Much has changed in financial markets since our last commentary in April. US stocks began the year with a step backward following the announcement of the war in Iran. Other markets around the world briefly followed suit. Through the end of the first quarter, US stocks were down approximately -4 percent while the other asset classes in your portfolio were roughly flat to slightly positive.

However, the second quarter brought about a resurgence in stock prices. US stocks produced double-digit returns, while non-US stocks and real estate securities were not far behind. Markets seemed to brush aside concerns about the war, an increase in the price of oil, and the potential for higher inflation. Year-to-date through the end of June, all equity asset classes are nicely positive while interest-generating investments such as bonds have produced modest positive returns.

Is the Market Crazy?

When our advisors get together to review and discuss our investment research, one of the recurring topics is what we are individually hearing from our clients. We like to tailor illustrations and talking points to address common client concerns and questions. One theme that we hear from clients is that US stocks have performed a little too well. An underlying assumption is that recent stock price increases seem detached from reality and eventually the trend will go in the other direction.

That assumption may turn out to be true, but it overlooks an important point. Very large companies in the US have performed extremely well. This statement applies not just to stock prices but to the businesses themselves. If the companies in the S&P 500 (a common proxy for the US stock market) grow their earnings this year according to analyst estimates, the most recent decade of earnings growth will be the highest in the past 60 years of data¹.

The term “earnings” here refers to the profits generated by these businesses. A company can grow earnings by selling more products and services to more customers and/or by increasing their profit margins. Profit margins are the percentage of a company’s sales (revenue) that are leftover as profit after accounting for the costs of running the business.

You can see from the chart on the right that the companies in the S&P 500 have dramatically increased their profit margins. Current margins are nearly double what they were roughly 25 years ago.

Earnings growth is important for investors because it is one of the primary sources of long-term stock returns. Companies provide returns for their shareholders predominantly through paying dividends out in the form of cash and reinvesting profits to generate more earnings in the future. Earnings growth has historically been the more significant source of return for stock investors. So, the recent period of very strong earnings growth for US companies has supported significant increases in US stock market prices.

Earnings growth is a rational and data-driven explanation for some part of the recent returns for US stocks. Things get a little more subjective when we turn to future expectations. Stock prices reflect not only the present conditions but also expectations going forward, and it appears that many expect the good times to continue. For instance, analysts expect strong earnings growth for at least the next two years². Moreover, valuations for US stocks have increased, which is to say that investors are willing to pay a higher price for each dollar of corporate earnings. This fact, too, reflects optimism for the future.

The two problems with high expectations are that: 1) investors tend to extrapolate; and, 2) conditions change. Markets, therefore, tend to overshoot in both directions. The conundrum of today, quite frankly, involves the immediate and long-term economic impact of artificial intelligence. Have markets overshot on the hype of AI, or is this technological innovation unlike any other?

Note that both possibilities can be true. Amara’s Law, named after futurist Roy Amara, states that we tend to overestimate the impact of new technology in the short run and underestimate the effects in the long run. If this law holds in the case of AI, investors may be disappointed in the near-term with the returns made on the staggering amounts of capital invested in the chips, data centers, and expertise necessary to build the AI infrastructure. Yet society may ultimately benefit greatly.

Fortunately, your investment strategy does not have to rely on a bet on a particular scenario unfolding. A balanced approach today involves meaningful exposure to multiple asset classes, each with different risk and return characteristics. It requires the discipline to stick with asset classes that are temporarily out of favor and to periodically trim star performers. The basic playbook does not change much, but the landscape always looks different.

PRINT Quarterly Insights – July 2026

¹ Data Sources: Earnings data from NYU Professor Aswath Damodaran, analyst estimates and S&P 500 profit margins from JP Morgan’s Guide to the Markets.

² 15 percent for 2027 and 12 percent for 2028, according to JP Morgan.