National Call Replay: 2026 Mid-Year CIO Update
Brian Pietrangelo [00:00:03] Well, a warm welcome to everybody for joining us today. This is our webcast from Key Wealth and our national call for our 2026 Mid-Year Chief Investment Office update in terms of our comments on the markets and the economy. Now, in the invitation, if you had an opportunity to peruse it before you joined, we're going to cover a number of great topics today in our discussion, including geopolitics and global risk. artificial intelligence, inflation, interest rates, and what's going on with the Federal Reserve. Also touch upon equity markets and the consumer, and what our portfolio positioning is for the second half of 2026. So with that, a couple administrative items up front in terms of the disclosures, as we always provide, it's standard operating procedure in terms of many of the webcasts. in the industry, and in specific, a quick reminder that the webinar is intended for informational purposes only, and we don't give tax advice, investment advice, legal advice, all the good stuff, and please contact your professional if you are looking for that information. And we're also going to cover a lot of ground, a lot of great topics, but it might not necessarily fit your specific situation or your specific need, and that's okay, because a lot of, again, the content is tremendous. In terms of the administrative way to ask a question on your Zoom screen, you will see at the bottom of the screen the little Q&A icon. You can click it, and then you can basically type in your question and then hit send, and you can address it to any one of us on the panel, and we will try to address it during the call, and if not, we may have an opportunity to follow up after the call for it. But ultimately, we'll try to get as many questions as we can. In addition. The number one question we always receive is, will this deck be available? And the answer is, yes, it will. We will have the deck and the recording available of this call somewhere within the next 24 to 48 hours to be able to, again, review it and share. So with that, it is my pleasure to be joined by my colleagues. I am Brian Pietrangelo, Managing Director of Investment Strategy at Key Wealth, and I am joined by George Mateyo, our Chief Investment Officer. Steve Hoedt, our head of equities, Rajeev Sharma, our head of fixed income, and Sean Poe, our head of multi-strategy research. And each of us are going to have an opportunity to share with you many of our thoughts today in both surface level as well as significant details to make this conversation as robust as possible. So with that, we will start with our top-line comments, and I'll go to every individual here on the panel to give their surface-level, high-level comments, and then we'll dig in later on on the details of each of these sections. So, George, let's start with you on your opening remarks on the economy and inflation.
George Mateyo [00:02:44] Thanks, Brian, and good day, everybody. Thank you again for making the time to be with us. We hope this is useful information, and also relevant to your particular situation. So, as Brian mentioned, we thought we'd begin by talking a little bit about how we see things playing out, relative to where we thought things might play out as we begin this year. So, as you look through these first few slides, it's important to understand how we're thinking about things coming into 2026, And now we're approaching the back half of this year as we look towards next year. To answer your question, Brian, about how we thought might things play out with respect to the overall economy, when we entered this year, we really thought the overall backdrop was quite favorable. We continue to think the overall expansion will continue, meaning there would not be a recession in 2026. As we think about the second half of this year, and indeed, there's a lot to contend with, there's more challenges than we probably anticipated, but nonetheless, we still think the overall economic momentum can continue, although probably at a slower pace than we've seen in the past few months. On the inflation side, I think it's fair to say that in the beginning of this year, we thought inflation might stay roughly where it was, kind of in the mid to high twos. And clearly, though, however, that was a challenge for the Fed Reserve in the sense that their overall official target is that of 2%, and that might be difficult to maintain. Fast forward to where we are today, it's fair to say that inflation certainly has changed, and some of the outlook has actually worsened in the sense that inflation now is definitely higher than 2, and probably closer to 3%, all else equal. Furthermore, we think the risks are somewhat tilted to the upside, as the overall market has to contend with higher oil prices, higher prices as related to artificial intelligence infrastructure, and other shocks in the economy as well. So our outlook is still somewhat constructive on the economy, but with a slightly higher risk around inflation.
Brian Pietrangelo [00:04:27] Speaking of the Fed, let's bring in Rajeev to give your thoughts, Rajeev, on what we see at the Fed and policy for the second half of the year.
Rajeev Sharma [00:04:34] Yes, well, thank you, Brian, and thanks, everyone, for being on the call. We start… we started the year really thinking that we would have one to two rate cuts, because inflation had started to cool, growth was moderating, but the data then flipped. You had geopolitical events, which led to the energy spikes. And, this kept inflation not only further away from the Fed's 2% target, but actually it's now not even showing a disinflationary trend that we saw late last year. Growth remained resilient, as George said, and the labor market really didn't crack either, so the combination keeps the Fed on hold, at least, but it also introduces the potential for perhaps the Fed starting to think about tighter monetary policy going forward. And the overall biggest driver of this is exactly what George said, inflation has re-accelerated. And the data really is forcing the Fed's hand right now. The Fed cannot think about cutting rates if inflation continues to move higher. So we saw a couple of hotter prints on inflation that we did not expect at the beginning of the year. I don't think the market expected that either, which then, again, brings Fed policy into question, because the Fed does have the dual mandate of maximum employment and price stability, and if you don't have that price stability component, it really makes it difficult for the Fed to cut rates.
Brian Pietrangelo [00:05:45] Great, Rajeev, and we've got a new Fed chair we'll talk about within the hour, and that'll be a great conversation, but moving also to the stock market, Steve, what are your thoughts on the equity markets?
Stephen Hoedt [00:05:55] Where to begin? It feels as if it's been, 2 or 3 years rolled into 5 months as we head into June here, and, you know, we said, coming into the year that we felt stocks were going to have a solid year. I don't think we anticipated they would kind of have the start to the year that they did. Pullbacks, we said. we think, from here, are not to be unexpected. We believe stocks are going to continue higher. You're gonna see some charts as we go through. the deck that lay out the thesis for why stocks should continue to work. Largely, it comes down to the letter E, earnings. Earnings have been fantastic so far during 2026, and likely are going to continue higher Now, that doesn't mean that there aren't parts of the market which are pretty, hotly baked, and, you know, we would point at semiconductors and some other parts of technology as you know, baking in a lot of really good news here. But we keep coming back to the idea that, you know, earnings higher equals stocks higher, and it's really, really hard for investors to be bearish when you've got the strong earnings trend that we have. And, you know, we think that earnings are likely going to continue to be really strong in the second half of the year, which probably bodes pretty well for stocks, Brian.
