The Numbers First

The tech-heavy Nasdaq Composite gained 8.4% for the month, while the S&P 500 rose 5.3% and the Dow Jones Industrial Average was up 2.9%. The S&P 500 also saw its best two-month gain since May 2020, climbing over 16% since the end of March. International developed equities and US mid-caps also rose for the month (+4.5% and +2.5%, respectively). AI-related momentum and a strong US earnings season were the primary engines. On the fixed income side, the picture was mostly constructive: investment grade corporates were up 0.7%, high yield credits gained 0.5%, and municipal bonds rose 0.3%. Commodities told a different story — crude oil fell 12.2%, broad-based commodities declined 3.4%, and gold decreased 1.5%, with silver the lone standout at +2.5%.

A New Fed Chair Walks Into a Fire

Kevin Warsh was officially sworn in as Federal Reserve Chair at the White House on May 22, pledging to "lead a reform-oriented Federal Reserve" and to preserve the central bank's independence over monetary policy. The inheritance is anything but clean. The May reading of the Consumer Price Index came in at 3.8%, its highest level since May 2023, while the Producer Price Index inflation reached a 6.0% annual rate, the highest since late 2022. Energy prices, stoked by Middle East conflict, were a primary driver. Bond markets responded: the 30-year Treasury yield reached approximately 5.2% in mid-May, its highest level since 2007, while the 10-year yield climbed above 4.6%.

Some relief came late in the month as reports of progress toward a peace agreement and the potential reopening of the Strait of Hormuz helped conditions ease. But the Fed's posture remains hawkish. Fed Governor Lisa Cook noted that "the risks remain tilted toward higher inflation" and indicated she would be prepared to raise rates if price pressures persist. Despite political pressure for lower rates, markets expect the Fed to hold through year-end while pricing in roughly a 41% probability of a December hike.

Can Equities Live With Higher Yields?

The most important structural question in the report: can this equity rally coexist with structurally higher rates? Astoria's answer is conditional but constructive. The key distinction is why rates are moving. An inflation-driven repricing is historically less equity-friendly than a growth-driven one — but growth, right now, is holding up. Morgan Stanley Research notes that average quarterly returns have historically been strongest when PMIs are rising alongside rates, with the S&P 500 Equal Weight returning approximately 5.0% and the cap-weighted S&P 500 returning roughly 4.1% in such regimes.

Earnings breadth is central to this thesis. Nearly two-thirds of S&P 500 companies are growing their top line by at least 5%, the highest share since 2023. And it's not just large caps carrying the load: the median Russell 3000 stock posted EPS growth of 10% in Q1 2026, the highest since Q3 2021. If growth continues at these levels, it may provide the fundamental cushion that allows equities to absorb higher rates — but that's a conditional, not a guarantee.

Europe vs. the US: A Widening Gap

Astoria highlights an important macro divergence through the Citi Economic Surprise Index. The Europe index has fallen to around -80, suggesting data has consistently missed expectations, while the US index has risen to roughly +40, as releases have generally exceeded forecasts. The culprit is largely energy: Europe's greater exposure to Middle Eastern supply disruptions has weighed heavily on its economic data. This dynamic helps explain the sustained outperformance of US equities relative to European peers since the conflict-driven lows and reinforces the relative resilience of the US economy.

SpaceX: Secular Story, Terrible Historical Comp

Astoria closes with a timely flag on the SpaceX Nasdaq debut. The historical base rate for mega-IPOs is sobering: the vast majority posted negative one-year forward returns from their IPO date, with a median decline of 31%. Even strong early performers gave back gains. Among the list, only Airbnb (+25%) and Arm (+132%) bucked the trend over their first twelve months.

SpaceX, however, carries structural differentiators. Major indices have adopted or are considering new fast-entry rules that would allow SpaceX to be included shortly after listing, potentially pulling forward significant passive buying from ETFs and index funds. And the thematic positioning is compelling: SpaceX sits at the intersection of several secular growth themes, including satellite connectivity, commercial space infrastructure, and AI. Whether passive flow mechanics and thematic tailwinds are enough to overcome a historically poor mega-IPO track record, remains a consequential question for the second half of 2026.

Key Takeaways for Advisors

• Record highs are real, but the backdrop is complex. Earnings breadth and AI momentum are genuine tailwinds — inflation and energy-driven rate pressure are genuine headwinds. Both are true simultaneously.
• The Fed is not cutting. A 41% implied probability of a December hike means advisors should stress-test client portfolios for a higher-for-longer rate environment, not position for relief.
• Growth is the equity market's shield. As long as top-line growth remains broad and EPS expansion continues at the Russell 3000 level, equities have a fundamental case for absorbing elevated yields.
• US over Europe remains the right lean. The economic surprise divergence is stark and geopolitically anchored — not a short-term blip.
• SpaceX warrants discipline, not euphoria. The secular thesis is real. The historical mega-IPO pattern is also real. Sizing and timing matter more than conviction alone.

Footnote:

1 "Record Highs on the Back of Earnings and AI. Will Inflation Prove Sticky and Derail the Rally?" Astoria Portfolio Advisors, 3 June 2026.

Writing in Horizon's Big Number series, Dickson offers a precise, data-grounded corrective to what is already becoming one of the most hyped market moments in a generation. His argument is compact, methodical, and lands with force: the sheer scale of what SpaceX is about to do in the public markets will be almost entirely insulated from most investors' portfolios — by design.

The Numbers Are Staggering. The Float Is Not.

SpaceX is targeting $75 billion in IPO proceeds, with an opening market capitalization of roughly $2 trillion — figures that would make it the largest public offering in history. By any conventional measure, the spectacle is extraordinary. Yet Dickson zeroes in on the structural reality that separates the headline from the portfolio impact.

"SpaceX is expected to offer between 3 to 5% of its shares to the public. By contrast, most publicly traded large U.S. companies offer 80% or more of their shares."

That gap — between total valuation and freely tradable supply — is the crux of everything. Major indices do not simply admit companies based on overall market cap. They weight by float: shares actually available in the open market, excluding insider holdings. With SpaceX locking away 95 to 97 percent of its shares from public trading at launch, the sliver that enters the indices carries a radically different economic weight than the headline valuation implies.

Dickson's chart crystallizes the scale of the disparity. Adjusted for float, every single member of the Magnificent 7 will carry a larger effective index footprint than SpaceX. At the top sits Nvidia, whose free-float-adjusted market cap is estimated at 68 times that of SpaceX's adjusted figure. The graphic makes the point without equivocation: for index investors, SpaceX's arrival will be a whisper, not a roar.

Index Inclusion Came With Asterisks

SpaceX's path into major benchmarks wasn't routine. Dickson notes that rule changes were made specifically to accommodate the company — the S&P 500 and Nasdaq-100 each adjusted their eligibility frameworks to allow entry. The objectives were consistent across providers: ease SpaceX into the market with minimal disruption. That intent is itself revealing. Index gatekeepers anticipated the asymmetry and calibrated accordingly.

The implication for advisors: clients who hold broad index funds will gain some SpaceX exposure — but not in any proportion that resembles the company's $2 trillion gross valuation. The exposure will be minimal, highly controlled, and deliberately dampened by the mechanics of float-weighting.

Separating Spectacle from Signal

Dickson's closing line is worth sitting with: "SpaceX's headline valuation next week may be out of this world, but its impact on investors' portfolios should feel far more earthbound because of its limited availability in the marketplace."

The phrasing is intentional. The IPO is a historic moment in the history of private capital accessing public markets. It is not, however, a portfolio event of comparable magnitude for the average investor. The distinction matters — especially in an environment where media coverage of the offering will be intense, client questions will be plentiful, and the temptation to overestimate exposure or chase direct allocation could be significant.

Key Takeaways for Advisors and Investors

1. Float determines index weight, not total market cap. SpaceX's $2 trillion headline figure will not translate into $2 trillion of index influence. At 3–5% public float, its effective index weight will be a fraction of its gross valuation — and well below every Magnificent 7 constituent.

2. Passive investors will have minimal SpaceX exposure at launch. Clients holding S&P 500 or Nasdaq-100 index funds will technically own SpaceX — but the position size will be negligible relative to the company's notional scale.

3. Index rule changes were structural accommodations, not precedent-setting shifts. The carve-outs created for SpaceX reflect the company's uniqueness, not a new standard. Advisors should not expect this to become the template for future IPO inclusions.

4. Client conversations should calibrate expectation. The media narrative will frame this as a transformative portfolio event. Dickson's analysis suggests the more accurate framing is: a historic corporate milestone with earthbound portfolio consequences.

5. For those seeking direct SpaceX exposure: The float reality cuts both ways. Limited supply in the public market means price discovery will be volatile, liquidity will be constrained early, and valuation will be under-anchored relative to the company's private-market track record. Patience and sizing discipline will matter.

Footnote:

1 Mike Dickson, Ph. D. "SpaceX’s Upcoming IPO: A Reality Check For Investors." Horizon, 3 June 2026.

The Economy Is Surprising — In the Right Direction

The starting point is unambiguously constructive. The Citi Economic Surprise Index sits at 41.6 as of late May, near YTD highs and part of what has been a positive streak stretching back over a year — the longest run of upside surprises since the 2008-09 financial crisis. That's not noise. That's a persistent pattern of the economy outrunning consensus expectations quarter after quarter, a signal that the soft-landing thesis isn't just holding — it's quietly strengthening.

Labor markets reinforce the picture. The last two months have seen outsized prints — March at 178K versus a consensus of negative 6K, and April at 115K against expectations of roughly 62K to 90K. The pace is running at a level that will keep the unemployment rate from rising. A labor market this tight doesn't hand the Fed permission to cut. It hands the inflation hawks a megaphone.

Inflation's Unwelcome Return — With an Energy Twist

Here is where the narrative thickens. Inflation isn't just re-emerging; it's being driven by a variable that monetary policy cannot directly address. April CPI came in at 3.8% year-over-year, up sharply from 3.3% the prior month, driven largely by a 17.9% annual surge in energy costs and a 28.4% jump in gasoline prices. Sage points directly to the geopolitical source: gasoline prices remain elevated due to the Strait of Hormuz shutdown. The national average sits near $4.32 per gallon, up roughly 54% from pre-conflict levels at the end of February.

The transmission from crude to rates is direct and visible. Sage's chart of national gasoline prices against the US 2-year Treasury yield tells the story without ambiguity. As the firm states: "Until the Strait of Hormuz situation is fully resolved, rates — particularly on the short end — will have to price in an inflation risk premium and remain elevated." The short end of the curve, typically the most policy-sensitive, is being held hostage by tankers and geopolitics — not FOMC decisions.

A New Chairman With a Deliberate Blind Spot

Into this environment walks Kevin Warsh, whose first FOMC meeting on June 16-17 will immediately test his governing philosophy against the messiest possible backdrop. Sage frames the challenge with precision: Warsh "has been vocal about eliminating forward guidance, framing it as a constraint on the Fed's ability to respond dynamically to changing economic conditions."

