My family and I had been looking forward to hiking the Sucha Bela Gorge in Slovakia since Thanksgiving. The problem was that my doctor called me the day before I left telling me I had torn my rotator cuff in a recent fall. My vacation started off with a little bit of craziness, sort of like the markets in July.
The markets began in the second half of 2026 with no shortage of craziness, from the Iran mess which is begging to feel like a daily soap opera that never ends to higher oil prices and ongoing questions about whether there will be a big payoff from the huge artificial intelligence (AI) spending. Despite these uncertainties, the S&P 500 started August near all-time highs, and chances for further gains seem possible because of the resilient economy and solid corporate fundamentals.
The main story continues to be the AI investment cycle. As the big technology companies reported second quarter earnings, it became clear that investors have shifted from investing in whichever companies promised the most out of AI to rewarding companies who have started seeing a return on their AI investment. Investors are waiting to see if the big guys such as Microsoft, Amazon, Alphabet, and Meta generate profit from their spending on data centers, chips, cloud infrastructure, and AI platforms. Second quarter results were a mixed bag. Some showed strong revenue growth, increased cash flow, and a hint of making money on AI and saw their stocks rise, while those companies who announced more AI spending but with little to no profit from their previous AI spending saw their stock prices drop.
I believe the AI story is still a positive one, but I wouldn’t be surprised if saw some streaks of volatility as markets begin to hold companies responsible for their massive spending. Investors are beginning to show their impatience with the spending and want to see a return sooner rather than later.
Corporate earnings continued to be strong and provide strong support for stocks. S&P 500 companies as a whole had profits of nearly 30% year over year in the second quarter, not counting the markups of private holdings in Anthropic, OpenAI, and SpaceX. That earning strength isn’t just the technology sector, with earnings growth excluding the Magnificent Seven at nearly 20%.
The inflation picture is still difficult but seems ready to improve. The ongoing Iran mess and strong economic growth have put pressure on long-term interest rates, leaving the Federal Reserve and its new chairman in a tricky spot. Hopefully, the weaker jobs report on August 7th might have put the brakes on any talk of a Fed rate increase this year.
Overall, the earning season showed me that the economy is still strong, and I like the fact that investors have stopped rewarding hype and are pushing up companies making AI profitable tools. We need to see shipping traffic restored in the Persian Gulf or that could grow into a problem. I will be keeping an eye on that and will continue to preach investment diversification.
My doctor told me, “The hike is off the table, you can’t do it,” but I said, “Doc, the hike is definitely on the table.” So, I bought a sling for support and to squeeze out maximum sympathy from my wife and hiked the number one rated hike in Europe with all its ladders one handed. I was slow but I did it. It wasn’t pretty but I worked my way upward and finished strong. The same way the market has done so far in the second half. Not pretty, not smooth, and not fast but finishing upward and strong.
Have a blessed week.
Richard Baker
www.FerventWM.com
This article was written by humans for humans because AI doesn’t have this quality of sarcasm.
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