Brian Pietrangelo [00:07:23] Thanks, Steve. And finally, we'll talk a little bit about the complement to public markets, which is private markets, and Sean, how are your insights looking for this year?
Sean Poe [00:07:33] Yeah, thanks, Brian. Coming into the year, we really thought that public and private markets would really continue to merge more into a continuum rather than sort of a bifurcated market. And we've really seen that as democratization continues to play out, as well as some of the large late-stage Private companies approaching public markets. But with that, and with some of the concentration that echoes what's happening in equity markets, we really thought that selection and fundamentals would remain paramount. what we think's gonna happen is that these trends will really continue as public and private markets continue to converge. We've got a number of IPOs on the horizon that we will certainly talk about, as well as continuing to see major divergence among the managers, and so We will highlight how manager selection is critical to navigating those markets.
Brian Pietrangelo [00:08:28] Tremendous. Well, thank you all for giving your opening remarks and having our audience understand those topics at a very high level. Now let's turn back to George and go a little bit deeper into our conversation with some of our top key takeaways on the markets and the economy.
George Mateyo [00:08:44] Thanks, Brian. Let me just begin by laying out how we think things are playing out, again, relative to where we thought things would play out at the beginning of this year. As noted, we did… we do think that things have played out generally as expected, and I realize that there's a lot of things that have happened in the last 6 months that maybe caused people to think, well, it can't possibly be the same outlook as was 6 months ago, so there have been some material twists. But overall, some of the themes we identified coming into 2026 are certainly playing out as expected and coming to fruition, perhaps at a greater pace and with more volatility along the way, but some of the themes that we have identified, we still think actually hold merit and actually have come out as we expected. First and foremost is this notion around nationalism. This is something we wrote about quite extensively. We also refer to this as state capitalism. geopolitical fragmentation. It basically refers to the fact that many countries now unlike periods in the recent past, are now operating independently. They're putting their own best interests first, they're less likely to cooperate with each other, and as a result of that, we've seen higher prices around inflation, we've seen greater geopolitical instability, and just greater overall uncertainty that's been more exacerbated. Now, certainly we can't dismiss the fact that in the last 6 months, we've had to contend with some major shocks with respect to oil prices moving higher, which, again, is further exasperating the inflation situation. But as I outlined a minute ago, it is not, right now, denting the outlook. It's not derailing it, it's denting it, rather, it's not derailing it. And what I mean by that, essentially, we still think the economy can grow at a decent clip, perhaps at a slower pace, because inflation is likely to be higher, and to be fair, there are some risks that still suggest that maybe there's some downside potential to that, but our base case right now is that the overall economy will continue to grow at a decent clip. We also have to acknowledge, and one thing we wrote about furthermore in our 2026 outlook, was the notion that the market structure is shifting in some significant ways. Sean already discussed that, and I know he's going to spend more time talking about it later in the conversation this afternoon. But effectively, companies now, historically, would be loaned to actually become public companies. They were really very content to be privately held businesses, and continue to attract significant capital to fund their operations. What we see now in the past few weeks, and indeed we'll probably see that this week and in the next few weeks ahead, is that many high-profile companies are rushing to come public. That's actually a significant sea change, and we continue to think, as Sean pointed out, that this convergence between public and private markets will therefore continue. At the same time, we've seen a rush of money flow into passive funds, and really, that kind of suggests the overall notion that's identified here, which is that there are more price in different investors and flows that are also influencing markets than ever before. That presents opportunities and also challenges for long-term investors that we'll identify later in this conversation as well. Fourthly, we have acknowledged and we've written extensively about the fact that we think the AI investment theme is alive and well, but it's becoming much more discerning. Indeed, this is something we specifically called out in our beginning of year outlook, and that's indeed played out, as Steve mentioned earlier, where now we've seen some significant locations within technology and also the broader market itself. Furthermore, artificial intelligence itself is also becoming more disruptive. We've seen elements of speculative behavior now emerge, we've seen some rise of regulatory pressures that are becoming real. At the same time, though, we also have to acknowledge that some of the productivity benefits from AI are just beginning. Though as we acknowledge, periods of things, of transformation of this time that we've seen in the past around innovation and so forth, things like this cycle are rarely linear. They don't always move in a straight line, they're prone to some fits and starts, and volatility along the way. So what does somebody to do with all this information? In our view, I think it's important to maintain discipline. remain diversified, right? So the idea that we've talked about many times is that there are opportunities beyond just the Magnificent 7. These are 7 stocks that garnered a lot of attention in 2023, 2024, and the first half of 2025. One thing… one theme we've been emphasizing is that we would be loath to actually load up on just those handful of stocks, and instead, we favor the forgotten 493, meaning the other companies in the S&P 500, for example. We also have a tilt towards AI adopters, companies that are actually going to be benefiting from AI, as opposed to the pure companies that are enabling AI. Within Rajeev's team, they've done a fantastic job of managing high-quality portfolios for a long time, and in this environment where inflation is likely to be stickier, there's a transition, as Brian mentioned, at the Federal Reserve, we think it's important to really stay up in quality within fixed income. And then lastly, we think real investors need real assets. Those are things that can provide diversification to your portfolio beyond traditional assets, such as stocks and bonds. So those, Brian, are some of our key takeaways and thoughts as we think about how to position portfolios and how we see the outlook evolving in the second half of this year. Now, let me walk you through some slides to talk about how we get to this conclusion and support our overall rationale. First of all, as we acknowledge, the overall economy is doing fine. I think it is fair to say that is lumpy, and we are likely to see some pressures as we go through the second half of this year, potentially. And as I mentioned in my introductory comments, we do see, perhaps, some slowing in the overall momentum that we've seen in the first few weeks of this year. Now, again, the overall picture of the economy is a little bit hazy because of trade policy. Greater uncertainties with respect to tariffs is still an overhang. We also have, of course, the war in Iran that's creating additional uncertainty as well. But importantly, if you look at this chart, one thing I would have you pay attention to is the very far right part of your screen. This is an index known as the Final Sales to Domestic Purchases… purchases, rather. GDP is a very noisy statistic, it's a very broad aggregation of overall economic activity, and most economists look at that, but they have to parse out a lot of information. Instead, I like to look at this final sales to domestic purchasers, because that really strips out a lot of the noise with respect to trade policy and government intervention and so forth. And you can see, by most accounts, and if I took this chart out over a longer period of time, you'd see the same thing. That number has been fairly steady at 