This is not a minor stylistic preference. It represents a structural shift in how the Fed communicates — and how markets should price uncertainty. During his April confirmation hearing, he stated plainly that he does not believe in it and proposed ending or modifying the Fed's quarterly dot plot projections, arguing they pre-commit the committee to a course of action and reduce policy flexibility. Warsh's preferred framework, as Sage describes it, is one that is "transparent in its logic but deliberately opaque about its next move."

Transparent process, opaque outcome. For markets accustomed to reading dot plots and parsing every adjective in FOMC statements for rate signals, this is a meaningful recalibration of the information environment.

The Hike Probability That Wasn't Supposed to Exist

Beneath the philosophical debate sits a harder data point. The April FOMC minutes revealed a majority of participants acknowledged that rate hikes will likely become appropriate if inflation continues to run above 2%, underscored by four dissents at the April meeting. Market pricing now reflects roughly a 30% probability of a hike in 2026, leaving risks more evenly balanced ahead of this meeting. A 30% hike probability in 2026 would have been viewed as a tail risk at the start of the year. It is now a baseline scenario worth positioning around.

Key Takeaways for Advisors and Investors

• Short-end rates stay elevated until Hormuz resolves. The 2-year yield is tracking gasoline prices, not Fed guidance. A geopolitical resolution — not a CPI print — may be the single most important catalyst for near-term rate relief.
• Warsh's no-forward-guidance stance increases volatility, not clarity. Markets will have fewer anchors. Advisors should expect higher uncertainty premiums in rate-sensitive instruments.
• A 30% hike probability deserves portfolio attention. Duration risk is not one-directional. Balanced rate positioning — laddered maturities, floating rate exposure, inflation-linked buffers — is more defensible than a pure duration extension bet.
• Strong labor data is the Fed's constraint. As long as payrolls run above trend, the case for easing is politically and economically difficult to make — regardless of what Warsh prefers philosophically.
• Inflation surprise indices are at local highs. The environment rewards active fixed income management over passive duration indexing.

The fog Sage Advisory describes is not the temporary kind that burns off by mid-morning. It is structural — monetary philosophy, geopolitical energy disruption, and persistently resilient economic data pulling in different directions simultaneously. For portfolios with fixed income exposure, that fog is the forecast.

Footnote:

1 Sage Advisory Services — "A Cloudy Rates Outlook Heading Into Summer," authored by Komson Silapachai and Thomas Urano, published June 4, 2026.

Why the conventional wisdom on active management doesn't apply to bonds — and what advisors need to know

The conventional wisdom has been clear for decades: active managers can't beat the index, so buy the market and go home. But a landmark April 2026 academic paper by Jaewon Choi (Seoul National University), K.J. Martijn Cremers (Notre Dame), and Timothy B. Riley (University of Arkansas) draws a precise and important boundary around that wisdom. It applies to equities. For bonds, it does not — and may even invert.

The paper's thesis is stated without reservation: "passive bond management is, in practice, something of an oxymoron." The reason isn't semantic. It's structural.

The Replication Problem

Bond indexes are not like equity indexes. The S&P 500 has 500 liquid, publicly traded securities. The Bloomberg US Aggregate Bond Index — the most common benchmark in the study's sample — holds thousands of bonds, many of which don't trade once in a given day. The median benchmark in the passive bond fund sample contains approximately 7,900 bonds, with an average fraction of non-trading days of 49%. Full replication is not just costly. It is operationally impossible.

Passive bond funds respond to this constraint by holding a fraction of their benchmarks. The average passive bond fund holds 2,344 bonds against a benchmark of 6,601. To measure the resulting divergence, the authors apply Active Share — the portfolio overlap metric introduced by Cremers and Petajisto (2009). The findings are striking: the median bond-level active share for passive bond funds is 59%. For passive equity funds, the comparable figure is 2%.

Put directly: a fund marketed as passive is, in practice, making active security selection decisions across more than half its portfolio.

The Performance Drag Is Real — And Pre-Fee

The implications for performance are severe. Passive bond funds don't just underperform after fees. They underperform before them. The study's portfolio analysis finds an average annualized gross alpha of −0.07% for passive bond funds relative to their stated benchmarks — meaning the underperformance cannot be explained by expense ratios alone.

The culprit is rebalancing cost. Bond indexes rebalance constantly: new issuances enter, bonds mature or get downgraded, and inclusion rules force turnover. The average turnover rate for passive bond funds in the sample is approximately 70%, compared to 42% for passive equity funds. And trading bonds costs orders of magnitude more than trading equities. The authors estimate average annualized rebalancing transaction costs of approximately 25 basis points for passive bond funds, compared to as little as 0.13 to 1.09 basis points for passive equity ETFs. During the COVID disruption of 2020, those bond rebalancing costs spiked above 60 basis points per year.

The Skewness Argument: Why "Buying the Haystack" Works in Equities But Not Bonds

Jack Bogle's famous logic — "don't look for the needle in the haystack; just buy the haystack" — rests on a specific empirical premise: that equity returns are so positively skewed that missing a handful of star stocks destroys long-run performance. Bessembinder (2018) demonstrated this conclusively for equities.

Choi, Cremers, and Riley show the premise doesn't transfer to bonds. Annual equity returns carry a cross-sectional skewness of 1.76. Corporate bonds: 0.47. The practical consequence is direct. A randomly selected portfolio of 100 equities will underperform the broad equity market by approximately 21 basis points per year simply due to skewness — what the authors call "the skewness cost of underdiversification." For 100 randomly selected bonds, that figure drops to just 5 basis points.

In equities, passive funds justify their existence by capturing stars that active managers miss. In bonds, those stars don't exist in the same form. Instead, broad bond index strategies may increase the likelihood of including large defaults.

Active Bond Funds: The Numbers

Against this backdrop, active bond fund performance looks materially different from the equity narrative. Using their five-factor CCR5 model constructed from investable passive ETFs, the authors find active bond funds generate an average annualized net alpha of 0.30% across the full sample, rising to 0.55% among high yield funds. Approximately 71% of active bond funds exhibit positive net alpha.

Over longer horizons, the advantage compounds. Where active equity fund outperformance declines over time — from 31.1% beating their benchmark over two years to just 19.0% over ten — active bond funds move in the opposite direction: 56.1% outperform over two years, rising to 68.6% over ten.

Among the most active bond funds — those with the highest firm-level active share combined with strong past performance — the annualized alpha reaches 1.76%, with statistical significance. These funds also show lower maximum drawdown and reduced financial fragility, with a linear rather than concave flow-performance relationship.

Key Takeaways for Advisors

1. Passive bond fund labels are misleading. With median active share of 59%, these funds are making significant active decisions without the mandate or the track record to justify them.

2. Rebalancing costs are a hidden drag. The gross underperformance of passive bond funds is a structural feature, not a fee artifact. Advisors should scrutinize total cost of ownership, not just expense ratios.

3. Active bond management has a credible, durable edge. The longer the horizon, the stronger the case. This is the inverse of the equity story.

4. Active share and past alpha are actionable screening tools. High firm-level active share combined with strong prior performance identifies a subset of active bond managers with persistent, economically significant outperformance.

5. The Bogle argument has limits. Buying the haystack works when stars drive returns. In bonds, the haystack may include the defaults.

Endnote:

1 Choi, Jaewon, et al. "Active versus Passive Management of Bonds (and why passive bond management is an oxymoron)." 26 Apr. 2026.

Copyright © AdvisorAnalyst

Our 2026 Investor Survey focused on how investors view AI within financial advisory practices and as an investment.

In my first article delving into the findings, I discussed the significant risk advisors face simply by not being transparent with clients about the use of AI in their practices. Aside from the most obvious route to transparency – talking to clients about AI – I encouraged advisors to create an inventory of the specific tasks for which they leverage AI so they can be prepared to address questions that come up in client conversations.

While this sort of exercise may seem daunting and/or unnecessary, our survey findings might convince you to take a closer look at how you’re using – and disclosing – AI in your practice.

As we did in our 2024 survey, this year we asked participants:

How would you feel if you learned that your advisor used AI (e.g., ChatGPT, Claude, Gemini) to:

• Create educational content to share with you
• Handle administrative tasks
• Provide investment recommendations
• Automatically responds to your texts or emails

Possible responses were:

• I would feel good
• I would feel neutral
• I would be upset

Comfort with advisors using AI for different tasks

As you can see, clients’ comfort with their advisor using AI depends strongly on what it’s being used for, with most feeling good or neutral with AI supporting activities like administrative tasks and creating educational content.

On the other end of the spectrum, a significant portion of investors would be “upset” to learn their advisor used AI to provide investment recommendations or automatically respond to texts and emails.

Not automatic for the people

Through our Amplifying Human Intelligence program, I’ve had the opportunity to speak with advisors across the country about how they are using AI in their practices. I’ve heard cases where advisors have used AI to do one or more of the tasks referenced above, including draft emails or create communications after meetings. However, seeing that 40% (44% in 2024) would be “upset” to find their advisor was doing this should make all of us stop and think.

Referencing our survey findings, the use of the word “automatically” is important to note. We’ve all received automated replies to text messages and emails, whether for an appointment or a dinner reservation. Everyone knows an automated response when they see one based on how quickly it arrives (i.e., immediately) and what it says (usually a generic “canned” message). With AI and automated AI agents, advisors can now create processes through which a client email can be responded to quickly and easily. But as with a lot of things in life, just because you can do it, doesn’t mean you should.

In this case, it’s generally a good idea to adhere to the AI-era adage of “keeping a human in the loop.” It’s also important to consider why clients might be upset about this type of automatic, AI-generated response. When AI is leveraged to draft or send an email, the message can easily lose the personalization and human touch clients need and want in their relationships with advisors.

That doesn’t necessarily mean you shouldn’t use AI to help with idea generation, review, and editing. But regardless of the medium, the client conversation should retain some friction and personalization.

What would you say … you do here?

The other idea where we saw negative sentiment around AI is when it comes to providing investment recommendations. In this case, I would have loved to be able to ask respondents “why” they feel negative about this idea. But my guess is that it speaks to how investors view the value of financial advisors and the services they provide.

It’s not difficult to imagine clients asking, “If you’re using AI to make investment recommendations, then what would you say you do here, and what am I paying you for?”

Again, just as with client communications, I think the personalization aspect cannot be discounted. If advisors are using AI to come up with investment ideas, investors may feel as if their personal situation is not being considered. (In fact, research backs this up: As I discussed in a recent article, when it comes to portfolio recommendations, AI has been shown to fall short of human advice.)

They want the truth

In all the potential use cases of AI, the key is transparency. Our survey found that, among those investors working with or planning to work with an advisor, 85% expect their advisor to be responsible for AI-driven outputs and 79% would be upset if AI use was not disclosed.

Being clear and specific about how these processes work within your practice, how they help improve efficiency, and how they affect clients should be the main goal of this transparency. If you’re using AI to draft emails, be up front about it and explain exactly how it is being done. If you are using it for investment research and decisions, explain the process involved. Importantly, using AI for any task should always allow advisors to spend more time with clients – and clients should be made aware of how that benefits them.

