2026 Second Quarter Stock Market Update

There’s Gold in Them Hills

July 2026

Equity indices posted exceptional gains in the second quarter. Negative investor sentiment at the end of Q1 planted the seeds for outsized returns as the market backdrop improved. Corporate earnings were generally encouraging, conflict with Iran eased from a boil to a simmer, and investor fixation on artificial intelligence (AI) infrastructure reached a fevered pitch. The S&P 500^® Index finished the quarter up 15.2% and the Russell 2000^® Index advanced a staggering 21.5%. Year-to-date, the S&P and Russell finished the quarter up 10.2% and 22.6%, respectively. Of note, the top 12 performing stocks in the S&P this year are technology stocks (and 16 of the top 20).

There’s gold in them hills…or should we say there’s semiconductors in them hills. Market gains were led by all things related to AI infrastructure. Indeed, a gold rush mindset seemed to grip the market as investors swarmed into all things tied to the AI compute/infrastructure buildout. Much like the original gold rush, providers of picks and shovels have been big winners. Semiconductors have been front and center. The semiconductor index¹ advanced 88% in the quarter (its best quarter ever) and is now up 102% for the year. The semi-industry now accounts for a record 19% of the S&P 500 by itself (the broader tech sector is now a record 38% of the S&P versus 35% at the height of the dot-com bubble). Of note, the semiconductor industry now trades at roughly 11x next 12-month sales (not profits), up from about 5x at the start of 2023.

Much like the gold rush, few are paying attention to what could go wrong here. It’s not that we doubt the power of AI or the need for compute. Let’s be clear, insatiable demand for computing power clearly bodes well for the AI infrastructure complex in the near-to-intermediate term. We are, however, wondering how many people are left to discover this story. Investor crowding into a narrow segment of the market is at unprecedented levels. At some point, there may be a “Wile E. Coyote moment” where the marginal buyer of these stocks runs off a cliff only to realize there’s no ground beneath them (this is a reference to an old cartoon for those under 40). There’s also the fundamental risk that the revenue pool from demand for AI models isn’t big enough to support the entire value chain. In other words, we are going to need a lot of dollars from consumers, enterprises and governments to support all of the various AI models being built. Bottom line: while there are currently few if any cracks in the bull case surrounding AI infrastructure, we need to be vigilant and aware that the emergence of such cracks could prompt material declines in share prices for the various players.

While AI has been center stage, many other areas of the market have languished. For sure, many investors are selling positions in companies from virtually all other industries to help fund the AI trade. In other words, as hot stocks have become hotter, cold stocks have become colder. We have a fair share of these companies, and it appears the notion of intrinsic value is being thrown out the door in favor of AI FOMO (fear of missing out). Exposure to value-oriented areas has come with a significant opportunity cost. It just doesn’t seem to matter how cheap many of these stocks get – they simply can’t garner any interest. As value-biased investors (or growth at a reasonable price), we struggle to give chase to the names that have been working. We still own a handful of the AI leaders (albeit less than the indices), but our recent emphasis has been on other areas where risk/reward profiles look much more favorable.

To that end, we continue to think a broadening of market gains still seems very logical. This could come in the form of a market rotation where tech/AI cools down, or other areas simply participating in gains alongside technology. A broadening seemed to be commencing earlier this year but was put on hold by conflict in Iran. Spiking oil and gasoline prices as well as supply chain disruptions put pressure on many consumer and industrial stocks. With progress towards a resolution to the war, oil prices have sharply retrenched and the outlook for more cyclical sectors has improved. Furthermore, declining oil prices should ease inflationary pressures, thereby taking pressure off the Federal Reserve and new Fed Chair Kevin Warsh to raise interest rates. This should also bode well for more cyclical areas of the market.

All told, we are not altering our approach to investing and will continue to look for intrinsic value. Many market participants have abandoned this approach in favor of speculation and immediate gratification. However, we suspect some recent signposts will be looked back upon as clear indications of froth in popular corners of the market. Warren Buffett recently described the market as a “church with a casino attached.” We agree and might even argue it’s morphing into a casino with a church attached. Hence, we have become more risk averse, especially as it pertains to popular momentum stocks, as investors broadly have become hungrier for risk. Our relative returns may look pedestrian versus tech-heavy indices in some cases, but it doesn’t feel like time to play “catch up” by increasing risk in hot areas. Thank you for your support and we look forward to reporting back to you in a few months.

Sincerely,

 George L. Smith III, CFA®
Chairman, Investment Policy Committee

Market Returns	Q2 2026	YTD
U.S. Large Caps	15.2	10.2
U.S. Mid Caps	13.8	15.3
U.S. Small Caps	21.5	22.6
International Developed Markets	-0.6	9.4
Emerging Markets	24.1	23.8
Intermediate Term Bonds	0.4	0.4