Q3 2026
INVESTMENT OUTLOOK
July 20
DBFitzpatrick
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INVESTMENT OUTLOOK | Q3 2026
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TECHNOLOGY STOCKS BOUNCE BACK IN Q2 Stocks performed well during the
the Strait of Hormuz reopening.
watching rapid advancements in this
second quarter, led by a sharp
That expectation is being tested early field. Optimism is high that the new
rebound in the technology sector.
in the third quarter as the belligerents technology will greatly enhance
The S&P 500, which measures U.S.- have resumed fighting, but the lack
productivity across the economy and
based large cap stocks, returned
that substantial investments in AI
of serious impact on stock prices
15.2% during the quarter and was up shows that the market continues to
infrastructure will justify their
10.2% year-to-date through June.
take a sanguine view of the conflict’s considerable cost. There remain
International large cap stocks have
ultimate outcome. That view is
fundamentally unanswered questions
performed similarly, with the MSCI
probably right when thinking of the
regarding the technology’s future,
All Country World Index, a measure conflict’s impact on long-term equity however. of the global stock market, returning returns (over the next 3-5 years). If 15.1% during the quarter. Of note,
the conflict continues in the coming
The biggest and most fundamental is
all major equity sectors outside
weeks, however, the chances
whether the broad productivity gains
technology underperformed the
increase that short-term market
generated by AI will meet the
broader market during the second
sentiment will move from optimism
market’s lofty expectations. Closely
quarter, as increasingly tech-heavy
to “risk-off”.
related to this is uncertainty
market indices were pulled upward by technology stocks.
surrounding the long-term trajectory The equity market is primarily
of AI infrastructure spending.
focused today on the development of Currently, there is no end in sight to The conflict in the Middle East
artificial intelligence (AI)
a massive buildout of data centers
dominated global headlines during
technology, with investors closely
and related projects, but, depending
the second quarter, yet the equity market generally looked past news from that volatile part of the world. Equity investors have
shown persistent belief that, despite the often discouraging day-today news cycle, President Trump would
2026 Equity Returns
ultimately bring the conflict to an end, with
Source: Bloomberg
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INVESTMENT OUTLOOK | Q3 2026
on changing outlooks for returns on these projects, AI
potential more effectively.
capital expenditure plans could be altered. Small changes to these investment plans could have a big
Given high valuations across most of the technology
impact on the stock prices of AI infrastructure
sector, we remain cautious with our equity positioning.
providers, which have been the recent darlings of the
We have recently lowered technology exposure and are
stock market.
now considerably underweight technology vis-à-vis the MSCI All Country World Index and, especially, the
It is also too early to know what companies will
large cap technology-heavy S&P 500. While our
ultimately be the winners and which will disappoint as
portfolios retain meaningful technology exposure, we
artificial intelligence technologies mature. A similar
view anything near a market-neutral weight (technology
circumstance occurred in the late 1990s and early 2000s stocks represent roughly 32% of the MSCI All Country as the internet entered the mainstream of economic life.
World Index and 38% of the S&P 500 Index) as overly
Many of the early assumed winners of the internet boom aggressive in today’s environment. We see better value
ultimately dramatically underperformed, while many
today in other areas of the market, including healthcare,
late arrivals to the scene captured that new technology’s industrials, and certain consumer discretionary stocks.
FIXED INCOME: TREASURY YIELD CURVE FLATTENS The U.S. Treasury yield curve flat-
Short-end Treasury bond yields, on
probable increase of the Fed’s main
tened during the second quarter.
the other hand, rose meaningfully
policy rate by year-end, a change
The long end of the curve had risen
throughout the second quarter and
from early in the second quarter
through mid-May as investors fret-
did not fall considerably even after a when a cut was viewed as more like-
ted about the high price of oil and
preliminary peace agreement in the
ly.
the potential for continued inflation- Middle East was announced in June. ary pressures throughout the econo-
This is primarily explained by
my. Longer-term Treasury yields
hawkish comments from new Feder- inflation remains a concern for the
The potential for continued elevated
later fell as a preliminary agreement al Reserve (Fed) chair Kevin Warsh, bond market, but during the last few to halt the fighting in the Middle
who promised to honor the Fed’s
weeks of June inflation breakeven
East was anticipated and then
commitment to contain inflation
rates – roughly what the bond mar-
reached. By quarter-end the move
during his first official comments as ket is forecasting inflation will be in
down in longer term yields had
leader. This mildly surprised (and
largely counteracted the prior move
reassured) many in the bond market, -year inflation breakeven rate was
up, with a 10-year Treasury bond
who had thought he might proceed
down 61 basis points in June to
yielding 4.47% at quarter end.
with previous intimations of a more
2.00%, while the 10-year inflation
dovish path. By the end of June
breakeven was down 17 basis points
Treasury futures had priced in a
to 2.23%. Falling inflation breake-
the future – fell considerably. The 2
5 ven rates have clearly been influenced by lower oil prices and Fed chair Warsh’s unexpected hawkish comments. They may also be influenced to some degree by a forecast in the bond market that the U.S. economy will slow during the next 6-12 months. Agency mortgage-backed security (MBS) spreads were little changed during the second quarter. The asset class has been boosted by President
U.S. Treasury Yield Curve
Trump’s call in January for the agen-
cies (Fannie Mae, Freddie Mac, and Ginnie Mae) to buy additional MBS
Source: Bloomberg
for their own balance sheets. These purchases have had only a marginal impact on mort-
months as the market will need to absorb significant
gage rates for home buyers, but they do imply im-
new bond supply issued by the technology giants and
portant support for MBS option-adjusted spreads
their infrastructure suppliers.
(OAS) and have aided MBS prices. In the closing weeks of the second quarter we lengthLooking at the credit markets, corporate bond spreads
ened duration in our bond portfolios by adding both
remain very tight, with high yield corporate spreads (as longer-term agency MBS and Treasury bonds to client measured by the Bloomberg High Yield Very Liquid
accounts. A renewed “risk-off” sentiment in the mar-
Bond Index) falling roughly 50 basis points during the
ket, which we believe is overdue, should aid these posi-
second quarter to 2.53%. Corporate bond spreads are
tions. In our view, corporate bond spreads are vulnera-
near multi-year lows and have been aided by a continu- ble to changing market sentiment and lower quality coration of an ebullient mood among many equity inves-
porate names should be severely underweighted today.
tors, combined with few fears among bond investors that corporate profitability will slow in the near term. We believe this optimism will be tested in the coming
- Brandon Fitzpatrick, CFA
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INVESTMENT OUTLOOK | Q3 2026
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