Having spoken to advisors across the country, many of those who have discussed AI usage in their practices with clients have noted to me that the conversations have gone well if it is framed correctly. So yes, clients want the truth and they can handle it.

Having these conversations sooner rather than later is crucial. We are all getting caught up in the AI wave, and I fear that if we don’t discuss how the technology is being implemented by advisors, we will reach a point where clients may just view everything as AI.

That’s one of the primary reasons we developed our Amplifying Human Intelligence program: to help advisors think about ways to use AI that drive them back into human interaction. It is my belief that, in the age of AI, being able to use high-tech tools to support high-touch client relationships will be the primary way advisors differentiate themselves.

2026 Investor Survey - Discover how investors are thinking about AI - Discover

Artificial intelligence (“AI”) focused companies, including those that develop or utilize AI technologies, may face rapid product obsolescence, intense competition, and increased regulatory scrutiny. These companies often rely heavily on intellectual property, invest significantly in research and development, and depend on maintaining and growing consumer demand. Their securities may be more volatile than those of companies offering more established technologies and may be affected by risks tied to the use of AI in business operations, including legal liability or reputational harm.

Copyright © Janus Henderson

As markets broaden beyond mega-cap technology stocks, dividend-oriented strategies are attracting renewed attention. US dividend allocations hold appeal for many investors seeking resilience and diversification, while international dividend-focused indexes have benefited from lower valuations, easing cycles in several regions and improving shareholder-return trends.

Key takeaways

• Despite continued concentration in mega-cap technology stocks, US dividend-focused strategies have generally remained competitive and historically experienced more shallow drawdowns than broader equity markets.
• Last year, US companies paid a record US$704.8 billion in dividends—the 15th consecutive annual record. Concurrently, dividend growth accelerated across several international markets, highlighting the continued strength of shareholder-return trends.
• International dividend-oriented strategies have benefited from lower valuations, improving shareholder-return cultures and broader exposure to sectors such as financials and industrials.

Dividend investing has long been marked by an unfortunate reputation: dependable, perhaps, but rarely the subject of lively market chatter. Then came the era of zero interest rates and the “Magnificent Seven,”¹ when income strategies may have seemed even less relevant. That may be changing.

With markets broadening beyond a narrow group of US technology leaders, dividend-oriented equities have found their footing again. The appeal today is not merely yield, but quality, cash flow discipline and broader sector exposure at a time when economic growth has become more uneven across regions and sectors.

Recent performance may already reflect part of this shift, though the story differs somewhat between US and international markets. In the United States, dividend-oriented strategies have generally remained competitive despite returns continuing to be driven heavily by mega-cap tech darlings. Last year, US companies paid a record US$704.8 billion in dividends—the 15^th consecutive annual record.² Dividend growth also remains broadly supported; more than 90% of US companies either increased their payouts or held them steady in 2025.³ For investors concerned about concentration risk, that resilience may remain an important part of the appeal.

Historically, dividend-oriented equities have tended to provide a smoother ride. Over the past five years, US dividend-oriented equities experienced a maximum drawdown of roughly 17%, compared with nearly 26% for the broader market,⁴ with global dividend-oriented equities exhibiting a similar resilience profile.

Broad Market vs. Dividends Risk Comparison

Note: Blue denotes lower max drawdowns/volatility. Data refers to the following indexes: Global Equities: MSCI ACWI Net Total Return USD Index, MSCI ACWI High Dividend Yield USD Net Total Return Index, US Equities: MSCI USA Net Total Return USD Index, MSCI USA High Dividend Yield Net Total Return USD Index, International Equities: MSCI World ex-US Net Total Return USD Index and MSCI World ex-US High Dividend Yield Net Return USD Index. The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 24 emerging market (EM) countries. The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the US market. The MSCI World ex-US Index captures large- and mid-cap representation across 22 DM countries. The MSCI ACWI High Dividend Yield Index, MSCI USA High Dividend Yield Index and MSCI World ex-US High Dividend Yield Index are based on their respective parent indexes, the MSCI ACWI, MSCI USA Index and MSCI Europe Index. Annualized standard deviations (based on daily returns) are used for volatility. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Not reflective of the performance or portfolio composition of any Franklin Templeton Fund.

Sources: FactSet, MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com. Created by Franklin Templeton’s Global Research Library.
International dividend-oriented strategies, meanwhile, have benefited from a different set of tailwinds. Growth in dividends accelerated across several markets in 2025, led by Japan, where payouts rose 12.5% on a core basis—more than twice the global growth rate.⁵ Lower valuations, broader sector exposure and improving shareholder-return trends have supported performance across several markets. Compared with many cap-weighted US benchmarks, international dividend-oriented indexes also tend to be less concentrated in mega-cap technology stocks while maintaining exposure to leading manufacturing, industrial and technology leaders.

Japan may be among the clearest examples of this. Despite strong market performance in recent years, Japanese equities continue to trade at a meaningful discount to US stocks on a forward earnings basis. As of early June, the TOPIX (a capitalization-weighted benchmark for the market) was trading at roughly 18.5x forward earnings compared with more than 22x for the S&P 500 Index.⁶ At the same time, ongoing corporate governance reforms have encouraged companies to deploy balance-sheet cash more efficiently. Share buybacks by Japan-listed companies reached a record of about US$142 billion in fiscal 2025,⁷ marking the fifth consecutive year of record repurchases and reflecting growing pressure to improve capital efficiency and shareholder returns. In our view, these developments are helping reshape investor perceptions of Japanese equities, particularly among investors seeking diversification beyond the United States.

The broader macro backdrop also appears supportive. Several central banks outside the United States—including those in the eurozone, United Kingdom, Brazil and Mexico—are already further along in easing cycles, which is relieving pressure on rate-sensitive sectors often represented heavily in dividend-oriented indexes. At the same time, infrastructure investment, industrial reshoring and energy-security spending continue supporting many global cash-generative businesses.

None of this suggests the era of artificial intelligence or US technology leadership is over. But we believe market participation should continue to expand, and such periods have historically created a more favorable environment for dividend- and value-oriented equities. That is worth remembering because dividends have historically accounted for roughly two-fifths of total US equity returns over the past 25 years, with a similar contribution in Europe.

When volatility rises and market narratives shift rapidly, companies capable of generating durable free cash flow and consistently returning capital to shareholders may regain appeal—not because they are flashy, but precisely because they are not.

Endnotes

1. The Magnificent Seven refers to shares of Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla.
2. Source: Capital Group Dividend Watch, Global Equity Study 2026.
3. Source: Ibid.
4. Source: FactSet, MSCI.
5. Source: Capital Group Dividend Watch, Global Equity Study 2026.
6. Source: Bloomberg, as of June 3, 2026.
7. Sources: Nikkei Asia, Bloomberg, May 2026.

Copyright © Franklin Templeton ETFs

Three weeks ago, I wrote: “The expected consolidation will likely be short-lived because the economy keeps rolling up. Economists have shaved their 12-month U.S. recession probability to 25% as economic activity has held up well as both boomers and high-income earners intend to keep on spending and business capital expenditure plans are sturdy. Indeed, on May 14, the Atlanta Fed raised its second quarter GDP growth estimate to 4.0%, up from 3.7% on May 8. Meanwhile, the Citigroup Economic Surprise Index - the difference between actual economic releases and Bloomberg surveys - confirms that the business performance of the US economy keeps on beating market expectations. The index has been in positive territory since June 2025 and rising briskly for the past six weeks.

Goldman Sachs has a Risk Appetite Indicator (RAE) that uses high-frequency data across five primary headings: bond, equity, liquidity, commodities and credit. It has been a useful contrarian tool when a sharp fall occurs, as it has lately, suggesting that traders might become too cautious in the short term, thereby inciting investors to step in, ensuring an eventual resumption of the S&P 500 rally that Wall Street estimates will end the year around 8000 because AI will have expanded the pie fast and broad enough to beat the earnings beyond the tech sector.”

The week of June 1 brought key pieces of fresh labour data that showed that job openings were plentiful, new jobs had been created, and hourly compensation matched inflation, while productivity was keeping unit labour costs in check.

Unfortunately, mounting inflationary pressure, stemming from higher tariff rates and energy prices has tilted the misery index — which is the addition of the yearly increase in the consumer prices to 3.8% and the current unemployment rate to 4.3% — to an inflation content of 47%. That is too much for any responsible central banker to accept, if the growth path of the economy is to remain intact. In this connection, the likelihood of a Fed rate hike rose significantly, which in turn finally brought about the widely anticipated valuation adjustment. The S&P 500 booked a plummet for the week of 3.0% to 7485.

I realize that a price drop of such magnitude is nerve-racking, in part because President Trump said that he did not care about the mid-term elections even though his popularity has consistently and considerably declined. However, investors should not despair because economic conditions are still promising. First, the True Inflation Index, a measure of price changes in real time, is below the annual rate of 2.0% and trending down. Second, the Fed’s NowCasting economic models (New York and Atlanta) are pointing toward more than a 2.5% annual growth rate for both Q1 and Q2. Third, commercial energy producers are betting robustly that contract oil prices are heading to $75 a barrel. Fourth, the profit picture is appealing, consumer spending is holding up, business capital formation is booming, and energy export is growing. Fifth, the recent increase in bond yields has been caused mostly by higher real growth rather than inflation expectations. Sixth, the surge in initial public offerings (IPOs) has forced a reallocation of portfolio positions to the detriment of chipmakers; and seventh, the non-tech sector is doing reasonably well.

Put simply, the market will continue to be choppy, as it always is, but it should travel north to 8000 by year-end given that the US government may take equity stakes in forthcoming giant IPOs: OpenAI, Anthropic, SpaceX and others. In the meantime, in light of this week’s sell-off, investors should have some perspective: nothing keeps going up every single day, as Bernstein analyst Stacy Rasgon rightly says.

Copyright © Palos Management

International Business Machines Corp. (IBM) appears to be exhibiting strong technical characteristics at present, supported by a SMAX score of 10 out of 10, which may indicate broad confirmation across several SIA measures. Within the SIA Dow Jones Industrial Average Report, IBM is currently ranked 5th out of 31 and sits in the Favoured Green Zone, which suggests that its relative strength remains among the stronger profiles in that universe. Its movement higher in the rankings, up 18 positions over the past month and 23 over the past quarter, could indicate that investor interest and technical leadership have been improving.

The broader sector backdrop may also be supportive, with Computer Hardware ranked 2nd out of 31 sectors and positioned in the favoured area of the SIA Sector Report. IBM’s most recent Point and Figure signal, a Spread Triple Top, appears to reflect a positive breakout development, while the stock’s recent returns relative to the Dow Jones Industrial Average suggest that it has been outperforming its benchmark over shorter time frames.

