Q2 2026 Market Update

U.S. stocks were down almost 5% in the first quarter. Then up 15% in the second. On paper, the first half of 2026 looks fine. But underneath those numbers, there is a concentration in semiconductor stocks that just had their best quarter in history, an AI spending wave that is running well ahead of the revenue it is producing, margin borrowing at all-time highs, and a consumer savings rate approaching low 2007 levels. 

In this episode of Financial Commute, Chief Executive Officer Jeff Sarti and Chief Investment Officer Meghan Pinchuk walk through what happened in Q2 2026, what the signals in the data are telling them, and how they are thinking about portfolio positioning when the market is this disconnected from the fundamentals.

Key Takeaways

• Semiconductor stocks had their best quarter ever, up over 80% in three months. Intel and Micron were up almost 200% for the quarter. That kind of move comes with a warning: this is also one of the most cyclical industries in the market, with a history of 45 to 80 percent drawdowns when the cycle turns. Semiconductors now make up roughly 20 percent of the S&P 500.
• The four hyperscalers are spending close to $1 trillion a year on AI data centers. Google, Amazon, Microsoft, and Meta have shifted from cash-flow-generating machines to heavily capital-intensive spenders, now issuing significant debt to fund the buildout. The key question investors should be wondering: when does the spending translate into revenue?
• The AI spending boom has a structural problem the railroad and internet booms did not. Railway lines and fiber cables are durable assets still in use today. Computer chips depreciate rapidly. A data center built today may need its chips replaced in three to five years, raising real questions about the long-term economics of this build-out.
• Margin borrowing and leveraged ETFs are flashing speculative excess. Retail margin borrowing is at an all-time high. Leveraged single-stock ETFs, a product that barely existed five years ago, now represent over 400 of the 600-plus leveraged ETFs on the market with nearly $200 billion in the category. Increased borrowing is a sign of escalating speculation and previous peaks in margin borrowing (e.g., 2000 and 2007, and 2022) preceded market corrections.
• Gold pulled back about 7% in the first half after a massive multi-year run, but the thesis is unchanged. Rising interest rates created an opportunity cost for holding gold. But the underlying reasons to own it, a federal interest expense now approaching $1.3 trillion annually, ongoing dollar debasement, and structural deficits running nearly $2 trillion per year, have not changed.

Transcript

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Meghan: Jeff, this is our second quarter market update review.Looking back, it was an interesting one. Following a very tough first quarterfor stocks, US stocks were down a little less than 5%, it was a tremendoussecond quarter, up about 15%. So now we are basically at positive 10% year todate for the first half of the year.

Jeff: What an incredible ride. We had the Iran conflict wherestocks went down. But the conflict is still going on. And now all of a suddenstocks shot up.

Meghan: Stocks have decided everything is fine. On theinternational side, it was actually a little bit easier going in the firstquarter. They were only down about 1%, and then up about 11%.

Jeff: Also very strong performance in the second quarter.

Meghan: Right. So now they are comparable. On the traditionalbond side it was a little bit different. Interest rates ticked up. Traditionalbonds were only up about 0.6% for the first half of the year. Our bond fundsdid much better than that, just because we intentionally designed the portfoliowith very little interest rate sensitivity. Of all these asset classes, the bigstory was a very specific segment: semiconductor stocks.

Jeff: Computer chips, in essence.

Meghan: Anyone making computer chips. And it makes sense givenall of the AI spending. But these semiconductor stocks as a group had theirbest quarter ever in history. Up 80% for a quarter.

Jeff: So basically almost doubled in three months.

Meghan: Higher, by the way, than even the dot-com boom. Really weare talking about extremes in performance. Intel, Micron, two of the bigproducers, up about 200%. Just massive moves for some of these companies.

Jeff: 200% means a triple. 100% is a double. So literally someof these stocks in a quarter tripled in price. And these are big companies. Letus stay focused on the semiconductor industry because it is a tremendous one.We all believe in the power of computer chips over the long run. That beingsaid, buyer beware, because this is an industry more than any other that goes throughbooms and busts. There is a reason for that. In times like now, where there isa lot of demand, the Microsofts, Amazons, and Apples of the world rush topurchase chips. Prices go up. They might be concerned about supply running out,so they buy even more to increase their inventory. All of that results inincreased revenue and pricing power for chip makers. That is exactly what hashappened.