2% to 2.5% for the last several quarters, and we think that's likely to continue. So again, the economy is in pretty good shape overall at the moment. We also acknowledge that the labor market is doing fine, and perhaps it's doing better than fine, based on some of the latest readings. On this chart, we show you essentially the overall number of jobs that have been added to the U.S. economy over the last several months and quarters. Those are the green bars going up, usually. We've seen some slowdown, but again, if you look at the very far right part of your screen, you'll observe again that the overall number of jobs being added in the last few months has been quite strong. In fact, it's actually been better than expected. At the same time, the blue line, which is a measure of the unemployment rate, has been pretty steady at around 4.3%. So again, the key takeaway here is that we've seen stability in the labor market, maybe a bit of a strengthening the labor market recently, we'll see if that continues. And again, the overall economy is in a pretty good shape overall. One question we often get when we think about the labor market, though, is the fact that people are concerned about AI disrupting the labor market, meaning maybe eliminating jobs. And indeed, to some extent, we have seen some of that play out. But importantly, the overall labor market continues to grow. So while the shift is occurring in terms of the overall composition of the label market, in other words, some sectors are growing, some are shrinking, the overall labor market is still growing. And indeed, since ChatGPT was first launched in late 2022, We've continued to see the labor market expand by roughly 3% at the aggregate level. Now, one thing we have to contend with, as I mentioned earlier, is inflation. It's been persistent, and given our thoughts around nationalism and geopolitical uncertainty, we've talked about inflation being one of the consequences of that phenomenon. And indeed, it has been more persistent than many people thought, and it's also been exacerbated by what's happened in the Middle East, in the sense that our oil prices are materially higher than where they were at the beginning of this year. So, as you can see quite clearly on the very far left part of your screen, you'll see the overall jump up in inflation in the past few months. Core inflation, which essentially removes food and energy to try and smooth out some of the distortions because of those variable commodity prices, has actually been somewhat steady, but it too has actually started to rise. And consumers, meanwhile, now face a double-edged sword in the sense that wages are starting to slow a little bit. So wage growth has been somewhat steady, slightly declining. At the same time, inflation has actually been escalated. Rajeev, as somebody who follows the Fed closely, I'd love to get your thoughts on inflation before we turn to the next topic.
Rajeev Sharma [00:17:20] I mean, I think you make very good points here, George, because, you know, inflation has been a lot more stubborn than had earlier been expected. As I mentioned, the Fed's dual mandate includes price stability, and if we don't see that stability, or at least we don't see a disinflationary trend, it becomes an issue for the Fed. You know, wage growth remains above pre-pandemic norms. Categories like healthcare, hospitality, personal services, these all pass through cost a lot slower So they don't fall as quickly as they rise, and services inflation is another area that the Fed really cares about. So the rise in energy prices, as we've talked about, it's been… it went from a tailwind to a headwind, and this is a new factor that directly pushes inflation higher. And this is going to be on the Fed's mind, and I think it's going to be key to note that Energy doesn't just raise prices, it slows down the disinflationary trend, or the disinflationary process, and that's what the Fed really needs to see before they can do any… anything with rates. So what they're doing right now is keeping higher for longer.
George Mateyo [00:18:18] Thanks, Rajeev. Brian, you mentioned the fact that people are probably anxious to hear our thoughts of the consumer, and it's a bit of a nuanced story. Indeed, it also gets a lot of attention in the financial media. Now, when thinking about the consumer, I think it is fair to say that consumers view inflation differently than most economists. And because of that, I think consumers are probably justly feeling fairly glum right now. More specifically, when I talked about inflation a minute ago, what often people do in our business, essentially, is look at inflation as a basket of goods. And they measure that basket over a period of time, usually on a month-to-month basis or a year-to-year basis. And indeed, if you look at the chart on the left, you'll see on the blue line, that's been kind of where we've been. So we saw a jump up inflation around COVID-19, and actually people getting back to work, the economy restarting, and since then, it's been in a pretty steady clip, a steady range, rather, I should say, for roughly 3%. Now, that's how economists measure inflation. How consumers measure inflation, though, is really the cumulative impact of a price that they might actually… a good, rather, they might buy on a regular basis. So they, for example, go to the store, they know what a gallon of milk costs, and mentally, they know what that cost, that gallon of milk cost just 2 or 3 weeks ago. And indeed, what they're experiencing is the fact that on a cumulative basis, which is the orange line on the left-hand side, has continued to rise. So inflation, as I said, is also having an impact on consumer spending, is having an impact on consumer sentiment. And indeed, on the chart on the right, it shows you that very phenomenon. This is a survey conducted by the University of Michigan. It's been a long-dated survey going back to the mid-70s, and indeed, on that measure alone, consumer spending, and consumer sentiment, rather, more specifically, is at an all-time low. Now, at the same time, while consumer sentiment is somewhat depressed. Stock prices are at all-time or near all-time highs, which is the blue line on the right-hand side. So how do we reconcile this? What's going on? I think from the consumer's perspective, this dynamic of low sentiment and high stock prices is what people refer to as the K-shaped economy. And more specifically, people often refer to low-income and low savings portions of our economy as suffering more so than the upper end of the economy. And indeed, that's been a phenomenon too, where I think people at the low-income stratas are facing greater pressures, they're facing more, they're effectively more susceptible to rising inflation. But notably, from the aggregate perspective. the top 10% and the top 20% of the overall wealth income strata is actually doing quite well. They are benefiting, frankly, from higher stock prices, they are benefiting from higher home prices, and indeed, now, they are driving the economy. So, it's probably not pleasant to talk about the fact that income equality has actually risen. We have to acknowledge that's a very… a real thing, but at the same time, the overall economy is actually being able to withstand that, because the upper end of the economy now is a greater portion of the economy, and they continue to actually spend money at a pretty decent clip. Now, I mentioned the fact that oil prices have been one thing in the news a lot, and that's actually likely to change the outcome and the outlook going forward. But we have to acknowledge that there are some risks to that, what I talked about, with a high-income consumer being susceptible to that going forward. So, while we talk about consumer spending as being okay right now, we talk about the economy in decent shape right now, we have to acknowledge that we're at a moment in time where, if not addressed soon. We probably could see some slowing in the economy further than what we might expect to happen, all us equal. So, indeed, prices of oil, indeed. Have come down since the war began, but they're also still very elevated, as shown by this chart. Now, looking ahead, Steve, I know you're somebody that follows these markets quite closely, we can look to futures markets to get a gauge on where prices are going. And notably, it looks like we're at probably a certain level where prices at the pump and prices, in crude in the ground, so forth, will likely be higher all sequel. What is your thoughts, Steve, about the oil price complex going forward as we think about what this might mean for the economy?