From a support and resistance perspective, IBM’s Point and Figure structure provides several levels that may help define the current technical framework. Near-term support is identified at the 3-box reversal level of $298.95, which could serve as the first area to watch should the stock experience a pullback. Beneath that, additional support at $255.15 and $213.50 may indicate deeper areas where the broader trend could find stability if weakness were to develop. On the upside, resistance levels derived from Point and Figure vertical count methodology stand at $410.40 and $444.22. These levels should be viewed as potential upside objectives derived from Point and Figure methodology rather than forecasts. In technical terms, the recent Spread Triple Top signal may suggest that IBM has already overcome a prior congestion area, and these higher levels could now represent the next areas where the advance may begin to encounter greater supply.

IBM’s relative strength profile also appears notable when viewed in the context of its recent ranking progress and return comparisons. Its position near the top of the Dow Jones Industrial Average Report, together with its presence in the Favoured Green Zone, suggests that it remains one of the stronger technical names in that group. The rise of 18 positions over the past month and 23 over the past quarter may point to improving leadership characteristics.

Performance data further supports that view over the shorter term. IBM has gained 32.57% over the past month, compared with 2.40% for the Dow Jones Industrial Average, while its quarterly return of 25.52% compares with 4.51% for the benchmark. On a yearly basis, IBM has returned 18.20% versus 19.21% for the Dow, which may suggest that the stock’s strongest relative improvement has occurred more recently rather than consistently over the full annual period. In combination with the favourable sector ranking, these figures could indicate that IBM’s relative strength has been strengthening within both its index and sector context.

International Business Machines Corp. is a global technology company focused on enterprise software, cloud computing, and consulting services. The company has a long history in mainframe systems and infrastructure technology, while its more recent strategic emphasis has centred on hybrid cloud solutions and artificial intelligence, including business applications associated with its Watson platform. IBM generates much of its revenue from large corporate and government clients, and places considerable emphasis on recurring software and services revenue rather than consumer-oriented businesses.

Disclaimer: SIACharts Inc. specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment whatsoever. This information has been prepared without regard to any particular investors investment objectives, financial situation, and needs. None of the information contained in this document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. As such, advisors and their clients should not act on any recommendation (express or implied) or information in this report without obtaining specific advice in relation to their accounts and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. SIACharts Inc. nor its third party content providers make any representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein and shall not be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice.

For years, Canadian investors have been stuck with a binary choice: pay over 1% in fees to underperforming active managers, or settle for cap-weighted index funds that capture only part of what financial economics has learned over the past three decades. That gap just narrowed considerably.

Ben Felix, Chief Investment Officer at PWL Capital and one of Canada's most respected evidence-based voices in personal finance, breaks down the significance of the CIBC Avantis ETF launch — a suite of Canadian-listed, factor-tilted funds that Felix describes as categorically different from the "ETF slop" he has warned investors about. "These ETFs are not slop," Felix says directly. "And I'm going to tell you why."

The Problem With the Status Quo

Felix opens with a structural critique of how most Canadians still invest. More than 80% of the Canadian fund market, by year-end 2025 data, remains in actively managed products. The verdict on active management is not ambiguous. "Active management is, broadly speaking, a losing game," Felix says. "Active managers rarely outperform the market, especially over longer time horizons." The result: the vast majority of Canadian investors are paying well over 1% annually — mostly to the big five banks — and likely underperforming the market for the privilege.

The natural upgrade is low-cost cap-weighted index funds, and Felix endorses them unreservedly over active management. But his argument goes further. Index funds, while a dramatic improvement, are not the end state of portfolio construction. "Market cap weighted index funds are not perfect," he says. "They offer exposure to a single expected return premium, the market premium, but they ignore other well established return premiums that can be pursued systematically and at a low cost."

The Factor Framework

The theoretical backbone Felix deploys is the Fama-French valuation equation from their landmark 1993 and 2015 papers. Using the dividend discount model extended by Miller and Modigliani's dividend irrelevance theorem, Felix walks through three structural implications that define which stocks should have higher expected returns.

First, the value premium: a company with a lower price relative to book value must carry a higher discount rate — and therefore higher expected returns — all else equal.

Second, the profitability premium: if two companies trade at the same price, the one with higher earnings must have a higher discount rate.

Third, the investment premium: companies with lower expected asset growth carry higher expected returns, since aggressive reinvestment implies a lower required discount rate.

Felix is careful to flag that these factors cannot be evaluated in isolation. "A portfolio that focuses on profitability without controlling for relative price is likely to result in a portfolio of high priced growth stocks — think overpaying for growth," he says. "And a portfolio that focuses on value without controlling for profitability is likely to result in a portfolio of stocks with weak profitability — think cheap for a reason." The highest expected returns go to stocks that are simultaneously cheap and profitable. That joint targeting is exactly what Avantis implements.

Why the CIBC Launch Matters

Dimensional Fund Advisors has operated in this space since 1981, but their Canadian access is largely limited. Avantis — launched in 2019 by former Dimensional executives including former co-CEO and CIO Eduardo Repetto — operates inside American Century Investments, which manages over $300 billion. "Avantis is cut from the same cloth as Dimensional and is backed by a long standing and a large asset manager," Felix says. "They're not going to disappear."

The CIBC distribution partnership solves three structural problems for Canadian investors simultaneously: no currency conversion required, no double withholding tax on foreign stocks in TFSAs, RRSPs or taxable accounts, and a carve-out of Canadian equities from the international funds — a detail that matters for home country allocation construction.

The flagship product is CAGE, the Avantis CIBC All Equity Asset Allocation ETF — a single-ticker, globally diversified, factor-tilted portfolio. "This is a one stop shop for a low cost, broadly diversified portfolio that takes full advantage of the last 30 years of financial economics research," Felix says, "all in a single ticker, just like VEQT and XEQT."

The IPO Dimension

Felix adds a timely warning for index fund holders. Cap-weighted index funds are mechanically obligated to buy shares of newly listed companies when they enter an index — "very likely at high prices." With SpaceX, OpenAI, and Anthropic reportedly preparing for public offerings, the implicit cost of that mechanical buying could be material. Avantis, by contrast, only includes newly listed companies when sufficient financial data exists and the shares trade at an attractive price relative to their fundamentals. "They are well aware of the issues around index inclusion," Felix notes, "and they're careful not to get caught up in the mechanical price increases following index inclusion."

What Advisors Need to Hear

Felix closes with honest behavioural caveats. Factor tilts have underperformed — sometimes painfully, sometimes for years — and the US market's recent mega-cap dominance is a live example. "If you're worried about short term underperformance and even the possibility of long term underperformance, this approach may not be for you." The right fit depends on investor psychology, account types, tax situation, and time horizon. It's a portfolio management question, not just a product selection.

For advisors already building evidence-based portfolios, the arrival of single-ticker, Canadian-listed, factor-aware ETFs is a meaningful development. The execution complexity that once kept this approach out of retail hands has largely been removed.

5 Key Takeaways for Advisors and Investors

1.  Factor premiums are theoretically grounded, not data-mined. The value, profitability, and investment premiums derive directly from equity valuation theory — the same framework that explains why stocks outperform bonds. Advisors should be prepared to explain the why, not just the what.

2.  Value and profitability must be targeted jointly. Cheap stocks without profitability controls are cheap for a reason. Profitable stocks without valuation controls become overpriced growth bets. The interaction between these factors is where expected return improvement is most reliable.

3.  The CIBC Avantis launch removes the structural barriers that kept this strategy out of retail Canadian portfolios. No currency conversion, no withholding tax complications, and a single-ticker all-equity option make implementation significantly simpler than anything previously available to Canadian investors.

4.  Cap-weighted index funds carry an embedded IPO cost that factor funds avoid. With major private companies preparing to go public at likely elevated valuations, the mechanical index-inclusion buying process represents a real and underappreciated drag — one that Avantis is designed to sidestep.

5.  Behavioural fit matters as much as expected return math. Long periods of tracking error relative to cap-weighted benchmarks are not a bug in factor investing — they are an inherent feature. Advisors should pre-qualify clients on tolerance for interim underperformance before recommending a factor-tilted strategy, regardless of its long-run theoretical merits.

For Reference: The CIBC Avantis ETF lineup includes:

CACE: Canadian Equity ETF (0.19% management fee) – Moderate tilts across the total Canadian market.

CALV: US Large Cap Value ETF (0.25% management fee) – Focuses on larger US value companies.

CAUS: US All Cap Equity ETF (0.19% management fee) – US total market with mild factor tilts.

CAUV: US Small Cap Value ETF (0.35% management fee) – Heavy tilts toward the smallest, cheapest, most profitable US companies (high expected return, but high tracking error).

CADE: International Equity ETF (0.29% management fee) – Developed markets excluding Canada and the US.

CASV: Global Small Cap Value ETF (0.39% management fee) – Globally diversified small-cap value exposure.

CAEM: Emerging Markets ETF (0.39% management fee) – Factor-tilted exposure to emerging markets.

CAGE: All-Equity Asset Allocation ETF – A "one-stop shop" fund-of-funds (similar to Vanguard's VEQT or iShares' XEQT) that packages all these tilted ETFs into a single ticker.

Footnote:

1 Ben Felix. "Canada's New Evidence-Based ETFs." YouTube, 26 Apr. 2026, https://www.youtube.com/watch?v=Yts3o2EDO-Y.

Copyright © AdvisorAnalyst

Key Takeaways

• With the 10-year Treasury yield pulling back from 4.67% but still within its 4.0%–4.5% range, employment and inflation data remain the main drivers of bond market direction.
• Despite speculation that Bessent could shift issuance toward shorter maturities, large deficits and Treasury’s commitment to “regular and predictable” issuance make that unlikely.
• With supply pressures potentially returning in 2027, investors should consider a barbell approach to their fixed income portfolio.

The rise in U.S. Treasury (UST) yields, specifically the ten-year note, since late February has captured the attention of global investors in a very visible fashion. Just a couple of weeks ago, headlines were blaring that the UST 10-year yield had reached its highest level since the beginning of 2025, leaving market participants to wonder: What comes next?

‘What comes next?’ is actually a two-part question. The first aspect is determining whether the yield will rise further or has reached another peak and will begin to decline. Traditional and social media have been abuzz about the second aspect of the question, which centers on conjecture that the Trump Administration could implement a strategy to arrest further increases in—or ‘cap’—the 10-year yield.

However, before we address this part of the question, it’s important to look at the recent path of the UST 10-year yield and the reasons behind the movement.

Figure 1: U.S. Treasury 10-Year Yield

Recent Perspective

The 10-year Treasury yield has largely remained range-bound between 4.0% and 4.5% over the past three years, and we expect that trend to continue. While yields may overshoot or undershoot in the short term, they have consistently reverted to this range as markets react to changes in employment and inflation, the Treasury market’s primary drivers. Technical analysis currently still supports this range.

