The Rising Tide - Market Update Q2 2026

We hope this blog finds you doing exceptionally well as we wrap up the spring season. Our goal is to provide some insight into what is going on in the markets these days and give you a sense of how we are thinking in the current investing climate. It has been a while since our last blog and the reason for that is twofold. Firstly, the micro factors are changing at a rapid pace and we’ve aimed to address those with one-off emails periodically rather than full blog postings. Secondly, the macro themes are very similar today to the picture we painted over 12 months ago in our previous blog: Turbulent Times – Market Update Q1 2025. You could re-read that and still have a pretty good sense of what is driving markets. If we had to boil down the majority of what’s gone on over the past year, we would put it this way: Short term pains for long term gains. The sharp pullbacks in the market, followed by significant gains illustrate this fairly well.

The big themes we’ve discussed previously are all still relevant today: AI build out, Federal Reserve’s battle with inflation, reshoring of production and manufacturing, deregulation, public spending offramp vs. private spending onramp, and more are all major factors that drive markets both up and down depending on the day. In our opinion, the one factor overriding any fears that day-to-day headlines bring is earnings. In general, company’s earnings have been nothing short of remarkable – the reason any piece of news, both good or bad, has an impact on the stock market is because investors then discount the implications of that news into the outlook for earnings. For example, an investor’s thought process could look something like this: Iran war leads to higher oil prices, which leads to higher cost of goods sold, which leads to lower earnings per share. This could explain why stocks sold off across the board in February and March of this year. The Iran war hasn’t happened in a vacuum however, and other factors have mitigated and even overshadowed the downside of higher oil prices, driving stocks back up to new highs. Since earnings have generally been strong, investors have been able to shake off bad news more easily than they might in a different earnings environment.

Always keep in mind, fear and greed tend to drive the shorter-term moves in the stock market and they often lead to overshoots, both to the upside and the downside. Any trepidation investors have had due to seemingly scary headlines has been allayed by the earnings that companies are putting up. Whether or not we think that has led people to be overly greedy, we’ll discuss further below.

Here’s a fly over of what we’ll cover – though I would strongly encourage you to read everything below – you’re welcome to jump to areas of most interest to you.

• Technological Disruption and Its Implications

• Fixed Pie vs. Expanding Pie

• Iran and Oil

• Private Markets: Credit and Equity

• AI Buildout – Is it a bubble?

• Manufacturing Upswing

• Housing Cycle: Always Winter But Never Christmas

• New Chairman of the Federal Reserve

• What’s Next?

Technological Disruption and Its Implications

Throughout history, there has been wave after wave of new technologies that reshape industries and even entire economies. With changes like this come disruption and often significant growing pains – companies go bankrupt and employees lose jobs. This is the downside and is often the only side people can see when standing on the cusp of the next technological revolution. What people don’t see, because it’s so difficult to imagine at the time, are the brand-new industries that have never existed in the past, born out of the new technology, which may lead to job growth and economic expansion. Here are some examples:

The sewing machine: legend has it that an inventor named William Lee invented the stocking frame and seeking a royal patent, demonstrated it for Queen Elizabeth I in 1589. You read that right – 1589!! Her alleged response summarizes well the fear everyone has regarding a new technology: “Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring them to ruin by depriving them of employment, thus making them beggars.” Link Though this quote wasn’t documented until hundreds of years later, it well represents the Tudor Monarchy’s overall economic policy: Paternalistic protectionism – social stability was prioritized over innovation. What they were missing was the vision of what would be born out of the innovation. Entire industries that we still operate today were born on the back of the sewing machine: ready to wear clothing, consumer credit and installment banking, modern factory assembly, the list goes on. Not to mention the fact that now the masses have access to the quality of clothing that only the monarchs could get their hands on.

