Q3 2026 Conversations on Markets

Delicate Balance
Equity markets entered the second half of 2026 with remarkable resilience. Market leadership has broadened beyond the largest U.S. technology companies, with small-cap stocks participating in the rally and international equities narrowing their valuation gap relative to U.S. markets. This broader participation suggests investor confidence is expanding beyond a handful of mega-cap technology companies into a wider opportunity set across global markets. Beneath the surface, however, investors continue to weigh competing forces, as strong corporate fundamentals and rapid technological innovation confront a range of macroeconomic and geopolitical headwinds.

Consumer purchasing power remains constrained by persistent inflation, geopolitical risks continue to influence energy markets, and equity valuations remain elevated. At the same time, investor enthusiasm surrounding artificial intelligence continues to fuel demand for both public and private technology companies. Despite these headwinds, corporate earnings growth remains exceptionally strong, providing the fundamental support that has enabled markets to continue climbing despite an increasingly complex macroeconomic backdrop.

Valuations, while important, provide an incomplete picture of today’s market. Although risks have undoubtedly increased, the earnings power of many businesses has strengthened as well, benefiting from long-term structural growth trends. This is most evident within the expanding AI ecosystem, where significant investment and accelerating adoption reshape industries and create opportunities across a range of companies and sectors.

Consumers Continue to Feel Persistent Inflation
Although headline inflation has moderated considerably from its post-pandemic peak, underlying price pressures have proven more persistent than many policymakers expected. For consumers, the cost of everyday necessities remains one of the most tangible reminders that inflation has not fully subsided, with grocery offering perhaps the clearest example of lingering pressures. According to the Kitchen Table Project, groceries remain one of the largest sources of financial burden for American households. A representative basket of common food items has increased by more than 40% over the past five years – roughly twice the pace of median wage growth – with another 12% increase occurring over the past year.¹

² These higher prices reflect more than simply temporary supply disruptions. Rather, elevated energy costs, tighter livestock supplies, higher feed and fertilizer expenses, and increased transportation and packaging costs have all contributed to sustained inflation throughout the food supply chain. While inflation has slowed from its peak, many households continue to experience meaningful pressure on discretionary spending, weighing on consumer sentiment despite a relatively healthy labor market. This dynamic serves as a reminder that inflation remains closely tied to the cost of key inputs, particularly energy, with changing market conditions quickly feeding through to consumer prices and economic sentiment.

Oil Remains the Swing Factor
Energy prices remain one of the most important variables influencing the inflation outlook. As discussed last quarter, the conflict with Iran raised concerns that a prolonged disruption of oil exports through the Strait of Hormuz could significantly tighten global energy supplies. Those fears eased considerably following the provisional ceasefire agreement reached in June, allowing oil exports from the Gulf to continue and restoring confidence that a prolonged supply shock could be avoided.

At the same time, weaker Chinese demand has helped stabilize global oil markets. China’s combination of slower consumption growth and substantial strategic and commercial inventories has acted as an important buffer against potential supply disruptions. With crude oil trading around $80 per barrel at the time of writing, the immediate geopolitical risk premium has largely receded. Even so, energy markets remain highly sensitive, and any renewed disruption could quickly reintroduce inflationary pressures across transportation, manufacturing, agriculture, and consumer goods.

Investor Psychology Remains Remarkably Constructive
Despite persistent inflation, elevated valuations, and geopolitical uncertainty, investor appetite for risk remains exceptionally healthy. The market debut of SpaceX demonstrated investors’ willingness to absorb one of the largest technology offerings in history with relatively little disruption. Attention has now shifted toward the anticipated public listings of Anthropic and OpenAI, both expected to rank among the largest IPOs ever brought to market.

³*US-listed, venture-backed companies that raised more than $3 billion in private capital prior to IPO. IRR annualized from IPO date to May 29, 2026. 6-month return = simple return to 180 days following IPO. Alpha = return minus S&P 500 over same time period. SPACs (Lucid, WeWork, Grab) use first-day close as reference. Didi: OTC as DIDIY. WeWork: bankrupt Nov 2023. Full Truck Alliance: regulatory probe Jul 2021. Klarna: NYSE IPO Sep 2025.

The ease with which markets absorbed these offerings highlights the depth and liquidity of U.S. capital markets, as well as investors’ continued confidence in artificial intelligence. However, history offers a useful reminder that while a small number of innovative companies ultimately become exceptional investments, most IPOs have historically underperformed the broader market during their first several years as public companies.

Fundamentals Drive Stock Market Returns
In the end, business fundamentals matter more than investor sentiment. Anthropic, for example, expects revenue to roughly double to approximately $10.9 billion this year while generating its first operating profit of roughly $559 million.⁴ While profitability may fluctuate as AI infrastructure spending accelerates, the broader investment case remains unchanged: these are increasingly real businesses generating substantial revenues and earnings, not simply speculative concepts.

More broadly, corporate profitability remains exceptionally strong, with consensus expectations calling for earnings growth of approximately 24% in 2026, followed by another 17% in 2027.⁵ While technology has been the primary driver of recent market performance, earnings momentum is beginning to broaden across industries as AI adoption improves productivity and expands beyond the hyperscalers and semiconductor companies. Encouragingly, profit margins among smaller companies have also reached new cycle highs, suggesting that the benefits of the AI-driven investment are gradually spreading across the broader economy.

Short-term sentiment, valuation multiples, geopolitical events, and interest-rate expectations will continue to influence prices from quarter to quarter. Over time, however, shareholder wealth is created by owning businesses that consistently grow their earnings and cash flow. While periodic corrections should be expected, we remain constructive on companies positioned to benefit from the expanding AI investment cycle across both public equities and real assets as we look toward the second half of 2026.

1. Global Strategy Group. The Kitchen Table Project, June 2026.
2. The Economist. July 2nd, 2026.
3. The Odin Times. “The Magical Money Tree of Management Fees.” May 31st, 2026.
4. The Wall Street Journal. “Mind-Blowing Growth Is About to Propel Anthropic Into Its First Profitable Quarter.” May 20th, 2026.
5. FactSet. June 2026.

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