Stephen Hoedt [00:22:20] Well, George, it's complicated. And I think when you look at what you see here in this chart, clearly prices are higher today than they were on February 27th. And the market continues to bet that there's gonna be a resolution to this situation within a reasonable timeframe. From our perspective, that's been kind of a rose-colored glasses point of view, that the market has taken on this for quite a long time, and We're getting to a point where The inventory buffers that gave the market the confidence and the ability to kind of place that bet that this was all gonna be something that blew over fairly quickly. We're getting toward, effectively the bottom of the barrels when we're getting to the… or the bottom of the tanks when we're getting to the levels that can cause operational issues for… for the economy. And you can see that on the chart here on the left. Nobody knows how things are gonna function when we get to that level, if we get to that dotted line that you see across here. We've never gone there before. I mean, we've gotten close back post-COVID, but we didn't get there. So, I think it's an open question, and there are a lot of commodity specialists who feel like there's a potential for us to see a… what I would call a delayed shock. both to oil prices and to the economy in general, if we get below these operating inventory levels. And you can see it already in things like airlines adjusting their schedules for the second half of the year and taking flight capacity out, not because they don't have demand, but because they don't have fuel to fly the planes.
George Mateyo [00:24:11] Well, indeed, it's something to watch very carefully and closely, given the fact that we have started to see some behavior change, and we've also started to see consumers and businesses adapt as well. Now, one consequence of this is the fact, of course, that interest rates now have moved higher. And Rajeev, I know you pay a lot of attention to this, and I think, indeed, there are probably other things than oil inflation that are driving higher prices and higher rates. But what are your thoughts about where rates are now, and more importantly, where interest rates might be going?
Rajeev Sharma [00:24:39] Sure, I mean, you know, this is a chart of the 10-year Treasury note yield, and we can see that it's moved higher as the year has progressed. We're currently at 4.5%, a little over 4.5% on a yield basis for the 10-year Treasury note. We're not at the 5% level that we were a few years ago, but the trend line shows that we're consistently been moving in that direction. And this has a lot of factors involved to it, but some of them, as we've talked about already, is the fact that inflation has stopped falling. We're not seeing the disinflation that the market wants to expect. Even with growth being resilient, the market is now pricing in a higher-for-longer monetary policy. When you have a Fed that's not cutting rates and keeping rates higher, it adds to the movement higher in interest rates, and we see that in the 10-year, and we see it in the front end of the curve as well. Add to that, we've seen heavy Treasury supply that's come to market this year, which continues to put pressure on the markets. And we haven't seen the foreign buyers that we generally see that take part in the Treasury market step in when we get to certain key levels. 4.5% is a very key level for the 10-year, and generally you start seeing buyers start to step in at that point. We have not seen that. I think buyers still think that we could go higher from here. What I think it's important to note, the 10-year is not rising because the Fed is tightening. The Fed has been on hold. The market is tightening financial conditions for the Fed, so higher for longer yields, they automatically tighten financial conditions, even without the Fed doing anything. And you feel the impact of that on mortgages, corporate borrowing, and valuations. They all feel those effects. So if we go on to the next slide. You can see another thing that's happened. The Fed has not had any urgency to cut rates. We see that the odds of rate cuts that we started the year out with have dissipated, and this has a lot to do with because the data does not support Fed rate cuts right now. The Fed really has no cover to cut, and every reason to lean hawkish. What that does is it takes rate cuts off the table. and now introduces the odds that we may have rate hikes in the near term. In fact, the latest odds are now pointing towards a 50% chance that we get a rate cut… a rate hike, sorry, at the September meeting, or at least at the October FOMC meeting. And these odds weren't there before. And I think that's very important to note, because we do have a new Fed share, and every time you do have a new Fed share, you can see that it creates market volatility. Investors have to then recalibrate to what the new Fed reaction function will be. Historically, you can see here that Equities have seen an average drawdown of roughly 12% in the first year as the market tests the Fed share's tolerance for their dual mandate. The Fed, as I mentioned, has a dual mandate, price stability and maximum employment. And every new Fed chair has to deal with those two functions. So how the new Fed chairman will handle the hotter inflation that we see ourselves in The Fed, again, cannot cut rates in a rising inflationary environment. They will need multiple cooler inflation prints to start thinking about an easing policy. In addition, rating cuts are justified when you have a slowing growth in the economy. We didn't see that slowdown. And the other side of the Fed's dual mandate is maximum employment. Again, we did not see labor markets, they may have normalized, but they still remain… job gains remain positive. So the Fed doesn't really see any recessionary risk out there right now. So without labor stress, the Fed has no urgency to cut rates. So what we believe happens from here is the Fed starts to move from an easing bias to a more of a neutral bias, and that signals Fed discipline. And also, the Fed really doesn't want to lose any credibility. Kevin Warsh. needs consensus on the Fed to make any rating action, or any, cut or hike in rates And I think he's gonna have a hard time gaining that consensus one way or the other. We have a Fed meeting, next week. It'll be important to see how Fed Chair Warsh does in his first meeting, and also how much support he has at the Fed right now.
