Second Quarter 2026 North American Equity Strategy
Summary:
The second quarter delivered strong returns for U.S. equities, with the S&P 500 posting a +15.20% total return in USD terms, bolstered by exceptional corporate earnings momentum. Operating earnings per share surged +18.9% year-over-year in Q1 2026—more than double the long-run average—with consensus projections for continued acceleration through 2026 and 2027.
However, the investment landscape is shifting. New Federal Reserve Chair Kevin Warsh signaled a hawkish stance on inflation, with the FOMC’s June projections revealing upward revisions to PCE inflation for 2026 and nine of nineteen policymakers supporting at least one rate hike later this year. Markets have repriced accordingly, shifting from expectations of multiple rate cuts to pricing in potential hikes.
Despite tighter monetary policy headwinds, the economic backdrop remains resilient. Real GDP growth is tracking above Fed projections at 2.5%, while the labor market continues to expand at a pace consistent with 2023-2024 levels. Credit conditions remain neutral, signaling no imminent recession concerns.
The article highlights growing concerns around the “Magnificent 7” technology stocks, which have lagged the broader market year-to-date. The focus centers on three critical issues: massive capital spending requirements ($765B in 2026, potentially $1.6T by 2031), capital issuance pressures, and return on invested capital (ROIC) sustainability. Token pricing has doubled, yet consumption may be moderating, while competition from cheaper Chinese AI models intensifies.
In response, the portfolio has rotated from AI-exposed positions into cyclical industrials and healthcare, adding positions in Union Pacific and Linde, while initiating healthcare exposure through McKesson. Valuation multiples have compressed from 22.1x to 20.0x forward P/E, yet earnings growth has outpaced price appreciation, making markets cheaper despite significant gains. The outlook remains constructive, supported by broad earnings strength, market breadth improvement, and expectations for inflation to peak in Q3 2026.
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