The United States of America marks 250 years since the signing of the Declaration of Independence. This incredible document changed the course of mankind as our great nation led the world to champion ideals such as freedom of inquiry, private sector R&D, and bold entrepreneurship that have raised the standard of living worldwide. We give thanks and reflect upon our nation’s rich heritage, honor the sacrifices that have shaped our country, and look forward to the successfulness of the next generations.
The first half of 2026 has provided another reminder that markets often react differently than many would expect. Over the second quarter, investors have navigated escalating geopolitical tensions, military conflict in the Middle East, disruptions to shipping through the Strait of Hormuz, and a sharp increase in oil prices. Despite these developments, the stock market has remained remarkably resilient.
Historically, events of this magnitude would have generated significant concern regarding impacts to energy supplies, inflation, and economic growth. The disruption of traffic through the Strait of Hormuz represented one of the largest oil market disruptions in modern history, yet equity markets largely looked through the headlines. While oil prices did move higher, investors appear to be treating the event as temporary rather than structural. Markets are increasingly focused on what lies ahead rather than the immediate shock itself.
This does not mean the effects have been or will be completely avoided. Higher energy prices often create an inflation “hangover” that can take months to work its way through the economy. Transportation costs, manufacturing inputs, and consumer spending can all be affected. However, thus far, corporate America has continued to demonstrate an impressive ability to adapt and maintain profitability. As a result, markets appear far more focused on earnings growth than geopolitical uncertainty.
This reinforces a theme we have discussed over the past several years: markets tend to follow earnings over time. While headlines drive short-term volatility, long-term stock prices are ultimately driven by a company’s ability to grow revenues, earnings, and cash flows. Despite ongoing economic and geopolitical concerns, many businesses continue to report healthy results, helping support equity valuations.
At the same time, the market’s leadership has become increasingly concentrated. The largest technology and AI-related companies now account for an even greater percentage of major market indices than they did just a year ago. Technology’s weighting within the S&P 500 has reached levels not seen since the late stages of the dot-com era, and a relatively small number of companies continue to drive a disproportionate share of overall index performance.
Artificial Intelligence remains one of the most transformative technologies we have seen in decades, and we continue to believe it will create significant opportunities over the long term. However, we are also mindful of the similarities between today’s AI infrastructure spending and previous technology investment cycles. Capital expenditures continue to grow rapidly while free cash flow has come under pressure at several major companies. Ultimately, these investments will need to generate sufficient revenues and profits to justify their enormous costs.
History shows that technological revolutions often create tremendous value, but not always in a straight line. The internet was a radical new technology when it became available to the public in the 1990s. Its importance and usefulness only increased over time, ultimately transforming nearly every aspect of business and daily life. Yet despite the internet’s success, the Technology sector declined approximately 80% from its peak during the 2000–2002 period as investors worked through excessive valuations and overly optimistic expectations. We believe AI will be enormously impactful, but investors should remember that even transformative technologies can experience periods where expectations run ahead of reality.
From our perspective, increasing market concentration reinforces the importance of diversification. Unlike capitalization-weighted indices that become increasingly dependent on the performance of a handful of companies, our portfolios maintain a more balanced approach across sectors and industries. This naturally reduces concentration risk, reduces volatility when compared to a cap-weighted index, and creates exposure to areas of the market that are often overlooked when investors become focused on a single theme.
We continue to see attractive opportunities among sectors that have lagged the broader market over the past several years. Health Care, Consumer Staples, Financials, Industrials, and many small- and mid-cap companies continue to trade at valuations well below those found in portions of the Technology sector. While these areas may not generate the same headlines, they often provide stable earnings, dividend income, and lower volatility during periods of market uncertainty.
Zooming out, the broader economy continues to exhibit characteristics of a “K-shaped” environment. Higher-income households generally remain in strong financial condition, supported by rising asset values and healthy employment trends. Meanwhile, many lower- and middle-income consumers continue to face pressure from elevated living costs and the cumulative effects of inflation. This divergence will likely remain an important economic and political theme as we move toward the midterm election cycle.
Looking ahead, the path higher is unlikely to be perfectly smooth. The combination of a midterm election cycle and a new Federal Reserve Chairman may create periods of uncertainty as investors digest changing political and monetary policy expectations. However, market volatility is a normal element of investing, not a flaw. In many cases, the most consistent returns are earned by investors who remain focused on business fundamentals.
As we have stated before, our focus remains on owning high-quality businesses that can grow earnings and cash flows through a variety of economic environments. We are less concerned with predicting the next headline and more concerned with identifying companies that have proven their ability to navigate changing market conditions. Strong balance sheets, consistent profitability, durable competitive advantages, and shareholder-friendly decisions remain the characteristics we value.
The market’s recent ability to look past geopolitical turmoil and focus on corporate earnings is a reminder that long-term fundamentals ultimately matter more than short-term headlines. While risks certainly remain, we continue to believe that a diversified portfolio of quality companies remains one of the best ways to participate in future growth while managing risk and volatility along the way.
| Thomas A. Toth, Senior Chairman | Kenneth Bowen, II President & CEO |