Brian Pietrangelo [00:28:37] Great, George and Rajeev, this would be a good time to answer a few questions that came into the chat that I'm going to combine questions 1 and 2 from both Joe and Christian, and it's going to take us a little bit back to the comments you had, George, about the jobs market and the jobs numbers being very strong. We're also going to touch upon artificial intelligence. So, George, could you give an overview of how the jobs are changing due to artificial intelligence? I know you've talked about this in the past. with different data on what sectors in the jobs market are changing due to what we see happening with the economy. There you go, George, on 14.
George Mateyo [00:29:13] Right, Brian, so I think the message, I think, would be twofold. One, I acknowledged earlier, is that the overall job market is still expanding. The last few prints have been better than expected. Some of that might be associated with some one-time things, such as the World Cup. We saw, for example, this past month, the number of jobs added on the leisure and hospitality segment grew some 70,000, which is a bit higher than a typical month. But to the question and your broader comment around the overall composition of the labor market, I think it is fair to say that, yes, we have started to see a shift. And indeed, if you think about things that are actually being used to develop and plan for the build-out of AI, are found typically in the construction and utility sectors. Now, if you look at the right-hand side of your screen, you'll see that those two segments of the economy and the labor market have actually spanned quite notably in the past few years. Conversely, other segments such as information technology, such as software developers, things of that sort, have actually seen job losses. And indeed, the overall information technology stature, which is shown at the very bottom part of the page, has actually contracted by roughly 10% in the past few years. So, I think that is really… maybe… it's too early to say for sure that AI is driven… is driving that exclusively. More specifically, we did see an influx of workers in the tech sector in the aftermath of COVID-19, and maybe this is maybe some rationalization around some of those hires made a few years ago. But I think it is probably some early signs that artificial intelligence is changing, not shrinking, but changing the overall composition of labor market.
Brian Pietrangelo [00:30:51] Thank you, George. And the second set of questions came in prior to the call opening up, so we'll just talk about that very quickly, and that is, George, what does a best-case scenario look like with Iran and oil? And where is, again, best-case scenario, worst-case scenario, as we map them out for our investment strategy all the time. But the question came in from one of the listeners on what would have to happen for it to turn very positive.
George Mateyo [00:31:17] Well, I think Steve summarized it pretty succinctly, in the sense that we would probably see the Strait of Hermus reopen. I think, Steve, you agree with that, I would guess, right? I think it's pretty simple, but…
Stephen Hoedt [00:31:27] Yeah.
George Mateyo [00:31:28] Yeah, so I think… not to be cavalier about it, and there's a lot that has to happen with that, but… To some extent, we had the beginning of the war, and then we actually started another phase of the war when the stray was effectively closed. And we went through this, I think, in our last client call to some… in some level of detail, but the straightforward moose is important in the sense that roughly 20% of the world's oil flows in and out of that strait on a daily basis, or at least it did. I guess I should caveat that. And so when you take out 20% of the world's global supply of energy, that impacts a lot of things. That would be a best-case scenario if we could reopen that freely. Now, it's debatable as to whether or not the Iranians will allow that to happen. I think there could be some negative consequences if it doesn't, because there are other ports, other straits as well, that are dependent upon free trade and free flow of commodities. So, that would be the best case scenario. A worst-case scenario, Brian, would probably be a more protracted engagement, and indeed, we've seen a little bit of some flares up in the last 3 or 4 days that need to be monitored very closely. This could actually lead to some outright escalation or re-escalation in a major way. Hopefully it doesn't, though, and no one knows for sure, as Steve pointed out. No one knows exactly how this might play out, but those would probably be a best case and worst case scenario, as I see them. Steve, anything you'd like to add to that?
Stephen Hoedt [00:32:46] No, I think you did a good job of summarizing it, George. The one thing I would say is that even in the best-case scenario, if the Strait opened today or tomorrow, there's still been permanent damage to oil-producing and gas-producing infrastructure in a number of the Gulf countries, so we can't go back to exactly where we were on February 27th. No matter what, and it's gonna take a while, like, multiple years to get there. So, even a best-case scenario, you have higher oil prices going forward than what you had, and you're gonna have a higher risk premium going forward, too.
Brian Pietrangelo [00:33:25] Great, thank you, George and Steve, on those answers to the questions from our audience. And Steve, let's stick with you and dive a little bit deeper on the equity markets, and your thoughts on earnings, as it is very important, as you alluded to in your opening remarks.
Stephen Hoedt [00:33:38] So, earnings have been doing something this year that they very rarely do, and typically what you see through the course of the year is that analysts are the most bulled up on, annual outlook basis for earnings as they come into the year. And then what we see is, as the… reality check happens quarter over quarter. We see earnings typically decline on a basis as we run forward, and we just haven't seen that at all this year. In fact, earnings have exploded to the upside. We came into the year, and earnings estimates were for 15% or 16% earnings growth, and I think that we were… we were… thought we were fairly optimistic that they would decline somewhere around 12% to 14%, while, you know, the historical average, I think, is a decline all the way into the high single digits. And lo and behold, 16% became 26% as we've… we've moved forward through this year. Simply remarkable. And that is largely what has been driving equity performance. If you look over the next few quarters, we see earnings forecasts for the S&P 500, which you had on that earlier chart. They're all over 20%, between 20% and 25%. Ow. Are we going to get those numbers? I mean, look, the quarter we just completed came in at 28. It was at 24 to 25 on a forecasted basis going into that quarter, so it's entirely likely that we could be looking at you know, what I would call a record year for year-over-year earnings growth absent coming out of a cyclical trough, right? The fact that we're having this kind of an earnings year, when we're, you know, 3 plus years into recovery post-COVID, it's actually remarkable, and it's happening all on the back of these technology companies. the earnings for the MAG7, and anything that is related to the AI infrastructure play has… has exploded to the upside. If you go to the… yeah, keep going forward. This one, I think this, George, you wanted to talk a little bit about the cycle here.
George Mateyo [00:35:56] Yeah, let me just, interject for a second, and then we can get back to talking more about earnings and kind of what the market's been doing, Steve. I think… I think it's fair to recognize that, you know, we… we probably are in the midst of another hype cycle, and I think you would agree with that as well. You know, I think you and I kind of came of age about the same time. The last time we had one of these cycles.
Stephen Hoedt [00:36:14] We don't talk about that, though, George.