Flash Freezing: When cold storage food was first introduced it was met with great skepticism by the public and for good reason – the food was frozen gradually over many hours and even days. So, when a consumer eventually thawed the food to eat it – they were met with smelly mushy food that in many cases was unsafe to eat. But then a breakthrough happened. Clarence Birdseye observed a solution when he was fur trading in Canada. He saw the local Inuit people catch fish in minus 40-degree temperatures and the fish would freeze almost immediately when they came out of the water. Then months later, when the fish was thawed and eaten, it tasted fresh. Birdseye realized the key was speed – thus the birth of quick frozen or flash frozen food. He then embarked on a massive marketing campaign to change the public’s perception of frozen food. Flash freezing then revolutionized the food industry by enabling food to be grown anywhere, flash frozen, then cold transported to wherever it would be consumed. This meant people could have access to peas and strawberries in the middle of winter. Not to mention the other benefits like a massive reduction in food waste, home cooking convenience, the drop in food prices, the consistency of food prices, a boom in home appliances like freezers, super market redesign, the entire cold food logistics industry… you get the idea – swaths of new jobs and industries born while the cost to the consumer declined. But on the way to that revolution – local farmers were terrified of this new concept and the threat it posed to their local monopolies. Traditionally, food would spoil during long transportation so local farmers effectively had a monopoly on the food supply for their respective areas. Their fear missed the bigger vision: guaranteed buyers (selling to freezing plants), reduced waste (could sell misshapen carrots that previously no one would buy because it would get chopped and frozen anyways), and ultimately the massive increase in total volume because fruits and vegetables could now be consumed year-round so global consumption skyrocketed.

Turbo Tax: here’s an example on a smaller scale but with more similarities to AI. Turbo tax was initially feared by CPAs because it was “coming for their jobs”. What really happened is various software products like turbo tax were adopted by CPAs and dramatically increased their productivity. Rather than plugging and chugging numbers and filling out forms all day to serve a handful of clients, accountants were freed up to serve many more clients and operate in higher paying advisory roles – moving from seasonal filing roles to year-round operations. It’s also worth mentioning that today we are currently experiencing a shortage of CPAs. Link  Accountants weren’t replaced, they were enhanced.

Our goal in showing you these examples is not to sweep concerns about artificial intelligence under the rug, but to give you a peak around the corner to what may be coming based on the history of past technological revolutions. Jobs and industries that we can’t even imagine today will likely be born in the coming years and decades. Many people are afraid of what AI is going to bring to the world. Some “experts” have even thrown out numbers like 40% unemployment as a potential future. Link  Certainly there will be specific jobs replaced by AI – it’s happening already and it can be paralyzing to consider the prospect of 40% unemployment. But in our opinion, it’s shortsighted to say that’s the end of the story. A good way to think about these things is through a fixed pie vs. expanding pie framework – which we’ll get into next to see if we can paint a brighter future to consider.

Fixed Pie vs. Expanding Pie

This discussion really boils down to one question: Is the economy a zero-sum operation where one person's gain is always someone else's loss (fixed pie), or is it a positive-sum operation where we can create entirely new value that makes everyone better off (expanding pie)? You can tell which camp someone falls into by the way they talk about wealth, resources, and economics. Once we explain the concepts, you’ll start to notice this as you talk to different people.

The fixed pie mentality believes there is a strictly limited amount resources, wealth, and opportunity. Think of the economy as a pizza: if one person takes a big slice, the remaining slices at the table must get smaller for everyone else. Put another way, for one person to win, someone else must lose. I’m sure you can already see where this path leads: fear, jealousy, and resentment are the natural by products of this worldview which lead to bad policy and decision making that stifles innovation and expansion. The Luddites provide us with a perfect example of this attitude, when the sewing machine first entered the scene. They went as far as to break into factories and smash all the machinery they feared would take their jobs. In contrast, the expanding pie mentality believes that wealth, resources, and opportunity are dynamic and can be increased through innovation and efficiency. In essence, if we invent a better way to do things, we aren’t just fighting over the existing pizza – we are freeing up resources which can be deployed to bake a much larger pizza, allowing everyone's slice to grow. Over time, this creates a standard of living for the lowest in society that once was enjoyed exclusively by the kings and queens of centuries past.

