Shareholder Resources

Technology led the way, again, from a sector perspective, but the narrative began to take a different shape. The AI hyperscalers—mega cap technology providers investing nearly a trillion dollars to build out their capabilities and scale—gave way to commodity-like businesses in the memory and compute space. These stocks had a blowout quarter, with some memory and storage stocks up between 150% and 200% in just three months. There is little doubt that the market is placing a scarcity premium on these names while growing anxious about the “when” and “if” the mega cap hyperscalers will start to realize a return on their investments, all while several corporate executives have begun questioning or curtailing their AI spending.

Inflation, Bonds, and a New Era for Monetary Policy

The few months of heightened energy prices were enough to reverse inflation’s downward course. The latest reading of the Federal Reserve’s preferred metric, Core Personal Consumption Expenditures Index (Core PCE), jumped to 3.4%, above the Fed’s target of 2.0%. Inflation is clearly top of mind for the Fed’s new boss, Kevin Warsh. At his first Federal Open Market Committee (FOMC) meeting, Warsh firmly established price stability as the Fed’s number one priority. As a result, bond markets have steadily repriced toward a more restrictive policy path with an expected rate hike by September and the potential for another to follow.

Despite the changing calculus with front-end rates, longer-term Treasury yields remained relatively stable throughout the quarter. Growing government deficits are unlikely to be resolved in the near term, keeping upward pressure on longer maturities, while moderating inflation expectations serves as a counterbalance.

Valuations in the corporate bond market remain one of the few areas where little has changed. Credit spreads continue to trade near historically tight levels despite the geopolitical risk and flood of AI-related issuance. Demand is insatiable while fundamentals remain sound. And with solid absolute yields, there remains value to be had in fixed income markets, regardless of the tight spread environment. As of this writing, the Bloomberg Aggregate Bond Index is up about 1% year-to-date.

Outlook: It’s an AI Economy

Heading into the second half of 2026, we expect markets to continue to look past the daily headlines from the Middle East and keep their sights on the promise of AI. Inflation expectations have moderated since the spring energy shock, and even if the next Fed policy action is a rate hike, the U.S. economy remains on firm footing. Business investment tied to AI has become a meaningful driver of economic activity, and while some may question the sustainability of spending, equity investors are certainly not complaining.

We see little reason that the exceptional corporate earnings can’t continue in the near term. While it has been an all-Tech market for much of the recent past and valuations in some individual names have become stretched, the backdrop remains supportive for stocks overall heading into the second half of the year.

Risks worth monitoring include index concentration, late-cycle capital funding, and the potential for scaling back of investment. Equity index investors remain heavily dependent on a narrow set of return drivers. Not only do the top weights in the S&P 500 represent an outsized portion of the index, but returns have also been concentrated in just a few select themes—mainly technology and memory/storage this past quarter. Even for investors diversified across international developed and emerging markets, popular indexes have become concentrated in the technology and AI theme as well, doubling down on U.S. return drivers.

Companies are still tapping both stock and bond markets for liquidity. This past quarter saw the most expensive initial public offering (IPO) in history with SpaceX, with other major technology IPOs slated for later this year and next year. This is a stark contrast to the post-financial crisis bull market, when buybacks told the opposite story. These private companies certainly appreciate the rich valuations that going public can provide.

Still, despite the exuberance, the equity market remains on the lookout for any signal that the AI buildout may crown new winners or deem others obsolete. Consumer price sensitivity to AI could be the first sign that the big players could start scaling back investment.

We continue to believe discipline is paramount in today’s investment environment. Investors no longer need to search in the riskiest corners of the market to earn a decent fixed income yield or pursue equity growth.

This piece was authored by Patrick Ryan, CFA®, Chief Investment Strategist, Head of Multi-Asset Solutions, and Portfolio Manager for Madison Investments. He also serves as a member of the Investment Risk Oversight Committee and is a Madison Investments Foundation board member.