Q3 2026 Investment Update

 

This update is for discretionary accounts.

 

 

Summary:

• The strong performance of AI stocks has helped the stock market overcome a war with Iran, higher oil prices, and higher inflation.

• We believe without AI spending the economy could have entered a recession caused by those three events.

• Most of this year’s gains in the U.S. equity markets have been driven my AI related stocks.

• According to a Goldman Sachs study, U.S. equities would be flat for the year if AI stocks were removed from the indexes.

• We still believe earnings growth could be strong enough in 2026 to generate modestly higher stock prices.

• Higher inflation caused by the recent increase in oil prices could lead the federal reserve to raise interest rates later this year.

• This prospect suggests that long-term interest rates will likely move modestly higher this year.

• The statement from the June 6, 2026, federal reserve meeting suggests that they have shifted course. The fed now appears to be leaning toward raising interest rates later in the year.

Economic and Monetary Outlook:

•  The economy had been on a slow-growth, low inflation, and full employment trend for several years until recent quarters.

• First quarter growth was about 1.6%. Most of the growth appears to be coming from AI spending.

•  Consumer spending is near flat at this time. Higher prices appear to have made consumers struggle to keep pace.

• Even with the war in Iran ending, linger inflation could cause the federal reserve to raise interest rate later this year.

Equity Market Outlook:

• Strength in AI spending has pushed corporate earnings to there best growth rate in years. This has pushed most averages up double digit this year. Most of that growth is in AI related areas like semi-conductors.

•  Technology stocks have a very large weighting in the S&P 500 and NASD averages. This has driven those averages most of the year. Only recently have small and mid-cap average joined the rally.

• Stocks continue to be expensive based on historical standards.

• Consensus 2026 S&P 500 earnings estimates are currently $340 a share. A substantial jump from $310 estimates of one quarter ago. This put the S&P 500 at about 21.8 times 2026 estimates at the current price level. This puts valuation back into the upper end of there historical range.

• In our last quarterly report, we expected a correction of 5%, which did occur, but was followed by a fast recovery.

• High valuation makes us concerned but continued increases in earnings estimates appear to be postponing a larger correction.

Fixed Income:

• The statement from the June 6, 2026, federal reserve meeting suggests that they have shifted course. The fed now appears to be leaning toward raising interest rates later in the year.

• We expect both short and long term interest rates to move slowly higher.

• Higher inflation is the biggest cause, but a large federal budget deficit has also become a major concern. This a caused a large increase in the supply of government bonds.

• Most of our bond holdings are in the shorter duration range of 2 to 5 years. There prices are less impacted by changes in inflation and appear to be a good place to wait until we believe interest rates have peaked. This peak could be more than twelve months out.

Investment Strategy:

• We remain over weighted in terms of U.S. stocks and under weighted fixed income.

• Our primary areas of focus are large-cap domestic equities and mid-cap growth oriented domestic equities.

• Valuations appear to be better in small and mid-cap equities, which is where we would like to increase our exposure when a 10% correction finally occurs.

• We recently trimmed large cap holdings in most client accounts to prepare for an increase in small and mid-cap stocks.

• We also see improving conditions in international markets. There valuation are better than the U.S. This combined with improving growth prospects could convince us to shift some money to that area for the first time in more than 15 years.

• Until the stock market suffers at least a 10% correction, we do not plan additional shifts in our allocation.

• We do not expect to make changes to our fixed income portfolio unless longer term interest jump significantly due to an increase in inflation.

Roy Blumberg,

Partner

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The economic forecasts set forth in the presentation may not develop as predicted

Stock investing involves risk including loss of principal.

The prices of small and mid-cap stocks are generally more volatile than large cap stocks.

International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

 

Bonds (fixed income) are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, and bonds are subject to availability and change in price.

No strategy assures success or guarantees against loss.

                Investing in stocks includes numerous specific risks including: the fluctuation of dividend, loss of         principal and potential illiquidity of the investment in a falling market. The economic forecasts set forth in this    material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.