As this relates to AI: when someone says AI can do 40% of the work we currently do so of course there will be 40% unemployment, they are assuming there is a fixed amount of work to be done. This is the Tudor Monarchy mindset: zero-sum. Here’s a different way to think about it: the 5-day work week turns into a 3-day work week. What if the result of AI is that everyone is now able to complete the amount of work that previously required 5 days, in only 3 days or an even shorter timeframe than that. Hopefully you see where we’re headed with this – to borrow one of my 3-year old daughter’s favorite words – we are talking about baking a pizza that is hugenormous in size compared to the pre-AI pizza. Efficiencies can and will be realized, freeing up time and resources to be deployed in new and expansive ways. The way I like to think about it is that humanity may just get 40% of its day back. Some of the smartest people I know are computer programmers or software engineers, what might they be freed up to innovate or invent or build when AI can do the heavy lifting of writing code for them, and they have weeks or even months of time back each year. The prospect is certainly scary because it will lead to specific job losses but at the same time, it’s exciting as the stage is being set for a remarkable future. We look forward to walking into it together.

A side note – the fixed pie vs. expanding pie concept applies to many areas of life, not just economics. Try approaching the relationships in your life with an expanding pie mindset and see how that changes your perspective on things. Try leaning into the natural synergies in your household, each person doing what they are best at rather than aiming for an even 50/50 split. You can even be happy seeing someone else do well, because it doesn’t have to mean their good fortune is coming at your expense.

Why did we spend so much time on this concept? Because a person’s underlying worldview informs everything they think and do and it may be helpful to understand some differing perspectives as they are the forces that drive much of what we’ll discuss next as well as our overall outlook on the economy and stock market.  

Iran and Oil:

We’re not war operators with insight into what might come next, so we won’t pretend to be, but here is how we are thinking about things: Oil prices going higher is generally bad for everyone except for those who produce oil. If this conflict results in sustained higher oil prices – by itself, that can have varying negative effects. Upward pressure on inflation which then puts upward pressure on interest rates. As we mentioned at the beginning, there are other forces at play which are overshadowing the current increase in oil prices. If oil prices settle down sooner than later, investors will move past this incident relatively quickly and it will be a blip on the radar, which has already happened in the stock market to some degree.

However, if oil stays elevated for months leading to years, we think there will be more wood to chop in the market as a result. Along with everyone else, we are in wait and see mode as this all plays out. In our opinion, the fog of war isn’t generally the time to make big changes or decisions because what seems to make sense today may be completely reversed tomorrow. Keep in mind, President Trump wants lower oil prices and it hasn’t been a winning formula to bet against the White House. That gives us some reason to believe this will get sorted out sooner than later.

Another process plays out during oil price spikes – companies are forced to find new efficiencies to offset the increase in costs that are brought on by the increase in oil prices. This accelerates timelines and forces change in some cases. As a result, companies often emerge from these environments stronger than they were at the outset.

One other factor that falls into the category of short-term pain for long-term gain. What if the strait of Hormuz never reopens to the degree it operated at before this war began? The Trump administration’s overarching goal of bringing production and manufacturing back to the United States will be accelerated. Like it or not, the world is reliant on oil for almost everything we use and do. Every country that imported oil or other goods for that matter which passed through the Strait of Hormuz is now forced to reevaluate where they buy from. If passage through that channel is being used by Iran as a negotiating tactic now, who’s to say they won’t use it again. That makes for an unreliable trading partner and supply chain, this will drive buyers to other areas of the world, with the United States likely being close to the top of that list.

Private Markets: Credit and Equity

This area really deserves its own blog which we’ll aim to deliver down the road. But for now, we’ll keep this simple and high level. There have been many headlines this year about private equity firms having liquidity issues, etc. The name Blue Owl Capital may ring some bells for you on this topic. Let’s zoom out a bit because the terms private equity or private credit don’t really mean anything to most people. Private equity simply refers to ownership or investments in private companies, and the total global market is estimated to be roughly $7 trillion in size, spanning hundreds of thousands of companies. Link Private credit, also known as private debt, refers to non-bank financing – privately negotiated loans directly to businesses or other recipients. The private credit market is estimated to be around $2 – $2.5 trillion in size globally. The TV show Shark Tank pulls back the curtain on private markets as it displays the unique deals which are struck that wouldn’t be achieved in a traditional banking environment. How do you make money in each of these markets? In the private credit market – when loans are issued the lender evaluates the probability of default and then demands an interest rate that compensates for taking on that risk. To put it simply, investor’s money is pooled together and then loaned out in various private deals. The upside is the interest earned, the downside is the potential default. In the private equity market – investors contribute capital which is pooled and then invested as ownership (equity) in various companies. Because they are private companies, the holding period can be very long in some cases, often 7-10 years before capital can be recouped. Capital is returned to investors once a company is sold, hopefully at a higher price than was originally paid.