George Mateyo [00:36:15] Well, maybe with, with age comes a little bit of experience, I don't know, that's debatable. All just aside, though, I think… to me, it does feel like we're living this again, in the sense that this is a Gartner hype cycle, and Gardner put this together to try and illustrate exactly how expectations work over time. And again, it's not time… date specific, so again, we don't really affix and dates these these labels. But typically, when you have a new type of technology, and we try to explain this in some of a detail, I think, in our outlook again. But you typically have, mass commercialization, meaning essentially many, many companies are attracted to this new technology once it gains critical scale. And actually, as some initial investors and some excitement takes over, and then more capital floods into that idea, or that theme. And at some point, you reach a peak where there's just too much money chasing too little goods, frankly, and overexcitement usually results in malinvestment, meaning people are spending money with reckless abandon, and they're spending money foolishly, and that investment just doesn't pay off. After that point in time, we then kind of enter what they call the trough of disillusionment, which people kind of dismissed the technology as not really being all that useful in the first place. Valuations contract quite meaningfully, but usually there is this kind of re-engagement, or this, what they call the slope of enlightenment, meaning that technology does catalyze new growth. Productivity usually is driven from that, new innovations are also spurred from that, and eventually we reach this new higher level of productivity in the economy. Now, the question I think that everybody's asking, and rightly so, is that are we near the bottom left of that chart, or are we near the top of the chart? Where are we on the rollercoaster ride, I guess? And I think we've debated this internally, I think we've kind of come out that we're probably near the later innings, but we don't think we're at the peak just yet. Now, that being said, I think, Steve, there are some cautionary signals, and there are certainly some elements of the overall hype cycle that are probably more elevated in terms of their expectations as well. So, let me turn it back to you to get your thoughts on that, and how we're thinking about the market risk right now, given the hype cycle backdrop that might be underlining this.
Stephen Hoedt [00:38:25] Yeah, we've got… I've got 3 charts to illustrate this. The first one shows… And kind of overlays the way that bubbles have historically worked, and what you see is this concentration within markets as you go through them. Now, we're not telling you that this is a bubble per se, but there… we're just showing you how, historically, this has worked. And typically, once you get these areas where you have 35% to 40% concentration in the market, it does show that you've gotten to a point where there are some things that you should be paying attention to here in terms of concentration. I would tell you that the thing that I like to focus on is the year-over-year performance. Anytime you see things go up over 100% on a year-over-year basis, historically, that's been a kind of a good flag. For it, and there are elements in the market that are that way right now, but not the overall market, and that's what I would focus on, and we'll focus on in the next couple of charts. So, when you… we're going to show again the concentration in the technology stocks here in this one. I think that where I start to get concerned is where you see parabolic moves. Obviously, technology has had and has continued to garner more market share within the S&P 500 over time. earnings have driven that, largely, so there's a reason for technology to be a large portion of the market. But when you start to get a little bit of a disconnect from reality, and you start to see parabolas form in charts, parabolas don't end well, and that's what we've seen over the last Now, let's call it 6 months or so. We've seen a handful of stocks driving market returns. We've seen narratives develop that kind of try to justify those moves, but again, I look at it and I see a parabola, and that, to me, signals caution. And we think it's wise for investors to be cautious. When you take a look at this, this is another way to visualize it. It's momentum versus low volatility. So not only do you see it in the sector work that we do, but you also see it in what are called factors. So momentum stocks have massively outperformed low volatility stocks. If you go back to 1990s, to the bubble period back then, you can see just the huge move in momentum relative to low volatility. And while we had kind of a creeping move higher over the last early part of this decade. That move exploded higher over the last couple of years, and then… then lit off like a rocket here in 2026. To the point that momentum now is more extended relative to low volatility than it even was back during the bubble period. So again, something that causes us to think that investors should be a little bit cautious here. I'm not saying that the overall market has to sell off, but there are portions of the market, namely. Namely some of the technology areas, which do seem a bit, overdone right now to us, George.
George Mateyo [00:41:39] So let's put that all together for our listeners and our viewers to understand how we think portfolios should be positioned, right? I think we've probably been, as I mentioned for quite some time now, somewhat underweight the AI enablers, we've been underweight these magnificent seven companies, and then you, Steven, specifically, have also been somewhat more, positioned towards what we might call value souchers. So, why don't you walk us through your thoughts on how to position an equity portfolio?
Stephen Hoedt [00:42:03] Yeah, we think that the best way to play this right now is through a bit of a barbell approach, where your long, cyclical value, which has exposure to the economic strength and kind of the run-it-hot economy that we saw there. you know, typical industrials, energy, materials, to a certain degree, financials, transportation, infrastructure, all these things are benefiting from a whole host of trends here domestically in the United States. And you pair that with things like healthcare, utilities, consumer staples, which are are not exposed to AI, right? People need to eat, people need to have healthcare services, people need to have to flip the lights on. Those things are going to work, whether AI is there or not. There's very low disintermediation risk. The bottom line for us is that we think that that's the best way to play here right now, and that you kind of are de-emphasizing the cyclical growth components like semiconductors, which have absolutely ripped during the first half of this year. And you're also kind of de-emphasizing things like defensive growth software stocks, which have been very difficult during the first half of this year because of the disintermediation from AI.
George Mateyo [00:43:22] And then one other theme that I think deserves mention is we've often talked about the fact that diversification should be thought about beyond U.S. markets. And indeed, when we look about the world, and we see different parts of the market have also responded and somewhat participated in this rally that Steve talked about, we've seen that take place in other parts of the world as well. More specifically, parts of the emerging market world have really been big beneficiaries of this captivation around artificial intelligence, and indeed semiconductors more specifically. The Emerging Market Index, which is shown on the right-hand side of your screen, now represents roughly… is actually represented by a 20% weight towards semiconductors. And indeed, some of those companies are now worth more than many countries around the world. Now, I think that's important that we do have exposure towards emerging markets for that reason. We think there's good growth opportunities there as well. But we also think there's opportunities for diversification, frankly, in more traditional developed markets outside the U.S. as well. And indeed, the right columns, the middle, I'm sorry, the center columns on your page here on slide 36 shows you that very phenomenon. So, countries such as Germany, for example, and other parts of Europe. other parts of the developed world, Canada, Mexico. Those type of countries probably have more exposure towards things outside of technology and provide some diversification as well. So while we think it's important to have exposure towards the U.S. markets, we also think it's important to have exposure beyond U.S. borders for reasons we've talked about as well.