But the flip side holds. When theeconomy slows, and this happens every five to seven years, there is too muchsupply. Companies work through their inventory and stop buying more chips.Prices fall drastically. Production slows drastically. In the dot-com bust, thesemiconductor index dropped 80%. In 2008, down a little over 60%. In 2022, whenbroad-based stocks were down in the mid to high teens, semiconductors were downabout 45%.

Meghan: They are more cyclical, more exposed. During good timescompanies are buying and profits look great. The complete opposite is true onthe downside. And this is like clockwork.

Jeff: So let us talk about AI. Why are chip stocks up so much?It is the data center buildout. Can you put some numbers to the massive amountof spending we are seeing?

Meghan: So the chip makers are profiting from everyone buying.Now let us look at who is spending. The main investors in AI are Google,Amazon, Microsoft, and Meta. You might hear them called hyperscalers, meaningsomeone putting a massive amount of money into AI to win the race and be one ofthe main providers of the technology. You can see the massive increase inannual spending, now approaching $1 trillion a year for these four companies.They were profitable companies, but now they have run through their free cashflow and are issuing debt or borrowing at very high levels. And one of theconcerns is when does the spend translate into actual revenue? We know thetechnology is amazing, but the revenue being generated is nowhere near theextent of what is being spent.

Jeff: These companies used to be cash flow generating machineswith very little capital expenditure. That has now flipped. And they areissuing a lot of debt to pay for these data centers. That is very concerning.

Now let us talk about whether thisis sustainable. One concern is competition. There is potentially a lot of cheapcompetition for AI from China. Many of you may have heard of DeepSeek as acompetitor to OpenAI or Claude. A fraction of the price. A lot of corporateAmerica is veering toward Chinese-based AI models that are nearly as good butmuch cheaper. Is all this expenditure sustainable?

A second aspect is thedepreciation of these chips. Think about the railroads of the mid to late 1800sor the internet buildout of the late 1990s. Both involved massive capitalexpenditure comparable to what we are seeing now. But railway lines are not adepreciating asset. The fiber cables from the internet boom are still beingused today. Very different from these data centers, where the lion's share ofthe cost is computer chips. We all know what happens to computer chips. Theydepreciate in value very quickly. So you wake up in three to five years and thechips need to be replaced. Is that what is going to happen? It is concerning.

Meghan: We are seeing all of these excesses. The excessivespending, the potential for the world in terms of AI. But there are a lot ofquestions. This is not to say it is going to blow up.

Jeff: And we believe in the technology.

Meghan: Technology is amazing. But the question is whether enoughrevenue is being generated to justify this crazy amount of spending. And comingback to stocks, investors now want their piece of it. They are borrowing atrecord levels. Margin rates are at an all-time high. Historically at thesepeaks, whether in 2000, 2008, or 2022, similar speculative fervor was outthere. It does not mean a collapse is imminent. It is just telling us somethingabout excesses in the market.

Jeff: People are leaning into this AI investment and using debtor leverage to monetize their viewpoint. Another sign worth noting: leveragedETFs. An ETF is an exchange-traded fund, basically a diversified pool ofstocks. Leveraged ETFs give you two or three times the exposure to the price ofan index or a single stock, in both directions. They have absolutely explodedin recent years. Over 600 now exist with close to $200 billion in the category,which basically did not exist five or six years ago. And of those 600, over 400are single-stock leveraged ETFs. Two or three times Nvidia, Tesla, you name it.These are signs of speculation, even gambling in the marketplace. That isconcerning.

Meghan: Something to watch. And so now: what does all of thismean for valuations?

Jeff: The stock market is expensive. Looking at price toearnings, price to cash flow, price to sales, we are at or near all-time highsdepending on the metric, and on some metrics exceeding the late 90s dot-comboom. The dividend yield on the S&P 500 is near all-time lows. The lasttrough was September of 2000, basically the last market high in the dot-comboom.

