Insights

Quarterly Commentary

2Q 2026

The resilience we observed in markets during the first three months of the year evolved into something closer to exuberance during the second quarter. Notable events:

• The S&P 500 gained 15%;
• Oil prices nearly returned to pre-war levels, despite much uncertainty in the Middle East; and
• SpaceX went public at a valuation of $1.77 trillion.

The S&P 500 had its best three months since the second quarter of 2020, when large cap stocks recovered from the Covid collapse. Once again, AI stocks drove the advance. This time it was computer chip and related hardware manufacturers that exploded higher. Software and IT consulting stocks were largely abandoned by investors afraid that AI will supplant their services.

Wall Street expects S&P 500 companies will generate 24% earnings growth in 2026 (ten-year average is about 10%). Three companies – Nvidia, Broadcom and Micron – are expected to account for half of this year’s growth. Notably, the hyperscalers, the companies that are buying more and paying higher prices for that hardware, were relatively subdued. This group includes Amazon, Alphabet (Google), Meta (Facebook), Microsoft and Oracle. Their share prices are not that far from where they started 2026.

As risk appetites increased, other sectors of the market came alive as well. After years of underperformance that played like a broken record, US small caps and emerging markets stocks each gained more than 20%. Japan’s Nikkei index returned 34% in the second quarter.

The decline in oil prices that accompanied reports of US / Iran deal progress contributed to investors’ excitement. We also learned that the US military had been sneaking ships through the Strait of Hormuz for weeks, likely a factor in keeping oil prices from reaching levels many feared ($150+ per barrel). With tensions once again flaring in early July, we are less confident than the market that Middle East-inspired market volatility is behind us.

The most talked about stock of the quarter was undoubtedly SpaceX. Its rockets carry payloads for many businesses and governments, as well as its own Starlink transponders that provide broadband internet services around the globe. Investors are hoping that within a year or so, SpaceX will be successfully launching even bigger rockets with reusable first and second stage engines. Future payloads are expected to include orbiting data centers that will provide AI computing capacity to subscribers. (The company’s espoused mission is to promote interplanetary human settlement.) Chairman Elon Musk’s past business successes promote confidence among SpaceX believers. In our opinion, too many things must go right in a short time frame to believe that SpaceX won’t fail to live up to its astronomical valuation at some point in the next few years.

Looking forward
Though both have received much attention, we believe geopolitical developments and the pace of AI adoption remain significant risks to markets and the economy. It feels like investors are trying to ignore the fact that the Middle East conflict is still playing out. The unpredictability of the parties involved makes for a heightened level of uncertainty that could dampen economic growth and market confidence (those so-called animal spirits) in the months to come.

On July 1st, the United States indicated it will not extend the US-Mexico-Canada (USMCA) trade agreement that with its predecessor NAFTA has benefited trade between the three neighbors since 1994. Instead, the current agreement will remain in place and be reviewed annually over the next ten years, at which point it might expire. Given the intensity of trade between the three, expiration would be extremely disruptive.

The magnitude of AI’s impact on the economy and markets is real. Given that the hyperscalers are borrowing like never before to finance the buildout, we need to ask whether this soaring capital expenditure will be as productive as expected. Moreover, any pullback in such spending could trigger a recession and/or a market correction. That is not our expectation, but it’s certainly in the range of reasonable scenarios over the quarters to come.

The current chip shortages are well known. Semiconductor chip manufacturing is a notoriously cyclical business, meaning today’s shortages will eventually give way to tomorrow's overcapacity. Just about everyone knows about this, and just about everyone is determined to reduce their exposure before the cycle turns. That caution could mean that the cyclical hardware stocks have less downside risk than usual. Sectors of the market regularly go in and out of favor – this is an extreme example.

We view today’s elevated uncertainty as the new normal. Frequently changing tariffs, armed conflicts, and rapidly evolving narratives around the impacts of AI will undoubtedly keep us on our toes as the rest of the year unfolds.

Strategy
Your portfolio with Rock Point maintains exposure to frontline AI players as well as attractive and often overlooked non-AI businesses. We are comfortable identifying good businesses available at historically favorable prices and waiting patiently for value to be realized. The massive AI capital investments will be considered successful when productivity gains spread throughout the US economy, a process that is likely to take several years. By then, virtually every company will likely be an AI adopter in one form or another.

The AI journey, we hope, is ultimately about making the world a better place, not just making funny videos for our friends or doing our thinking for us. Either way, its ubiquity demands our full attention.