Brian Pietrangelo [00:44:51] So, George and Steve, we had a couple questions in the queue around how do you plan for things like a pullback? And George and Steve, you both answered them already proactively, which is continuing to remain diversified with specific language here on the slide about how we are allocated. So, thank you for that, so no need to go back to those questions. So, at this time, it's an opportunity to bring in Sean Poe to talk a little bit about private markets. as a complement to public markets. So, Sean, your thoughts are here.
Sean Poe [00:45:20] Thanks, Brian. So as we talk about private markets, there's… there's really two dynamics that are, underlying what you're seeing in the headlines. The first of these is concentrating capital. George just talked about how capital is being concentrated in public markets, and in private markets, it's actually arguably, even worse. The second is delayed exits. So. In private markets, the key to, of course, realizing return is getting your money back. And so, on the bottom left here, you see that companies are staying private longer. And so, IPOs, you know, especially for the last several years, have not been the most prevalent form of exiting. That looks like it may be about to change, at least with some of the bigger names out there. But overall, companies are staying private longer. And private markets have been happy to fund these companies staying private longer. The chart here shows that the dollar invested in venture capital deals by quarter, and you see in this most recent quarter that was completed, an all-time high easily in venture-backed funding, and, you know, of course, that is strongly influenced by the AI trade. So these two dynamics, if you'll flip to the next slide, George, are really appearing in two different situations that you may have seen in the headlines. The first that I'll go through is the redemption backlogs that are popping up in evergreen vehicles and are generating sort of repeat headlines as each of these vehicles sort of comes up for their redemption window. The second emerging situation that is a little bit more fun, maybe, to talk about is the SpaceX IPO and the others that are going to follow. So I'll walk through each of these and how these emerging situations are impacting the markets. So the first, liquidity is being tested. There's no doubt about that. So, this is specifically talking about evergreen funds that are invested in private companies and are offering some semblance of liquidity These are also referred to as semi-liquid funds. A bit of a misnomer, but overall, these, this is part of the trend of democratizing private investments. And so, both the number of evergreen funds out there and the total AUM in these evergreen strategies has grown significantly over recent years, some of that driven by regular… regulatory change, but a lot driven simply by demand for private market investing. Now, at the same time, you're seeing redemption pressure rising, and so there's a series of headlines here, with well-known funds that are having to, gate redemptions, or cap redemptions, to what's outlined in their documents. And to put that in simpler terms. People are trying to get their money out of their private investments at a higher rate than the private funds are willing to give them their money. So, if you'll flip to the next slide, George, I just want to talk through, sort of, what's happening here. So, The nature of these vehicles is such that you've got private investments, which offer, you know, sort of long-term, locked-up capital, and usually higher returns, some form of reduced volatility. And then you've got people who are asking for their money back. Well, when that happens, you don't have a natural mechanism to quickly get your money back. So the simplest explanation is think of trying to sell a house quickly. Especially in today's market, you should expect that it'll sit on the market for a little bit and be fairly opaque, and so if you try to, you know, sell your house tomorrow, you're not going to be able to get your money tomorrow. It's going to take some time. That is a clear example of sort of what's happening in the private markets. Now, that doesn't mean that your house is impaired by any means, and so we've seen that, particularly on the credit side of things, the private credit side of things, that actually the underlying fundamentals of these private investments are strong, and in fact, the defaults remain below long-term averages. And so the overall kind of takeaway is there's going to be a lot of headlines, you know, and there already have been a lot of headlines regarding these funds, but our view is that long-term, there is a strategic opportunity to allocate to things like private credit that can be additive to total portfolio returns. You know, ultimately what we're seeing now is caused by, you know, elevated redemption requests as someone shouts fire and everyone runs for the exits. But that doesn't mean that the MOO is over, and ultimately there's still a strong kind of return potential here. For patient and opportunistic investors, and in fact, some more interesting investments popping up as a result of these structural flows. So, moving on.
Brian Pietrangelo [00:50:10] Talk about the big one.
Sean Poe [00:50:11] Yeah, of course, the final frontier, SpaceX going public. So, what I have here on the left is the, the snapshot from the S1, which is the IPO filing, for, for SpaceX. Few fast facts here. They filed their, their S1, last month. The IPO date is this Friday. A lot of you probably know the SpaceX story, but just as a reminder, Elon Musk-backed company, 3 main business segments, space, which is the one you hear about a lot, connectivity, which is Starlink. And is actually a pretty attractive business in its own right. And then AI, which is sort of a more recent investment with the merger of XAI with SpaceX earlier this year. It's got, you know, a strong sort of revenue run rate at $19 billion. The stated total addressable market, TAM on there, is $29 trillion. That is trillion with a T, and is obviously… they are trying to, make the market believe that there's a really sizable opportunity out there for them. On an EBITDA basis, they're generating $4-5 billion, so there's some nice, kind of, lower-scale profitability there. The headline numbers that really make you shake your head a little bit are the target valuation of $1.75 trillion. and the initial float of 3-5%, which would be a $75 billion raise, and the largest ever IPO raise. So this, just from a scale perspective, you've got, as I walk through that, you've got a decent, you know, business, some decent growth in there. Large addressable market, and an extremely high valuation, and extremely few shares available to trade. So if you'll go on to the next slide, you know, this is just a reminder of kind of how the story's evolved. These rocket ships are meant to, show where the SpaceX valuation's been, and believe it or not, this is just basically a two-year chart. So two years ago, this company was valued at $210 billion. with relatively similar financials to what I just talked through. They've gone through a few different fundraising rounds. You know, as of a year ago, this company was valued at $400 billion. The dots on the bottom here have shown that more stuff is happening rather quickly lately. So, in December of this past year, right around Christmas, SpaceX was valued at $800 billion, so a little bit less than half where it's going to come public. They acquired XAI, which is the AI company that Elon's been involved with for a long time, that's got Grok, if you're familiar with some of the language models, and that bumped them up to a $1.25 trillion valuation. Since then, there's been a couple other headlines. I've got the Artemis flight on here, which obviously increased