There is a high level of opacity in the private markets because the value of the underlying businesses are typically only marked to market on a quarterly basis and in some cases only once per year. What does that even mean? In the public markets, the value of every business is marked to market every minute of every day as traders buy and sell shares, so an investor knows exactly what the value of their holdings are at any time. In the private markets the value of the underlying holdings only gets updated four times per year or in some cases, once each year. There are also varying methods for determining the value which may or may not hold up in the public market. This is by design and isn’t necessarily a bad thing, but it’s a significantly lower level of transparency than in the public sphere.

What has happened this year is software companies have undergone a massive valuation re-rating. Software stocks in the public markets, that have been darlings for the past 15 years or so, are now down somewhere between 30-60% from their 52-week highs. Adobe (ADBE) and Salesforce (CRM) are names you are likely familiar with. As of this writing, they are down 46% and 40% from their 52-week highs respectively. ADBE is down nearly 70% from it’s all-time high just a few years ago. In case you are wondering why – we think investors worry that software companies will be entirely replaced at worst or at best eroded by AI which is why stocks like this have been re-rated so significantly. Some of the funds at Blue Owl have significant exposure to software companies, both on the debt and equity sides. With fears of a maturity wall materializing this year where the underlying companies may struggle to make good on their loans, investors in the Blue Owl funds and many other private equity funds have attempted to withdraw their money, not wanting to stick around for that maturity wall to hit. Enter the liquidity gate – investors are only permitted to withdraw a very small percentage of their capital (typically 5%) at set intervals. This protects the investment fund from having to sell large positions in illiquid assets at a loss just to meet redemption requests. Again, this is by design and isn’t necessarily a bad thing, it’s just how it works. That’s where headlines then run saying, so and so investors are restricted from making withdrawals and questions about liquidity start circulating and it all sounds a bit scary. Especially for people with scar tissue from the Great Financial Crisis of 2008. For now, we don’t see broader contamination in the markets from this being the most likely outcome, but it’s a situation we continue to monitor on behalf of our clients. We may dedicate some time in our next blog to go into more detail. Hopefully this at least gives you a sense of what is going on. We’ll touch more on this in the next section as well.

AI Buildout: Is it a bubble?

In our opinion, the short answer is no. Though it is of course impossible to know if you are in a bubble until after the fact, we will outline some reasons why we don’t believe we’re there now and some reasons why we may still end up there one day down the road. We should note, there are pockets of the market that are acting frothy – the semi-conductor space most notably. But that doesn’t mean the entire market is overvalued. The first and most obvious reason for us is that everyone is talking about it – when something is so widely discussed and analyzed, it isn’t usually something to be afraid of because investors have already positioned themselves for it to some degree. That doesn’t mean we don’t think AI stocks can go down. However, we think it does mean investors are still acting rationally and the significant dispersion within the AI trade is a good indicator of that rational thinking.

There have been rolling bear markets under the hood for years now. Even though it feels like things have moved steadily up and to the right for the stock market in recent years. If you look under the surface at the sector level, that certainly hasn’t been the case. This tells us that digestion and consideration of who will be the winners and who will be the losers is happening and that’s healthy activity – not what typically happens in a bubbly market.