Meghan: It is just another metric. It does not mean an impendingdrop. But one of our core tenets is cash flow. If you are getting robust cashflow from an investment, it is typically a good indicator that things are goingwell. At a 1% yield, it does not feel like we are being paid well for the risk.

Jeff: Are you even being paid appropriately for the risk youare taking? It does not feel like it.

Meghan: This is just one of many metrics telling us the risk isheightened. Pay attention. Moving on to gold. Also very volatile in the firsthalf. Coming off a tremendous 2026 run and previous years of strongperformance. Down about 7% for the first half of the year. This level ofvolatility does not massively surprise us.

Jeff: Not surprising. Gold was up about 25% in 2024 and northof 60% in 2025. It felt frothy. So we were not surprised to see some pullback.And we had discipline around that. When gold became an outsize position inclient portfolios, we pared it back to rebalance. That said, there are otherreasons why gold has pulled back of late.

Meghan: In the short term I think it is more interest ratedriven. Gold itself does not have a yield. So investors are saying: if interestrates are higher elsewhere, there is a higher opportunity cost to holding gold.But short term, we expect there to be noise. Our long-term thesis with gold hasnot changed at all.

Jeff: If anything it is as strong as ever. So much of it isaround our confidence in the dollar. Will the dollar hold its value over time?As history has shown, the dollar will continue to be debased over time. One ofthe main reasons is our debt levels. Our current deficit is now approaching oreven exceeding $2 trillion a year. We take in about $5 trillion in revenue andspend about $7 trillion. That $2 trillion differential is largely driven byinterest expense, which is now approaching $1.3 trillion annually. That lineitem exceeds our military budget. We are spending this money just to serviceour debt. This is getting worse. And the path of least resistance is for thegovernment to continue printing money, continuing to debase the currency sothey can pay off debts with cheaper dollars in the future. That has been thelong-standing thesis on why we own gold.

Meghan: And as it ties into interest rates, the Fed is in areally tough spot. The Fed sets very short-term rates that feed into broadermarket rates. Any increases in interest rates make that interest expense chartlook worse. So there is pressure to bring rates down. But on the other hand,with oil prices spiking due to the conflict in Iran, inflation is ticking up.So now the Fed is caught: on one hand it would be helpful to lower rates, buton the other they need to control inflation. Is this the wrong time to bedropping rates when inflation is actually picking up?

Jeff: We have been critical of the Fed for a long time. Butthey are in a genuinely challenging position. Because of these inflationarypressures, rate cuts are unlikely in the near term. But the flip side is theeconomy outside of the data center buildout and the AI boom is prettylackluster. Recent GDP numbers have been weak. And the personal savings rate istracking near all-time lows, back toward 2007 levels. Right before a very toughtime in the economy. So we have these different forces: inflation arguing againstrate cuts, and a stagnant economy and a challenged consumer arguing for them.The Fed is in a tough position.

Meghan: And you really have what we call the K-shaped economy.There are almost two different economies. The wealthiest are still spending atvery high levels, supporting things to a large degree. But a large percentageof the population is really struggling to make ends meet, let alone save.

In conclusion: we talked a lotabout traditional markets and what is going on. But fundamentally we feelfortunate that we are not only limited to stocks and bonds. We need to call outand be aware of these risks when the market is really disconnected fromfundamentals and when things get extreme. That has to feed into our sizing onstocks. We are going to own stocks. If this keeps running we are going toparticipate. How much is the question. And you also have to think the otherway: if the market continues to run, do you have enough to feel good aboutparticipating on the way up and supporting your goals? And if it drops, is itgoing to derail your retirement? Being able to pair volatile stock exposurewith something more stable is what gives us confidence.

Jeff: And by something else, a lot of different things in termsof diversification. The key is to find assets that march to the beat of adifferent drummer than all of these stock risks we talk about.

Meghan: We did not talk much about alternatives today, but thoseare things that are more consistent and resilient across a variety ofenvironments. Being able to have that mix is what helps our clients sleep atnight.

Jeff: Love that. Nice chatting.

Meghan: Thanks so much.

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