some interest in space travel. The IPO market also seemed to have some good things going for it with the Cerebus IPO that was, you know, quite successful. And then there's been a number of headlines around indexes changing their rules, which I'll talk about shortly. And then here we are, coming up this Friday with the actual IPO event at a $1.75 trillion valuation. On the next slide, I'll talk through, you know, one of the… one of the major implications, and the headline's a little bit cheeky here, but should you own SpaceX? Well, you're probably gonna have it anyway. You don't necessarily need to make that decision. So a number of these index providers, NASDAQ, FTSE Russell. MSCI all have mechanisms now, a couple of them that have notably changed their their methodologies to allow SpaceX to enter their, To enter the indexes and drive… really, the effect of that is going to be an aggregate early passive demand of $10 to $15 billion. Now, recall that this is a $75 billion raise, so you're talking about, within the first few months, call it a fifth of demand for these shares is going to come from index providers that are completely insensitive to price or valuation or anything like that. Now, I will call out S&P Global, which, you know, I think had some strong thoughts about whether to change their rules, but ultimately decided not to change their eligibility rules. So they will likely… you will not see in your S&P 500 index fund, you'll probably have a year or so before SpaceX shows up in there. The main takeaway here, though, is that flows, rather than fundamentals, are going to set the price early. It's relatively few shares and a, you know, some significant demand from passive buyers. And if you, aren't entertained enough by the SpaceX IPO this Friday, there's been continued headlines, even actually one, I think, yesterday on OpenAI, but Anthropic is the AI company behind the Clod, Large language model, and also has had a lot of, sort of, enterprise-level success. They will probably come public in the next quarter or two here, and their last round was a $965 billion valuation, so about half of where SpaceX is coming public. OpenAI, the AI company behind ChatGPT, is also preparing to go public. They will take a little bit longer here, and probably be closer to the end of this year or early next year. Similarly, they are, you know, sort of just under that $1 trillion valuation. But, you know, the main takeaway here is that unlike recent years where IPOs have not been extremely popular. We are gonna have, within a one-year span, about 3 to 4 trillion of market cap come to public markets. That's an exceptionally large number in a short period of time, after relatively little activity in capital markets in recent years. So, again, a cheeky headline here, but this speaks to the dynamic I talked to earlier, in that private markets have been happy to provide funding, while public markets sort of wait for these unicorns to go public. So, for those who aren't familiar, unicorns are any company that's valued at greater than $1 billion. This, on the lower left, you see that the number of unicorn companies has gone up, and now is, you know, over 1,700 unicorns, in 2026 here. However, you know, the question is, when they come public, is it an attractive story? So I say here that the horns sometimes fall off the unicorns when they go public. So if you look at the two charts to the right. And the top one shows by size of the IPO, how returns have looked in the periods following the IPO. And so, you see, you know, that red line of the IPOs that are greater than $50 billion, of which SpaceX certainly will be one, have been negative, sort of, over any measurable period in the first year. In the bottom, you see the largest IPOs since 2000, and I remember watching the Alibaba IPO go public, and being very excited for a liquidity event for my prior employer, and then seeing kind of a thud in public markets. And so, there's really been you know, over those larger IPOs, only one IPO of real size arm holdings that has generated a positive return over the following year. So, I would just say to be cautious. A lot of times, there's a lot of excitement and headlines around these IPOs. The fundamentals are not going to make the story seem complete, so there will be a lot of flows early, and the main thing I would expect is just a lot of volatility, as there's a lot of interesting dynamics in particular with this IPO.
Brian Pietrangelo [00:57:57] Don, that's fascinating information, and what a great way to summarize it for us as we get here to the top of the hour. So I'll leave the last microphone to George if you've got any closing comments, George, and then we will end the webcast.
George Mateyo [00:58:09] Yeah, Brian, thanks very much. let me just kind of go back to where we kind of started the conversation, and I'll just kind of give you a bit of hope also. I think, you know, one thing we've often suggested is that people really should stay long human genuity, and there are certainly some moments right now where fundamentals and prices are diverging in the sense that we've seen, as Steve pointed out, some astronomical moves in certain stock prices and certain indices, and to some extent, we probably are a bit in euphoric territory. But at the same time, I think we are still of the belief that on a long-term basis, it's appropriate to be betting on human ingenuity. This has been the source of innovation for our country for many years now, many decades, many centuries now. And I think that's going to continue. So, we've been very cautious and thinking about how we want to position portfolios. We've been very judicious with where we put risk. That will remain the case. We also think it's important to be very selective. As Sean talked about, selectivity is going to be very important going forward, and as Steve and Rajeeva talked about as well, being thoughtful about security selection and sector positioning are very important as well. So, despite the fact that there are some headwinds and some headline risks that we probably all need to recognize and contend with. On a long-term basis, we remain very wedded and very strongly believing that human ingenuity will be the power that drives our economy going forward.
Brian Pietrangelo [00:59:26] Well, thank you, George. In addition to all of our other panelists today for your great content, and as always, thank you to our audience members for participating in the webcast. This does conclude our conversation for today. Thank you, everybody.
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Key Takeaways:
As we move into the second half of 2026, investors are facing a market environment shaped by geopolitical uncertainty, rapid advances in artificial intelligence, changing private market dynamics, and a more cautious U.S. consumer. This discussion will focus on the key forces influencing markets and portfolios, along with how we’re thinking about positioning in the months ahead.
- Geopolitics and global risk: Ongoing geopolitical tensions and energy market uncertainty continue to shape the outlook, making it important to separate short-term headlines from developments with lasting market impact.
- Artificial intelligence and disruption: AI investment is accelerating and creating new opportunities, while also reshaping competitive dynamics and increasing disruption across a range of industries.
- Inflation, interest rates, and the Fed: The direction of inflation, interest rates, and Federal Reserve policy remains central to the outlook as markets assess what could shape growth and volatility in the second half of the year.
- Markets, the consumer, and portfolio positioning: With equity markets near record highs even as consumer confidence stays subdued, the focus turns to what is driving that disconnect and how portfolios are positioned going forward.