Notably, the sharpest yield spikes have come when strong economic data coincided with concerns about Treasury supply. First, in October 2023, the 10-year peaked at 4.99%. This was due to continued inflation pressures, a solid labor market and increased Treasury auction sizes. A similar dynamic occurred in January 2025, when the 10-year peaked at 4.79%. There was solid payroll growth, along with expectations that fiscal policy could increase the budget deficit and, therefore, Treasury supply.

More recently, the 10-year Treasury yield has fallen from its latest peak of 4.67% as headlines regarding a Middle East peace deal have taken center stage. The primary focus has been on developments in the Middle East and inflation. As in the 2023 and 2025 episodes, investors could face increased auction sizes in 2027.

What’s the Conjecture?

The media stories surrounding the UST 10-year yield have centered on Treasury Secretary Bessent implementing a policy whereby future coupon auction sizes are reallocated from longer-term maturities to shorter-dated issues. In other words, issue less in ten-year notes and instead increase auction sizes for a two-year note. The goal is to lessen the burden on the 10-year and potentially bring down its yield level or, at worst, place a ‘cap’ on any increase.

Feasibility?

Unfortunately, when the U.S. is running just under $2 billion in budget deficits, the Treasury has rather limited options with debt management strategies. In other words, it’s ‘all hands on deck.’ This point was underscored by Treasury’s recent borrowing advisory committee minutes where it stated that “nominal coupon auction sizes might next increase in early CY2027” with “Treasury to modify its forward guidance several quarters ahead of such a change.”

Another key point is that Bessent has stated that Treasury would maintain “regular and predictable” offerings of coupon securities in order to safeguard the UST market as a benchmark for stability. A policy pursued with another goal in mind could very well ‘spook’ global investors, who may view it as government manipulation of the yield curve.

Conclusion

While stories may continue to circulate on this front, we believe the more likely path is for Treasury to continue following the ‘regular and predictable’ policy that has been in place for many years. As for the direction of the UST 10-year yield, as is typically the case, the primary driver will remain upcoming employment and inflation data, with Treasury supply either adding to, or taking away from, the existing trend.

Last week we made the case that the inflection to watch is growth - not inflation - and that stronger growth raises the probability of a more hawkish Fed. Historically, that hasn’t been a problem for equities. But does it change leadership? A short-term chart making the rounds suggests it might: tech stocks have surged even as rates have moved higher, creating what looks like a widening “gap” versus their normally negative correlation. The instinct is to read that as vulnerability - higher rates should be a headwind for tech. But short-term correlations are notoriously unstable and riddled with confounding effects, and gaps don’t have to close the way we expect. Rather than assume the answer, we can let the data speak.

When we segment the environment by growth (strong vs. weak) and rates (higher vs. lower), the results push against the common narrative. Buckets with higher rates actually show better average alpha than those with lower rates. The best outcome – counterintuitively - is weak growth with higher rates, while strong growth with lower rates is the worst. The message is consistent with what we highlighted last week: rates tend to confirm growth rather than derail it. In today’s backdrop - solid growth alongside rising rates - the setup still points historically to favorable alpha for tech, ranking near the top of the distribution.

And that’s before layering in valuation. Despite the recent rally, tech remains in the lower half of its historical valuation range, a reflection of how strong earnings growth has been. Historically, cheaper starting points have translated into higher odds of outperformance, in part because risks - from capex cycles to AI-driven disruption - are already being discounted.

Add valuation to the growth-and-rates framework and both the historical odds and magnitude of outperformance improve, with probabilities in the mid-80% range. It’s not a guarantee, but the pattern is hard to ignore: when growth is intact and rates are validating that strength - and when valuations aren’t stretched - technology continues to look like leadership.

This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.

Copyright © Fidelity Investments

Last week, a viewer of the Morning Show emailed me about risk management for retirees. He asked the single most important question retirees face, and rarely get a straight answer to.

“From an already retired perspective, and as one whose stock allocation is typically held in various index funds, if you see a market correction approaching, would you recommend reducing market exposure, like maybe a 10% to 20% reduction? Once the correction is near or started, then re-enter if you are close to the bottom, or at least at the point that the market rises back through the point you sold. Many say just ride it out. I find it hard to watch an account balance drop $100K and not do anything to preserve capital. I thought you said one day you don’t like to do that either. Don’t ride it all the way down. Stop the drop?” – May 2026

He’s right. And the conventional advice he’s been given is wrong.

Risk management for retirees is not the same as market timing, and the financial industry has spent the better part of three decades blurring that distinction. The blur costs retirees real money, because by the time they figure it out, they’ve already sat through a drawdown they didn’t need to take.

So, why is the question of “should I just ride it out,” the same one that every retiree eventually asks? The “just ride it out” premise follows an age-old Wall Street narrative designed to keep you invested in the markets at all times. Why? Because that’s how they make money. The narrative is simple.

“Markets always recover. Trying to time the top is impossible. If you sell, you’ll miss the rebound. So stay fully invested through every cycle.”

That advice isn’t wrong for a 35-year-old with three more decades of contributions ahead of him. For someone in retirement, however, it’s a much harder argument to defend. A retiree isn’t adding new capital each month; rather, he is either close to, or is, drawing income out. The following is the more crucial aspect of “time.”

A drawdown that a young saver can dollar-cost average through becomes a sequence-of-returns problem for the retiree, because every dollar withdrawn during a bear market is a dollar that can never compound back.

That reality changes the calculus completely. The reader who emailed me has already figured this out instinctively. Watching a six-figure decline feels different when you’re no longer earning a paycheck to replace it.

His reaction isn’t weakness; it’s the correct response to a real risk.

Risk Management Is Not Market Timing

First, we need a real understanding of what “risk” is. As discussed in “Portfolio Risk Management: The Hard Truth.”

“Volatility may feel like danger, but it is often simply price movement around a trend. Actual risk lies in permanent capital loss, overconcentration, or misalignment with one’s time horizon and objectives.” –

Here’s the distinction between market timing and risk management that matters, because most retirees don’t realize there’s a difference.

Market timing is binary. You sell everything at what you believe is the top, hold cash, wait for what you believe is the bottom, then buy everything back. The strategy fails not because the signals don’t exist, but because the psychology of getting back in is brutal. We’ve seen it in every cycle since 1987. Investors who go to cash almost never redeploy at lower prices. They wait for confirmation, and by the time they feel confirmed, the index is well above where they sold. So they sit. And they miss the recovery. They end up worse off than if they’d done nothing at all.

Risk management is a graduated process, not a switch. When conditions deteriorate, you reduce equity exposure modestly. Maybe 10%. Maybe 20%. Cash isn’t the destination. Staying invested matters because a sharp reversal to the upside shouldn’t leave you stranded on the sidelines. The proceeds go into something that earns yield while you wait, like short-duration Treasuries or a money market currently paying north of 4%. That leaves room to add exposure back when the setup improves.

I went through this distinction in detail in Correction Continues: The Value Of Risk Management. The key insight is that going to zero exposure is just market timing with extra steps. Maintaining some equity exposure while reducing risk produces materially better outcomes than either extreme.

The Math Of Loss For Retirees

Here’s where the math gets uncomfortable, especially for someone withdrawing income from a portfolio.

• A 10% drawdown requires an 11% rally to break even. Not bad. Manageable.
• A 20% drawdown requires a 25% drawdown.
• Push the loss to 30%, and you need 43%.
• At 50%, the market has to double.

That asymmetry isn’t a statistical quirk. It’s the math of compounding in reverse. The deeper the hole, the steeper the climb. And the climb gets steeper at an accelerating rate as the drawdown grows.

For a retiree, this matters in a way it doesn’t for a younger investor, because the retiree is taking distributions during the climb. Every dollar pulled out during the recovery is a dollar that doesn’t participate in the rebound. The portfolio that drops 30% and then withdraws 4% annually through the recovery period doesn’t actually break even at a 43% rally. It needs significantly more.

I’ve made this point before, and I’ll keep making it. Capital preservation isn’t optional once you’ve stopped earning income. It’s the single most important variable in the equation. We covered the underlying logic in detail in Investing Lesson Of Math Learned The Hard Way, and nothing about that math has changed.

And the math is actually worse than advertised. There’s a piece most retirement plans don’t show you.

Investors are told that markets compound over time. Therefore, just save consistently, hold equities, let compounding work, and you’ll get to your number. The problem is that a market loss breaks that compounding. What actually compounds, year after year, is the required rate of return needed to reach a financial goal. A 10% loss followed by an 11% gain returns the portfolio to even, but not the portfolio objective. Let me explain.:

If you needed a 6% return that year to stay on track, you didn’t just lose 10%, you also lost the 6% you should have earned, and that gap compounds for every remaining year over the horizon. Add a 4% annual withdrawal during the decline, and the math goes from bad to ruinous.

The chart above traces this for a $1 million portfolio invested at the start of 2000. The gold line shows what an 8% annual compound return, the assumption that fills most retirement projections, would have produced. Beside it, the navy line traces what the S&P 500 actually delivered on a total return basis. Below them, the red line shows what a retiree experienced who started drawing $40,000 a year from the same portfolio over the same period.

Notice that the S&P 500 caught up to the 8% expected line over the full 26-year window. From a buy-and-hold perspective, the market roughly delivered on the plan’s promise. From a retiree’s perspective, however, the same period destroyed close to three-quarters of the wealth the plan was supposed to provide. The S&P 500 finished where it was supposed to. The retiree did not. That gap is what disciplined risk management is supposed to protect against.

Watching a six-figure decline and doing nothing isn’t discipline. It’s denial.

The “Just Ride It Out” Counterargument

However, let me steel-man the “just stay invested” crowd, because the argument isn’t crazy, it’s just incomplete.

The buy-and-hold camp is right about one thing: the vast majority of people who try to time markets fail badly. The Dalbar QAIB study has shown for years that the average retail equity investor underperforms the S&P 500 by something like three to four percentage points annually, and the gap widens during periods of high volatility because investors panic at exactly the wrong moments. That gap is real, and it’s a strong argument against active management for the average investor.¹

However, here is where the argument breaks down. The Dalbar study measures emotional reactions, not disciplined risk reduction. The investors who underperform aren’t the ones who trimmed exposure modestly after a deterioration in market internals. They’re the ones who sold everything in March 2020 after the index was already down 35%, then waited until July 2020 to buy back in. Those are two different behaviors. Lumping them together is how the industry talks retirees into accepting drawdowns they don’t have to accept.

The other problem with “just ride it out” is that it assumes the investor’s time horizon matches the bear market’s recovery period. For a 30-year-old, that’s a safe assumption. For someone in their 70s taking distributions from the portfolio, it isn’t. The S&P 500 took roughly 13 years to recover its 2000 peak in real terms. That’s longer than many retirees have, and certainly longer than they can afford to wait without depleting capital.

How To Reduce Exposure In Practice

Practically speaking, here’s how a retiree using index funds can apply risk management without falling into the market-timing trap.

