Thursday, July 16, 2026
Outside of a resilient US economy that has faced several months’ worth of higher oil prices, the year over-year consensus S&P 500 earnings growth of approximately 22-24% is the big surprise of the year so far (keep in mind that this is earnings growth outside of a recession recovery which makes it even more remarkable). Many analysts attribute this growth rate to investment in and the implementation of artificial intelligence (AI). While some layoffs have occurred here and there, we have not seen the massive layoffs some were predicting. This is all good news for stocks, and the S&P 500 was up over 15% in the second quarter alone to share that enthusiasm. At the end of the day, stock performance boils down to the fundamentals: earnings.
Over the past few years, you could not mention the S&P 500 without including the Magnificent 7 stocks that have driven the S&P’s fantastic performance. You know the names: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. The Mag 7 names rallied as companies bought the equipment necessary to build out and implement the AI infrastructure. We are starting to see the benefits of that capital expenditure as the rest of the companies within the S&P 500 and elsewhere are starting to see these newfound AI efficiencies filter through to their respective bottom lines. Shareholders are thrilled and have been bidding up prices of the 493 non-Mag 7 names in the S&P 500 as well as US small-cap and foreign stocks. One of our main managed fund families, Primecap, had many investments outside of the Mag 7 and benefited as some of their data storage and chip making stocks surged into the end of the quarter. In fact, Vanguard PRIMECAP fund Admiral shares (VPMAX) was up 30.52% at the end of the quarter. Some of these underlying companies have cooled down in the first few weeks of July, but large gains that are handily beating the S&P 500 remain. The bottom line is this: CJ and I would have been pleased with an 8% return for the S&P 500 for all of 2026. Instead, the S&P 500 is up 10.21% through June 30th. It should be an interesting second half of the year.
Everything in the market seems pretty hunky-dory and that concerns me. I have had clients over the past few months ask about eventually getting funds out of the market for expenses they will need within the next year. I think a few of them are surprised when I suggest we sell those funds out of the stock market immediately. I have no idea how the market will perform over the next six months and no one else knows either. All I know is that we are very near all-time highs for the S&P 500 and with the rallies in the small-cap and overseas stocks, now is as good a time as any to pull the cash you will need over the next 12 months. While I typically like to let some of our “hot” securities run for a while, CJ and I will continue to watch the model and will adjust where we think we need more defense in case the market was to head south. Obviously, we always want to stay within 5% of your personal asset allocation, but we can also make top-down moves that can add a bit more defense to the portfolio. For example, trimming a fund managed by the Primecap team may be in order now after the huge rally we have seen from them over the past two years (VPMAX finished in the top 2% of its class at Morningstar and is currently in the top 2% with their year-to-date return).
Unfortunately, for those holding intermediate bonds, the ride has been a bit more boring, but solid, nevertheless. Our intermediate bonds are up 1-2% for the year so far while our short-term bonds are doing their thing and are up 2% – right about where I would expect them to be. Remember, the main role for our bonds is for portfolio stability. Obviously, we would like our fixed income annual returns to come close to their historical average of 4-5%. If you have not stopped in to see us lately, please do not hesitate to contact me to schedule an appointment. The back-to-school sales we are seeing at the big box stores are a reminder to enjoy the warm summer days while they are here. Have a great summer!
Best wishes,
Bill and CJ