Market Update: July 2026

We entered 2026 expecting a more uncertain market environment, yet the second quarter delivered one of the strongest equity rallies in recent memory. The S&P 500 gained approximately 15% during the quarter, marking its best performance since the post-pandemic rebound in 2020. What stands out is not just the magnitude of returns, but the market’s ability to absorb a steady stream of geopolitical and macroeconomic shocks with minimal disruption.

The Macro Analysis: Stronger-Than-Expected Earnings and a Steady Bond Market

Broadly speaking, investors were rewarded for staying invested. Improving sentiment, resilient earnings, and renewed enthusiasm around artificial intelligence helped lift equities despite ongoing geopolitical uncertainty and energy price volatility. As tensions in the Middle East showed signs of easing and oil prices retreated from their April peak, confidence improved. Continued capital spending on AI infrastructure supported a stronger earnings outlook across global markets.

Equity performance was notably strong and increasingly broad-based. Developed market equities rallied nearly 14% in the quarter, while emerging markets gained roughly 24%, supported by strength in semiconductors, IT hardware, and other parts of the AI supply chain. U.S. equities advanced meaningfully as well, with earnings coming in stronger than expected and AI-driven demand supporting profit growth across sectors, including technology, industrials, and parts of financials. Importantly, small-cap, mid-cap, and equal-weight indices also reached record highs alongside the S&P 500 and Nasdaq, suggesting that participation has extended beyond the largest technology companies.

Bond markets were steadier but continued to play an important role in diversified portfolios. The Global Aggregate Index posted a modest gain during the quarter, while tighter credit spreads and durable corporate fundamentals supported both investment-grade and high-yield credit. This backdrop reinforced the importance of maintaining balance across asset classes, particularly as macro conditions evolve.

Liquidity Matters in a Higher-Rate World: Inflation and Alternatives

Beneath the surface, however, the environment is more nuanced. The Federal Reserve’s leadership transition to Chair Kevin Warsh has brought a more explicit focus on inflation. At the start of the year, markets anticipated multiple rate cuts in 2026; by mid-year, those expectations have largely been priced out, with some debate shifting toward the possibility of further tightening.

At the same time, traditional “safe havens” have not behaved as expected. Gold experienced one of its sharpest monthly declines in decades, silver retraced a meaningful portion of its gains, and Bitcoin has lagged other major assets year-to-date. Private markets have also faced challenges. Private equity has underperformed public equities amid constrained exit activity and limited liquidity, while private credit, though more resilient, has begun to show early signs of strain as higher rates persist. This environment reinforces a key theme: liquidity matters. The trade-off between illiquidity and incremental return has become more tangible, particularly in a higher-rate world.

Evaluating AI’s Impact Across the Economy

Artificial intelligence remains the dominant driver of equity returns, with a small group of companies accounting for a disproportionate share of performance. The semiconductor sector illustrates this shift clearly: what was once a small, cyclical component of the index now represents almost 20% of the S&P’s market capitalization. Our portfolios have benefited from meaningful exposure to this theme, though we remain selective and mindful of broader sector balance.

We continue to view the AI infrastructure buildout as a multi-year investment cycle rather than a short-term trend. Demand across the supply chain from memory to data center equipment, remains robust, with pricing power supporting strong near-term earnings. That said, expectations remain elevated, and sustainability will depend on end markets translating AI investment into durable revenue.

One of the more important developments this year has been the divergence between AI pricing and usage. While the cost of AI on a per-unit basis has declined, total enterprise spending continues to rise as adoption scales. However, demand is proving more price-sensitive than initially expected. Companies are introducing spending controls and actively managing AI budgets, giving rise to cost-management disciplines reminiscent of early cloud adoption.

The financial profiles of leading AI developers highlight the capital intensity of this cycle. The two main AI models, Anthropic and Open AI, remain deeply unprofitable, even as they drive substantial demand across the broader ecosystem. Any moderation in that spending would likely have ripple effects across markets.

Globally, competition in AI is also intensifying. Lower-cost models, particularly from China, are gaining traction in certain enterprise use cases. While U.S. models continue to lead in performance, pricing pressure could make future profits less predictable.

SPOTLIGHT

High expectations for long-term growth: private AI companies approach public markets

Outside of public markets, 2026 has also highlighted an interesting divergence between enthusiasm for high-profile deals and broader economic sentiment. While capital continues to flow aggressively into marquee opportunities—particularly in AI and aerospace—confidence in other areas of the economy has been more mixed, evident in an uneven labor market for recent college graduates despite strong corporate profitability.

SpaceX’s public debut is one of the clearest examples of private-market enthusiasm transitioning into public markets. The company sits at the intersection of aerospace, national security, and communications infrastructure, with Starlink and launch services central to its long-term narrative. Its public debut was met with significant retail investor demand but the stock trades at a substantial premium to virtually any metric on near term sales or earnings. Similar dynamics are likely as other large private AI companies approach public markets, adding market cap while raising real questions around valuation and sustainability. Our discipline around profitability keeps us on the sidelines with SpaceX for now, though we will continue watching closely how the company shapes the industry.