• Start with your target allocation. If the financial plan calls for 60% equities, that’s your baseline. You don’t need to overthink it.
• From there, define the conditions that warrant reduction. Examples include a meaningful violation of the 40-week moving average, a collapse in market breadth, sentiment readings at historical extremes, or yield curve dynamics that historically precede recessions. These aren’t guesses. They’re observable conditions you can monitor without watching financial television every morning.
• When those conditions cluster, trim your target equity allocation by 10% to 20%. A 60% baseline becomes 45% to 50%. The proceeds are invested in short-duration Treasuries or a money market. Sitting in cash earning nothing isn’t the goal. Earning yield while you wait is. Importantly, you’re not trying to predict where the market goes next. You’re acknowledging that the distribution of outcomes has shifted, and you’re sizing your exposure accordingly.
• Most critically, write the rules down before you need them.

The moment to decide on your risk-reduction protocol is not during a 5% selloff with red headlines on every screen. Write the rules in calm conditions, then follow them mechanically when conditions deteriorate. That’s the behavioral discipline I argued for in our 15-Risk Management Rules To Wind The Long-Game.

How To Get Back In Without Catching A Falling Knife

The exit isn’t the hard part. The re-entry is.

The viewer’s instinct in his email was to wait until the market “rises back through the point you sold.” That’s reasonable as a rule of thumb, and better than no rule at all. I’d suggest something even simpler and more mechanical.

1. When the S&P 500 reclaims its 40-week moving average from below after a correction, that’s historically a high-probability moment to add exposure back. It won’t be the exact bottom. The market will already have rallied 8% to 12% off the lows by the time the moving average reclaim triggers. That’s the point. You’re not trying to catch the bottom. You’re trying to participate in the recovery while avoiding a false signal.
2. Add the exposure back in tranches rather than all at once. If you trimmed 15% off your equity allocation on the way down, add 5% back on the moving average reclaim, another 5% on a successful retest of the moving average from above, and the final 5% when breadth and volume confirm the trend. This isn’t precision timing. It’s graduated participation, and it solves the psychological problem that destroys most attempts at active risk management.

Does this process get you out at the exact top and in at the bottom? No. You will always be late; however, what should be evident is that over time, the process can help you safely navigate market risk.

The reason this works is the same reason most market timers fail. By the time the average investor feels safe enough to redeploy capital, the index is well above the price at which they sold. The 40-week moving average rule forces a decision before that emotional certainty arrives. You add exposure when the rule says to, not when financial television says to.

What This Looks Like Right Now

The reader wrote in at a useful moment in the cycle. We laid out the current case in detail in Market Correction Risk: Why Summer 2026 Looks Risky, and the short version is this. The S&P 500 hit all-time highs in May and has recorded 9 consecutive weeks of gains. This is occurring even as the median stock in the index sits 13% below its 52-week peak, breadth remains weak, and positioning is stretched. Seasonality is the worst window of the year. Historically, the political cycle is the worst year for equities.

None of that guarantees a correction this summer. What it does is shift the distribution of outcomes. The reward for staying maximally aggressive at this point in the cycle is small. A 20% to 30% drawdown for a retiree can be permanent. That’s the kind of asymmetric setup where modest risk reduction earns its keep, even if the correction doesn’t arrive.

The investors who survive long market cycles aren’t the ones who catch every uptick or the ones who worry about “beating some random benchmark index.” They are, however, the ones who refuse to be wiped out when the setup turns against them. Here is the most important lesson to take away from this article.

Underperformance can be made up over the next 12 to 24 months. Lost capital cannot.

That asymmetry should drive every exposure decision a retiree makes right now.

So the reader who wrote in is right. He’s been listening. He’s been doing the work. His instinct to reduce exposure modestly in front of an unfavorable setup isn’t panic. It isn’t market timing. It’s risk management, and the difference matters.

Copyright © RIA

Dear fellow investors,

Recently, we had dinner with some of our grandchildren and they ordered macaroni and cheese. The recent advertisement goes, “Kraft Mac and Cheese, the best thing ever!” For most investors in the stock market, the S&P 500 Index has been the best thing ever over the last 17 years and terrific since the bottom of the stock market in 1982. History would argue that investing in popular securities and heavily concentrated versions of the S&P 500 over history has been the worst thing ever for investors!

Here are some of the most concentrated markets in the past two centuries:

Some of the worst market declines in history have occurred in our 45 years in the stock market (1987, 2000-2003, 2007-2009 and 2020). However, the 1987 and 2020 declines lasted just 78 and 60 days and fully qualify as cases of fast death. The other two were 50% declines in the S&P and, in 2000-2003, included NASDAQ annihilation. Nobody survived the 85% decline in Amazon’s stock from December 27, 1999, to the bottom in 2003. Therefore, since 1981, when long-term Treasury interest rates peaked at 15%, the S&P 500 Index has had a massive tailwind from the reduction in the risk-free interest rates. Cheap stocks in 1982 and constantly declining interest rates were the BEST THING EVER!

Where are we now? Interest rates are rising, and probably the only thing that would bring those interest rates down would be a massive sell-off in the S&P 500 Index. Why do we say that? We say it because that is where the money is, and it won’t move to safety until the Index gets slaughtered. The Index will get slaughtered because it is massively over-weighted in technology and tech-related stocks to the tune of 50%.

Michael Hartnett, Managing Director and Chief Investment Strategist at BofA Global Research, says this is even starting to dwarf what happened in 2000: “What makes the current advance particularly striking is not the level of the major indices but the extraordinary narrowness beneath the surface. The S&P 500 may be printing fresh highs, yet only 21 companies, roughly 4% of the index, are making new highs alongside it, he stated.” Hartnett notes that the number was almost identical at the peak of the dot-com bubble in March 2000.

We know that Charlie Munger said, “Envy is a really stupid sin because it’s the only one you could never possibly have any fun at.” When Bezos asked Buffett in a recent conversation why more people don’t simply copy his straightforward investment thesis, Buffett bluntly replied, “Because no one wants to get rich slowly.” We are going to trust patience and avoid envy until this phase breaks.

What can do well in this monstrously expensive S&P 500 Index in a decade of heartache? Look no further than the 1970s. The Yom Kippur War came right after the top in the Nifty-Fifty concentrated bubble stock market:

We are expecting inflation in energy prices and a decline in interest rates when the poop hits the AI mania fan. For these reasons, we are overweight in oil stocks and home builders. These industries prospered in the 1970s, once the stock market mania broke in late 1972!

As always, play the long game!

William Smead

The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, Chairman & CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.

©2026 Smead Capital Management, Inc. All rights reserved.

This Missive and others are available at www.smeadcap.com

Key takeaways

• Economic growth is rebounding, but consumers are becoming strained by negative real wage growth, weak savings, and rising energy costs.
• Inflation remains sticky, with energy and artificial intelligence-driven capital expenditures (capex) adding to already elevated core services inflation.
• Earnings are driving the bull market, but market leadership is narrow and concentrated in artificial intelligence (AI) and energy-related sectors.
• Markets may be vulnerable to disappointment with stretched positioning, a thin equity risk premium, and rising bond yield pressure.

As is typically the case with our mid-year outlook, we like to take stock of the expectations we had at the beginning of the year when publishing our full-year outlook. Starting with the overall growth picture, one of the themes we had higher conviction on was a continued heavy lift from the private sector—namely, the ongoing expansion in the capital expenditures (capex) cycle related to artificial intelligence (AI). So far, that has played out to a healthy degree for headline economic growth. As shown below, real gross domestic product (GDP) growth has rebounded from its recent soft patch at the end of 2025 and is expected to look solid in the second quarter.

Per the nowcast from the Atlanta Fed's GDPNow model, real GDP growth is currently tracking at 3% (on a quarter-over-quarter annualized basis) in the second quarter. Importantly, a nowcast is not a forecast. The Atlanta Fed is not necessarily projecting a growth rate, but rather taking in data on a rolling basis and estimating what GDP is for the given quarter.

GDP continues to recover

Source: Charles Schwab, Bloomberg, Federal Reserve Bank of Atlanta, as of 6/1/2026.

Yellow bar represents Atlanta Fed's latest GDPNow forecast for 2Q26. GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter.

Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Forecasted future performance is not a reliable indicator of future results.
Since a good chunk of second-quarter data was still unavailable when this report was published, we think the current nowcast needs to be taken with a grain of salt—not least because of the current estimate for consumer spending. The chart below breaks out the key subcomponents of GDP and their contributions to growth. As shown, personal consumption is looking quite strong for the quarter but we think that could weaken further if higher energy prices persist and put more pressure on affordability.

Indeed, inflation-adjusted wage growth is currently in negative territory and the savings rate is about half of what it was right before the last meaningful inflation spike driven by Russia's invasion of Ukraine in 2022. Today's consumer—especially those populating the bottom part of the economy's K shape—is in a weaker spot. We don't expect affordability concerns to fade if the Strait of Hormuz remains effectively closed throughout the summer, mostly because of the likely persistence of higher energy prices.

GDP breadth improving

Source: Charles Schwab, Bloomberg, Federal Reserve Bank of Atlanta, as of 6/1/2026.

GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Forecasted future performance is not a reliable indicator of future results.

Despite real wage growth being negative, the main message from the labor market over the past year has been that a high and rising total number of nonfarm payrolls has mattered more than a slowdown in how many jobs are being created on a monthly basis (a differential we highlighted in our full year outlook). Our focus on layoff activity as a driver of labor views has thus far worked, as the labor market has shown signs of stabilization this year. We were, however, wrong on the slight upward pressure we expected for the unemployment rate. Labor weakness has continued in a rolling fashion at the industry level, not the broad economic level, leading to a relatively stable unemployment rate.

Looking to the back half of the year, we remain focused on layoff activity and will continue to let leading indicators like jobless claims and job postings drive our view. One gap worth monitoring, though, is the recent split between nonfarm payrolls (which come from the establishment survey) and household employment. As shown below, the latter has continued to weaken on a six-month average basis while the former has stabilized. At key turning points in economic cycles, household employment tends to be "right" in the end. We also recognize, though, that it's much more volatile than the establishment survey—even sending some false signals in 2024.

Another survey divergence

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 4/30/2026.

Y-axis is truncated for visual purposes.

The recent decline in real wage growth is not nearly as bad as it was in 2022 and 2023 when the inflation rate was higher. However, consumers will continue to feel a pinch, especially because the pace of job creation today is well below where it was in the prior inflation shock. Not much about that is encouraging, but if there is a silver lining, it's that the labor market isn't generating much inflation pressure right now—which is a key difference from a few years ago. That can be seen via the easing in unit labor cost growth over the past year, shown via the orange line in the chart below.

Little labor inflation pressure

Source: Charles Schwab, Bloomberg. Real average hourly earnings as of 4/30/2026. Unit labor costs as of 3/31/2026.

Unit labor cost growth can remain benign as long as the hiring environment stays in its lukewarm state. We continue to see a stagnant backdrop for labor demand, evidenced by the hiring rate being near a multi-decade low and job postings not rising much over the past six months (shown via the Indeed data in the chart below). Low initial jobless claims are normally consistent with a tight labor market, but in this unique cycle, they haven't been consistent with strong hiring activity. In short, we don't see the low-hire, low-fire backdrop dramatically changing in the back half of the year.

