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Investment Strategy, Quarterly Letters & Portfolio Analysis
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The first half of 2026 showcased a contest between geopolitical disruption and economic resilience, with resilience winning decisively. Despite the outbreak of conflict with Iran driving oil prices higher and sending the S&P 500 lower in Q1, the second quarter countered strongly with the index rising 15% for the period and nearly 10% year-to-date. Corporate earnings emerged as the key driver, with S&P 500 earnings growing more than 25% year-over-year and profit margins reaching record highs of nearly 15%. Importantly, equity returns were driven by earnings growth rather than valuation expansion, with forward P/E multiples compressing from 22x to below 20x. AI-related capital spending accelerated further, with benefits broadening beyond large tech to industrial companies supporting infrastructure buildout. The labor market provided stability with low hiring and low firing dynamics. Inflation remains the primary risk, particularly energy-driven pressures from Middle East tensions. Looking forward, the manager expects a slower, uneven expansion with earnings supporting growth while geopolitics cap valuation upside. If oil prices retreat and inflation stays anchored, a better second half driven by earnings and broader participation is achievable.
Economic resilience and corporate earnings strength have overcome geopolitical disruption in the first half of 2026, with companies demonstrating robust fundamentals through better-than-expected earnings growth and record profit margins despite headwinds from Middle East conflict and energy price volatility.
The manager expects the current environment to continue along a slower, uneven expansionary path in which earnings and investment keep the economy growing while inflation and geopolitics put a cap on valuation upside. If oil prices continue to retreat, inflation expectations stay anchored and labor-market data remains stable, the market has a credible path to a better second half driven by earnings, broader market participation, and improving investor confidence. Conversely, a re-escalation of tensions in the Middle East and renewed pressure on energy markets could challenge the resilience of the first half.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jul 10 2026 | 2026 Q2 | - | AI, Corporate Fundamentals, earnings, geopolitics, inflation, oil, Resilience | - | Corporate resilience dominated the first half of 2026 as companies delivered earnings growth exceeding 25% and record profit margins despite geopolitical shocks from Iran conflict. The S&P 500 rose 10% year-to-date driven by fundamentals rather than valuation expansion. AI capital spending accelerated with broadening leadership. Inflation from energy remains the key risk, but cessation of Middle East hostilities could enable a stronger second half. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q2 |
ResilienceCorporate resilience emerged as the defining characteristic of the first half, with companies demonstrating strong ability to absorb economic challenges. Years of adapting to pandemic disruptions, supply chain bottlenecks, labor shortages, and inflationary spikes have left many companies with stronger balance sheets, healthier margins, and greater ability to adjust quickly. This resilience showed up in better-than-expected earnings with S&P 500 earnings growing more than 25% year-over-year and profit margins reaching record highs of nearly 15%. |
Corporate earnings Profit margins Balance sheets Adaptability |
AIAI-related spending remains a core support for both earnings and economic activity. The capital spending cycle associated with AI accelerated further with hyperscale technology companies continuing to invest aggressively in data centers, cloud infrastructure, semiconductors, and software capabilities. Leadership has widened beyond the largest growth stocks to include industrial companies connected to power generation, infrastructure expansion, electrical equipment, and manufacturing that benefit from the AI-driven buildout. |
Data centers Cloud infrastructure Semiconductors Capital spending | |
InflationInflation continues to be the most visible macroeconomic risk. The conflict involving Iran created a shock by threatening oil flow through the Strait of Hormuz, reviving memories of the earlier inflation surge and raising concerns about a second inflation wave. Higher energy costs worked like a tax on consumers, lifting transportation costs. However, underlying inflation outside energy proved more constructive with wage pressures moderating and shelter inflation showing improvement. |
Energy prices Oil Wage pressures Consumer costs | |
EarningsCompanies reported first-quarter earnings that came in better than predicted, with S&P 500 earnings growing by more than 25% year-over-year and revenues rising more than 10%. Strong fundamentals pushed profit margins to record highs of nearly 15% and were the driving force behind the equity market's advance. Importantly, equity returns have been driven by earnings growth rather than expanding valuations, with the S&P 500's forward price-to-earnings multiple compressing from roughly 22x to below 20x. |
Revenue growth Profit margins Valuation compression Fundamentals | |
OilThe conflict involving Iran created a shock in the quarter by threatening the flow of oil and other critical commodities through the Strait of Hormuz. Rising energy prices quickly revived memories of the inflation surge experienced earlier this decade. While oil and gasoline prices are higher, the market is concluding that the cessation of hostilities in Iran will lead to lower energy costs six to nine months from now, which would allow the Fed to stay data-dependent and on hold rather than tightening. |
Iran conflict Energy prices Strait of Hormuz Geopolitical risk |
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