Progress happens very gradually and then all at once – this is the essence of the Hemingway Law of Motion, and it seems fitting to the current environment. AI has been around for decades, but it seems we’ve been in the “all at once” phase for a few years now and it’s created an arms race of monetary value that is truly staggering. We think the mentality in the C-suite of every major tech company (apart from AAPL) boils down to something like this: We must spend and build otherwise whoever spends and builds more is going to eat our dinner, our lunch, our neighbor’s lunch and even our dog’s kibble. This mindset, though exaggerated, is a bit concerning. Even countries are thinking this way, not just companies. As a result, both good ideas and bad ideas are getting funded right now because investors have no idea how to discriminate between what’s good or bad. That may end up being okay if the good ideas supersede the losses from the bad ones. A lot of the carnage will likely playout in the private markets – you probably don’t know this because all we hear about are the winners (SpaceX as the most recent example – going public more than 20 years after its founding), but 90% of venture capital companies fail. We don’t think this wave of investment will be any different, in fact it may be higher than 90% when all is said and done. This isn’t as much of a concern for private equity because the enormous gains made from the few companies that end up winning should more than offset the losses from losers. The trick is, you must own at least one of the winners and that’s not easy to identify when companies are in the startup phase. This, however, is a huge concern for the private credit space because in a winner-takes-all or winner-takes-most situation. If you own a basket of private debt and 90% of the companies go belly up – you’re left collecting interest on only 10% of your original investment and you’re writing off the other 90% as a loss. Howard Marks puts it very well when he says, “The worst of loans are made during the best of times.” This is another reason why the maturity wall we discussed earlier is a potential concern.

Let’s go through a thought process of why we are a little concerned about the semiconductor space. Why are companies so desperate to find other ways to build data centers? Why are we hearing about data centers in space? Because the cost of AI compute is enormous and for the economics to be sustainable in the long term, massive efficiencies need to be realized. What does more efficiency mean? Potentially less demand for chips, etc. This could be a headwind at some point – remember the Deep Seek moment in January 2025? NVDA dropped 17% in one day on news that a model was built using significantly less compute than was previously assumed to be required. That turned out to be false news out of China, but it gives you a sense of what could happen when demand for chips eventually slows. It may be years before this is a real conversation, but it’s something to keep an eye on.

A useful analog is the fiber build out of the 90’s which led to huge amounts of dark fiber (fiber optic cable that was built but then went unused). We think it may be years before that’s in play because every single bit of compute being built right now is immediately used at full capacity. We are just keeping an eye out for when that is no longer true. More efficient models could be the catalyst one day. The same way that DWDM (Dense Wavelength Division Multiplexing) multiplied the data carrying capacity of a single strand of fiber by 100x to 1000x – meaning the projected required fiber was reduced by 90%+ when DWDM was perfected – leading to massive amounts of useless fiber.

The other catalyst in our mind is that the big dogs in the race are currently giving away many of their products for free. What happens when they eventually start charging – will demand go down for something a majority of people currently use for free? We shall see – but that could be another catalyst for pain in the semiconductor space. Citadel put out an interesting article recently that outlines this concept, you can read it here: Tokenomics

Asset bubbles are born out of a state of mind more so than a particular asset valuation. The following quote captures well the state of mind we are keeping an eye out for:

“There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.” Charles Kindleberger and Robert Aliber in the fifth edition of Manias, Panics, and Crashes: A History of Financial Crises.

When someone invests, if they want to be in the game for more than 5 minutes, they should try to avoid losing money. When something is booming, that avoidance gets replaced with a fear of missing out. So do let us know when your friends start acting like they can’t lose money – that will help us gauge when bubble status may be near. 😊

Manufacturing Upswing

ISM Manufacturing PMI readings crossed below 50 in November 2022 and then spent 35 of the following 38 months below 50. To find a period of such prolonged weakness we must go all the way back to 1979.  Since January of this year, we’ve now seen 5 months in a row of readings above 50 and those numbers are steadily climbing. See the chart below:

Readings below 50 indicate contraction and that businesses are only manufacturing to meet demand – rampant pessimism. That leaves room for pessimism to turn into optimism, and we have started to see that in recent months. This is a very positive leading indicator that has many positive ripple effects. Lots of factors are behind this but let’s just name a few: faster permitting (deregulation), favorable tax policy allowing for immediate expensing of capital equipment, and a stabilizing interest rate environment. All of this is leading to an expansionary environment that we think can endure for many years.