Low firing, barely any hiring

Source: Charles Schwab, Bloomberg, Department of Labor, as of 5/22/2026.

The Indeed Job Postings Index is built from a 7-day moving average of job postings, with the index set to 100 on February 1, 2020.

Inflation vs. "inflation"

Coming into 2026, we expected inflation to be top of mind, albeit not as much on the energy front because—frankly—we did not have the United States-Iran war on our list of expectations. Needless to say, inflation has jumped to the top of the list of concerns, chiefly because of the rapid increase in energy's contribution to both the consumer price index (CPI) and personal consumption expenditures (PCE) price index (the Federal Reserve's preferred inflation gauge). As shown below, the jump is not only notable because of how much energy is now contributing to headline inflation, but also because of how stark a departure it is from the negative contributions over the past few years.

Energy's stark rise

Source: Charles Schwab, Bloomberg, as of 4/30/2026.

Even outside of the energy complex, we are not optimistic about inflation easing meaningfully in the back half of the year. There is a broadening base of pressure from various segments of the economy. Notably, as shown below, PCE core services excluding housing has settled into a new, uncomfortable range above 3% year-over-year (y/y). In April, the pace picked up to 3.5% y/y. Given this metric excludes any direct effects from tariffs and the energy sector, it gives us a clear view into the sticky nature of inflation, as well as how difficult it will be for the Fed to get to its 2% target anytime soon.

"Supercore" inflation stays sticky

Source: Charles Schwab, Bloomberg, as of 4/30/2026.

In the past several months, an increasingly dominant factor in the inflation surge has been a basket of goods and services tied to the AI buildout. From computer equipment to software, we are seeing meaningful momentum as the capex cycle continues its march. The rub is that these components' contributions to inflation make the Fed's job increasingly difficult. Software, for example, has a much larger weight in the PCE Price Index versus the CPI, which means its presence is much more dramatic in the PCE, as you can see in the chart below.

AI's growing inflation role

Source: Charles Schwab, Bloomberg, as of 4/30/2026.

AI's growing role in the inflation story is tricky since it represents a demand shock, which is happening alongside a major supply shock (the Iran war). We expect both to continue to weigh on consumer attitudes. While it might be hard to envision them getting worse from here, we wouldn't put the odds that low. As shown below, there is still a major gap between the actual (blue line) and expected (orange line) misery indexes (which combine the unemployment rate and y/y CPI). However, the former has started to drift higher, thanks to the recent climb in inflation.

We don't expect the actual index to climb into double-digit territory this year, but given the growing public pushback against data center construction, frustration with higher gas prices, and fear of AI consuming job opportunities, consumer sentiment is likely not set to see a major improvement any time soon. We like to remind investors that how the average consumer experiences inflation is vastly different than how Wall Street analyzes inflation. Main Street does not obsess over y/y changes in CPI, it cares about price levels, labor opportunities, and living wages.

Economic concerns are not fading

Source: Charles Schwab, Bloomberg, The Leuthold Group, University of Michigan (UMich).

Misery Index as of 4/30/2026. "Expected" Misery Index as of 5/31/2026.

Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

Bull market rages on

In our full-year 2026 outlook, we expressed optimism about a long runway for the AI buildout. We also anticipated that the strong run by stocks in the lead-in to 2026 could be met by a corrective phase. Although the S&P 500 avoided an "official" correction in March, the churn and rotation under the surface of index returns has been stark: the average S&P 500 member maximum drawdown has been -21% year-to-date.

In our full-year outlook we also highlighted "leapfrog effects," expecting a less obsessive focus on cohorts like the Magnificent 7. We also expected a broadening out in terms of leadership—or those with less concentration and greater participation among S&P 500 stocks. That held true until the war with Iran kicked back in a highly concentrated phase of leadership. Finally, we also expected continued strength in S&P 500 earnings.

The bullish case for U.S. equities entering the second half of 2026 rests on a foundation of earnings that have defied virtually every cautious forecast laid out at the start of this year. Wall Street analysts now project S&P 500 earnings growth of 25% for the full calendar year, up from less than 16% at the start of the year. The chart below shows the massive surge in earnings that occurred during first quarter 2026 reporting season, as well as each subsequent quarter and the full year (in turquoise).

2026 earnings estimates have surged

Source: Charles Schwab, London Stock Exchange Group Institutional Brokers' Estimate System (LSEG I/B/E/S), as of 5/29/2026.

Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

The pattern of estimate improvements is atypical as analysts have, more often than not, historically revised estimates lower as the year progresses. The improvement is not even across sectors, however. Relative to the start of the year, the largest jumps in expectations have been among the Energy, Materials, Technology, and Communication Services sectors (three of which we have favorable views on per our latest Sector Views); while the Consumer Discretionary, Consumer Staples, Health Care, Industrials, and Real Estate sectors now have lower estimates than at the start of the year.

Earnings growth rates as high as what's expected this year are rare outside of periods when the economy was emerging from recessions…not in year seven of an economic expansion. The chart, courtesy of our friends at Ned Davis Research (NDR), utilizes generally accepted accounting principles (GAAP) earnings growth and shows that when year-over-year earnings growth has exceeded 20%, S&P 500 returns have been somewhat anemic. The reason is that investors anticipate that companies will be unable to maintain a lofty pace of growth in the future.

Earnings: too good to be true?

Source: ©Copyright 2025 Ned Davis Research, Inc.

Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html, as of 5/29/2026.

GAAP stands for generally accepted accounting principles. Blue dotted lines represent y/y earnings growth readings shown in table. Gray shaded area indicates estimated earnings growth for 2026. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

Another rub to strong earnings growth is the concentration of that growth among AI-related leaders and the commodity/energy space. The full-year estimate of 25% S&P 500 earnings growth is driven disproportionately by a handful of high-momentum and individual stocks. In Communication Services, Alphabet (Google) is the largest single driver. In Technology, the outsized expectation is concentrated among Sandisk, Micron, Intel, and Broadcom. Only the Energy sector has notable breadth in terms of contributing stocks.

This is the AI earnings circular financing problem (about which we wrote in the full-year outlook) wearing a second-half outfit: the very companies that need continued hyperscaler capex to justify their earnings trajectories are the same companies whose results underpin the index. Note that hyperscalers are companies that design, own, and operate a large portion of data center networks to provide cloud computing at scale. AI infrastructure stocks have seen 2026 earnings estimates revised higher by more than 50% since December 2024, while the S&P 500, excluding AI infrastructure, has seen estimates move down slightly. That divergence is difficult to dismiss.

One way to remove the impact of outliers is to look at the median index stock. Per NDR, the median one-year forward estimate for S&P 500 stocks is nearly 13%. As shown below, that remains in a zone where the index has risen at a double-digit annual rate, on average. We will be keeping an eye on whether the median growth rate accelerates to a level that has been unsustainable in the past, but for now this is a positive.

Median earnings growth in good shape

Source: ©Copyright 2025 Ned Davis Research, Inc.

Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html, as of 5/31/2026.

Blue dotted lines represent expected EPS growth readings shown in table. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

From a valuation perspective, there is also good news as the forward price/earnings (P/E) ratio has actually moved slightly lower so far this year. An improving forward P/E alongside rising earnings estimates suggests investors are not pricing in stronger earnings growth in perpetuity.

Halitosis of note

Notwithstanding a lessening of valuation risk, market performance remains highly concentrated, with limited participation under the surface of the capitalization-weighted indexes. Shown below, only about 17% of stocks within the S&P 500 have outperformed the index itself over the past month, which is one of the lowest readings in the past decade, suggesting a possible rebound in participation. A more sustainable broadening out of market performance—like we saw pre-Iran war—would likely require an end to the war and a "permanent" re-opening of the Strait of Hormuz.

Looking for breadth rebound

Source: Charles Schwab, Bloomberg, as of 6/2/2026.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

AI all the time

We remain optimistic about AI, and trends in the space have broader economic implications. Per a recent Apollo Global note, semiconductor chips go into virtually everything manufactured, including automobiles, appliances, industrial equipment, and mobile phones. When manufacturers plan to ramp up production, they order chips first; often six to 12 months in advance due to long lead times. As shown below, chip demand therefore anticipates broader manufacturing demand. We also remain optimistic on U.S. manufacturing.

Chip demand bodes well for manufacturing

Source: Charles Schwab, Apollo, Bloomberg, Institute for Supply Management (ISM), as of 5/31/2026.

The Philadelphia Stock Exchange Semiconductor Index (SOX) is a modified capitalization-weighted index comprised of companies that are involved in the design, distribution, manufacturing, and sale of semiconductors. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

One of the striking structural features of the current AI investment cycle is the widening spread between hyperscalers' share of S&P 500 capex and their share of S&P 500 net income. The four largest hyperscalers—Amazon, Microsoft, Alphabet, and Meta—collectively spent north of $400 billion in 2025, nearly 70% more than in 2024, according to Goldman Sachs. As shown below, with total S&P 500 capex having nearly doubled since 2021, the hyperscalers' share of aggregate index capex commands an outsized, and rapidly growing, slice. Yet, their share of index-level net income, while also elevated, has not kept pace.

Hyper hyperscalers' capex

Source: Charles Schwab, Strategas, as of 3/31/2026.

Hyperscalers represent Alphabet, Amazon, Meta, Microsoft, Oracle. All names and market data shown are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance does not guarantee future results.

Goldman Sachs estimates that the largest hyperscalers will spend nearly $800 billion on capex this year, a more than 80% increase from last year, and another more than $900 billion in 2027. Hyperscalers' capex is on track to reach about 75% of the companies' cash flows, a ratio reminiscent of tech company spending in the late 1990s. The result is a structurally negative and widening spread, with hyperscalers claiming a dramatically larger share of the index's investment dollars than of its earnings dollars. This does raise questions about return on invested capital, the durability of free cash flow, and whether the market's valuation of these companies already prices in a monetization trajectory that has yet to materialize.

Supply chain vulnerabilities also represent a meaningful but often underappreciated risk to the AI infrastructure buildout. The concentration of advanced semiconductor manufacturing—particularly leading-edge logic and memory—in a narrow geographic corridor spanning Taiwan, South Korea, and the Netherlands creates single points of failure that geopolitical tensions could rapidly expose. Investors pricing in a smooth, multi-year AI ramp-up may be underweighting the fragility embedded in that assumption.

Sentiment sorrow

The consumer sentiment backdrop offers a different kind of complexity. As shown below, the University of Michigan Consumer Sentiment Index has plunged to a record low, largely driven by the war in Iran and the impact on the cost of living. That kind of reading—which is below every recession trough in the survey's 75-year history—would normally be treated as a bearish signal for equities. Yet, the S&P 500 has continued to grind higher. A simple explanation is that consumer sentiment measures how people feel, while the stock market reflects what investors expect.

