outside technology. But some of it relates to strong earnings performance alongside quieter stock-market reactions for the broader market.

We expect earnings strength to continue, at least near term. Combine that with better valuations outside the AI trade, and there may be some fundamental rationale for optimism for the broader U.S. equity market. That said, we’d note that earnings expectations are beginning to look a little aggressive in a few places. We consider higher yields an impediment, and compelling opportunities seem elusive, even as certain themes seem to have continued momentum (consider the energy space again, for example). We’d also caution that true diversification in the U.S. is hard to find; all roads seem to lead back to AI.

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