We discussed in our past blog the concept of public spending (government spending) coming down while private spending and investment could ramp up. We think the above ISM Manufacturing numbers are helping to tell that story. You can also click here: USA Investments to see a list of commitments to spending and investing in the US that total north of $10 Trillion. This should help support years of expansion.

Housing Cycle: Always Winter But Never Christmas

In the iconic Chronicles of Narnia written by C.S. Lewis, the fawn, Mr. Tumnus tells Lucy Pevensie that the White Witch cast a spell over the land of Narnia so that it is “always winter. Always winter and never Christmas.” This seems to us to be the perfect characterization of the housing market. The spell over the housing market in our opinion, is inflation, which has remained stubbornly above the Fed’s target of 2%. This has put a floor under interest rates. Whenever it seems that floor is about to give way, something happens. The rate on the 10-year Treasury Note has briefly touched down at 4% multiple times over the past year, most recently just prior to the Iran war. But as we discussed – oil going up leading to inflationary pressures has sent rates back up again, bouncing off the 4% level on the 10-year. We do believe that level will eventually break and Christmas will finally come to the housing market in the form of lower mortgage rates, but the timing on that remains elusive.

When that does finally arrive however, we think it will provide another major catalyst for years of growth. Perhaps the timing will work out so that the baton can be passed from the AI buildout investing theme to the jingling bells of Santa’s sleigh in the housing market. It doesn’t usually work out that smoothly but it’s a nice thought anyways.

New Chairman of the Federal Reserve

A new era is beginning as Kevin Warsh takes the role of Chair of the Federal Reserve. Time will tell what the impacts may be, but we are optimistic and we will explain why. The Fed’s dual mandate is maximum employment and stable prices. Those mandates have been working against each other for many months now, which is why the Fed has been sitting on their hands, neither raising or lowering interest rates.

Kevin Warsh seems to subscribe to the school of thought that economic growth does NOT have to translate to increases in inflation, which is contrary to the long-held beliefs of most economists (Phillips Curve Theory). To us, this means he may be willing to let the economy “run hot” longer than the Federal reserve has done in the past. There’s an old adage on Wall Street that goes something like this: Bull markets don’t die of old age, they get murdered by the Fed. This basically means that seeing the economy get hot, the Fed will then raise interest rates to keep it from turning into an inflationary issue, effectively killing the underlying bull market.

There is precedent now for the economy to run hot without it translating to an inflationary issue and it happened during President Trump’s first term. Jerome Powell, the newly former Chair of the Fed has, for years, referred to the economy of January/February 2020 with longing in his voice. It was a remarkable period because it was the first time in history that an incredibly tight labor market (a 50-year low unemployment of 3.5%) coexisted with stable prices (headline PCE of 1.5-1.6%). To translate that – the economy was booming and inflation remained below the Fed’s target of 2%. That’s the kind of situation Federal Reserve Chair’s dream about – winning on both sides of their mandate. We think Kevin Warsh may have the ability and wherewithal to steer the ship towards that same destination. Like we said, time will tell!

What’s next?

If you’ve made it here and are still reading – thank you for sticking around – we hope you’ve learned something valuable. Our overall view of the economy and stock market is positive and hopeful. We believe there are many reasons to think the 4-year-old bull market can continue for several more years – certainly with volatility along the way but that ties right into the theme of short-term pains for long-term gains that has categorized the markets for 12-18 months now. A new era at the Fed, an eventual Christmas then springtime thaw for the housing market, a manufacturing recovery that has just begun, eventual resolution with Iran and hopefully a subsequent drop in oil prices, rolling bear markets under the surface that indicate rational investor behavior, and a productivity boom brought on by AI. Typically, there are one or two things to be excited about – as you can see from the list above, right now there are many and I’m sure there are a few more we’re missing.

Thank you for the trust you’ve placed in our team at MFG Wealth Management, Inc. We don’t take the responsibility lightly and we look forward to growing with you over the years to come.

Authored by: Jeffrey Gardner, Financial Advisor and Michael McCracken CFP®, ChFC The information presented above has been prepared for informational purposes only and the commentary represent the opinions of the author and are subject to change at any time due to market or economic conditions or other factors.