2026 Mid-Year Commentary
By Jason@vigilarewealth.com on July 5, 2026 in Investor Lounge
Markets rebounded in the 2nd quarter, following a minor March correction. The markets mostly ignored the Iran/Hormuz oil shock, and the attention was more on the massive AI earnings boost. The capex into AI investment has gone parabolic and is estimated to be close to $800 billion in 2026 and eclipsing $1 Trillion in 2027. Wow! These numbers are staggering and move the needle so much that they almost overwhelm everything else, for better or worse.
November 30, 2022…The day of the big paradigm shift. What is the significance of that date? Hmmm…
This outsized earnings boom has impacted the markets. Let’s take a deeper dive and break this down in more detail.
If we split AI influence into different segments you would have: 1) the Hyperscalers (check writers of AI investment), 2) the Infrastructure/Suppliers (check cashers, the picks and shovels companies), 3) the Adopters (Companies that incorporate AI into their business), and 4) the Dodos (AI deniers). The stock outperformance wave started a few years ago with the Hyperscalers dominating but now has moved aggressively to the Infrastructure/Suppliers (and most recently into memory stocks). Our view is that we will continue to see this performance wave roll into the Adopters. These are the companies that are using AI to innovate, increase productivity, and drive sales and earnings. Lastly, we would avoid the Dodos altogether, regardless of how “cheap’ some of these companies get. These are businesses that are slow to adapt and/or have a head-in-the-sand mentality (think blockbuster).
This phenomenon is both unavoidable and exciting and we believe this trend will continue, possibly for the next few years. For better or worse, markets will live by the AI sword and die by the AI sword. Just like any disruptive revolution in history, there will be a sensational boom followed by a bust, followed by a long-term adoption and improvement in productivity. As investors we can choose to ignore it, or lean into it and ride the wave, but also learn from history to avoid making some of the mistakes of the past.
We have to remember not everything moves in a straight line, and we think if there is going be a major correction this year it will happen ahead of the mid-term elections. This means that although we are optimistic about the future, there could be significant volatility in the coming months.
To reiterate what we said in our prior commentary….
Our view for 2026 remains that markets can move higher, but not in a straight line and we are expecting at least one severe correction, even in the most of optimistic cases. The markets did decline in the first quarter, but not enough to classify as a severe decline.
The markets continue to trend higher at the time of this writing. But we do see some “short term” clouds forming that could develop into a late summer/fall storm.
Fasten your seatbelts…There could be some turbulence. Why do we say this? Some of the positive surprises we anticipated at the beginning of the year, such as better-than-expected growth and earnings, are now likely priced in.
What is not priced in is the anticipation of a more hawkish Fed. Remember that last time the Fed pivoted in 2022, the Nasdaq lost over 1/3 of its value. We are not saying that will repeat, but there is a confluence of factors that could grab the attention of the market: Fed policy shift, stickier inflation, mid-term election uncertainty, lofty earnings expectations, renewed oil prices, etc. When you combine this with a speculative level of investor positioning (high margin levels, speculative concentration in certain pockets of the markets, IPO frenzy) you get a recipe for a market sell-off.
But the main catalyst is the Fed. We have only had five Fed chairs in the last 40 years, and the honeymoon period is usually brief. New Fed Chair Warsh is known for his hawkish leanings, but we still don’t know much about how he will approach his new leadership role. He did leave some hints at his first policy meeting that there will be major reform at the Fed. His focus will be to modernize the Fed. He also made it clear that he will be loyal to the inflation mandate. We do not think the market currently “believes” his unequivocal pledge to be serious about the inflation mandate. This will be the debate in the coming months. And the question for us is how the market will respond and anticipate Fed actions. Our view is that it will be bumpy initially and the new leadership might have to stand up to the market to build some credibility. At least initially.
If the Fed does decide to assert its intolerance for inflation, this would be enough on its own to incite a correction. In the longer term however, this actually might not be a bad outcome, because a little medicine today is better than a lot of medicine later, especially if some of these speculative market tendencies go unchecked.
We will be watching these developments along with the other emerging risks and make the appropriate investment reallocations. The good news is that we do believe that this is transitory and that there is still great resiliency in the economy. We also believe that there will be more rotation out of the “tech” AI and into the broader stock market. This is a good outcome and opportunity to invest in companies with good valuations and fundamentals, instead of always having to chase “hot” momentum sectors to get returns.
For now, seatbacks and tray tables in full upright and locked positions.
Thank you for your trust.
The Vigilare Wealth Management Team
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