K-shape's poster child

Source: Charles Schwab, Bloomberg, University of Michigan, as of 5/31/2026.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

Equity ownership is heavily concentrated among higher-income households, and stock returns are being disproportionately driven by a relatively small group of mega-cap AI-related stocks. Investors are focusing on earnings, productivity gains from AI, and future cash flows. Consumers are still facing the cumulative effects of inflation and, as noted earlier, they tend to anchor on price levels, not inflation rates. Asset owners and non-asset owners are experiencing very different economies. Consumer sentiment signals capture economic stress that equity markets are structurally insulated from…at least for now.

That insulation comes with its own risks. According to the Federal Reserve, the share of equities in household financial assets has reached more than 47%, nearly tripling from the 2008 financial crisis low, as shown in the chart below. At that level of exposure, any meaningful correction by stocks likely wouldn't "stay" in portfolios—it would likely flow through to consumption as well. The "wealth effect," which has long been a tailwind, could become a transmission risk.

Households' lofty equity position

Source: Charles Schwab, Bloomberg, Federal Reserve, as of 12/31/2025.

Stocks represent directly held equities and indirectly held equities, which include life insurance companies, private pension funds, government (federal, state, local) retirement funds, and mutual funds.

Real household wealth excluding stocks has been far more tepid due to housing contributing less and real income growth constrained by above-average inflation. The stock market is effectively carrying the household balance sheet, which works until it doesn't.

Stocks carrying household wealth

Source: Charles Schwab, The Leuthold Group, as of 4/30/2026.

Real wealth effect ex stock market represents the 3-month average of the midpoint between the S&P Cotality Case-Shiller 20-City Home Price Index and per capita disposable income minus annual CPI rate. The S&P Colatility Case-Shiller 20-City Home Price Index covers 20 major U.S. metropolitan areas and is a key indicator of the U.S. housing market.

Investor positioning corroborates the vulnerability. Goldman Sachs' proprietary Risk Appetite Indicator—shown below—now sits in the 99th percentile of all observations since 1991. Historical analogues to this reading show S&P 500 forward returns running below historical averages out to 12 months. The signal is that markets are likely priced for continuation, not for disappointment.

Risk appetites in lofty territory

Source: Charles Schwab, Bloomberg, as of 6/1/2026.

The Goldman Sachs Risk Appetite Indicator, expressed as a z-score, is a proprietary market sentiment tool that measures investor psychology and willingness to take on financial risk. A reading of 1 or higher indicates risk-on sentiment or extreme bullishness. A reading of -1 or lower indicates risk-off sentiment or extreme bearishness. A z-score measures exactly how many standard deviations a specific data point is above or below the average of a data set.

The bond market is adding a dimension to this calculus as well. The 10-year Treasury yield recently jumped above 4.6% before retreating a bit. On the eve of the start of the war with Iran, the yield was sub-4%, with the yield surge since then driven by a combination of inflation risks and growing government debt issuance competing for capital. These moves have led to the correlation between equities and bond yields to turn deeply negative again, as shown below. That means that both stock prices and bond prices (which move opposite to yields) are moving in the same direction.

Sharp inverse yields/stocks correlation

Source: Charles Schwab, Bloomberg, as of 6/2/2026.

Correlation is a statistical measure of how two investments have historically moved in relation to each other, and ranges from -1 to +1. A correlation of 1 indicates a perfect positive correlation, while a correlation of -1 indicates a perfect negative correlation. A correlation of zero means the assets are not correlated. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance does not guarantee future results.

The equity risk premium is historically thin, meaning stocks offer only a small return advantage over Treasuries. AI-driven earnings growth might continue to offset higher yields for now, but a sustained 10-year yield approaching or exceeding 5% may raise correction risk.

Warsh test?

Sitting at the intersection of all of this is a new Federal Reserve chair potentially facing his first formal test. The selloff in U.S. Treasuries recently took some yields—like the 30-year yield—to their highest level in years, spurring a budding narrative that markets are "testing" new Fed Chair Kevin Warsh. This is a pattern with history behind it. New Fed chairs, as shown below, have reliably faced an early market probe of their inflation credibility and policy tolerance.

Market tends to test new Fed chairs

Source: Charles Schwab, Bloomberg, as of 5/31/2026.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results. 

The new chair is not the same as the old chair. Markets had become accustomed to former Fed Chair Jerome Powell's communication style, which was generally seen as market-friendly. The Warsh tenure may usher in more market volatility given his known skepticism of the Fed's balance-sheet footprint, and his preference for tighter communication discipline.

Other risks that could drive volatility episodes:

• High bar for forward earnings expectations and some accompanying sentiment froth.
• Longer-than-anticipated closure of the Strait of Hormuz, which would further entrench troubling inflation trends, impact the demand side of global growth, and cause further supply chain pressures.
• Private credit concerns spreading into the public markets.
• Massive size of pending initial public offerings (IPOs) leading to passive investment vehicles trimming existing mega-cap holdings to make room for new entrants.
• AI's benefits to productivity under-shooting expectations.

In sum

Considering the interplay between economic trends and stock market behavior, the second half of 2026 is presenting investors with a bit of a split verdict. The earnings backdrop is the strongest it has been in years and although it is concentrated, it is not a mirage. The economy and labor market have remained resilient. However, the index-level signal from the stock market is obscuring a more complicated picture: concentrated earnings growth, record household equity exposure, consumer sentiment at historical lows for everyone outside the stock market, a bond market that's increasingly competitive with equities on a risk-adjusted basis, and a new Fed chair who may not feel inclined to rescue a richly valued market at the first sign of stress. We think that the bull case has real substance. So does the case for managing it carefully.

Copyright © Charles Schwab & Company Ltd.

In their December 2025 whitepaper, Meketa's Ryan Lobdell and Lauren Giordano offer a rigorous dissection of trend following strategies — what they are, why they work, how they're built, and what role they play in a diversified portfolio. The picture that emerges is of a strategy that is misunderstood as often as it is underutilized.

The Core Idea: Follow the Price, Not the Story

Trend following is structurally simple. Buy what's going up. Sell what's going down. Bet that momentum persists. What makes it powerful is the systematic discipline behind it — no overrides, no opinions, no anchoring to fundamental value.

Lobdell and Giordano define it plainly: trend following strategies "capitalize on persistent price movements by systematically buying assets rising in value and selling those declining, without relying on market fundamentals or subjective judgment."

The strategies trade primarily through futures and forwards across equities, fixed income, commodities, and currencies — the most liquid markets in the world. Some managers layer in alternative exposures: VIX contracts, Bitcoin futures, credit default swaps. The universe is wide, and so is the dispersion of approaches within it.

Why Markets Trend: Three Structural Reasons

Markets don't trend by accident. Lobdell and Giordano identify three structural engines. Behaviorally, information is slow to get priced in — herding, feedback loops, and confirmation bias extend and amplify moves beyond what fundamentals justify. Economically, hedging activity by corporate actors — airlines buying oil futures, utilities locking in energy costs — creates sustained directional flows. Institutionally, embedded stop-losses and delta hedging mechanisms force price-amplifying trades at scale.

The authors suggest thinking of these not as competing explanations but as a mosaic: "Market trends likely develop because of many of these explanations and do so in different weights, at different times, and through different security types."

Crisis Alpha: The Strategy's Defining Feature

The most compelling case for trend following is what Lobdell and Giordano call "crisis alpha" — the tendency to generate positive returns precisely when equities are in freefall. The data is unambiguous. The SG Trend Index posted strong gains during the dot-com collapse, the Global Financial Crisis, the COVID shock, and the 2022–2023 rate hike cycle.

Since January 2000, the SG Trend Index has delivered a 4.9% annualized return — above the Bloomberg US Aggregate Bonds' 4.0% and below the MSCI ACWI's 6.2% — with an average correlation of -0.10 to global equities. The strategy's "smile-shaped" convexity profile means it tends to perform best in both extreme down and extreme up equity environments.

The authors are direct about the tradeoff: "Trend following has generated positive returns during the historical market downturns of the past 25 years, though it has lagged traditional equities during the upturns." For advisors constructing portfolios, that asymmetry is precisely the point.

Strategy Design: Where Dispersion Hides

The whitepaper's most operationally valuable section details how identical core logic — buy winners, sell losers — produces dramatically different outcomes across managers. Six design variables drive the divergence.

Signal speed matters enormously. Fast systems (short lookbacks) pivot quickly and generate stronger crisis alpha but suffer more whipsaw losses. Slow systems (multi-month windows) capture sustained trends but are slower to react. Most managers in the SG Trend Index operate in the medium-to-long term range of three to six months.

Markets traded, signal types, position modifiers, risk allocation approach, and volatility targets each add another layer of differentiation. The authors note that most managers target 12–15% annualized volatility — but a manager running at 20% vol versus one at 10% could produce double the return or double the loss, even with identical underlying signals.

The implication: "Understanding these differences is crucial to making informed decisions about manager selection and performance comparisons."

The Case for Multiple Managers

One of the whitepaper's more counterintuitive findings is that the best-versus-worst spread among SG Trend Index constituents averages 26% per year, exceeding 30% in nine of the past 25 calendar years. Directional alignment is high — managers tend to rise and fall together — but the magnitude of individual outcomes varies sharply.

The solution Lobdell and Giordano advocate: allocate across three to five trend managers. Multi-manager portfolios meaningfully improve Sharpe ratios and reduce drawdown risk without diluting the strategy's impact, because trend following is capital-efficient — you don't need a full dollar of capital to gain a dollar of exposure. Importantly, "using multiple managers also does not eliminate the positive skew or 'crisis alpha' that trend following offers. In fact, it can enhance reliability."

Portfolio Role: Second Responder, Not Just Diversifier

Meketa places trend following within its Risk Mitigating Strategies (RMS) framework as a "second responder" — the second line of portfolio defense, designed to capitalize on protracted bear markets while also participating in extended bull runs. First responders (long Treasuries, long vol, tail risk) absorb the initial shock. Trend following sustains the defense through prolonged dislocations.

Historically, adding trend to a 60/40 portfolio shifted the efficient frontier upward and to the left — better returns per unit of risk. The authors frame the conclusion clearly: "even a relatively small allocation to trend strategies can shift the risk/return profile of a stock/bond portfolio for the better."

Key Takeaways for Advisors

1. Trend following is not a return enhancer — it's a portfolio stabilizer. Its value lies in what it does when everything else is struggling.

2. Manager selection is not incidental. With 26%+ average annual dispersion among top CTAs, picking the wrong manager — or relying on a single one — is a meaningful risk.

3. Multi-manager allocations improve reliability without sacrificing impact. Capital efficiency allows volatility calibration across the combined allocation.

4. Crisis alpha is the signal, not the noise. The periods of underperformance in calm markets are the expected cost of owning something that pays off in chaos.

5. Fees matter most when trend is working hardest. Higher fees erode the exact returns that justify the allocation.

Footnote:

1 Source: "Trend Following Strategies," Ryan Lobdell, CFA, CAIA, and Lauren Giordano, Meketa Investment Group, December 2025.