ONE MARKET, TWO PERSONALITIES.
The first half of 2026 displayed a pronounced duality as second quarter market dynamics were nearly opposite those seen in the first. The first quarter was marked by a broadening of performance led by energy, materials and utilities, while the major growth sectors lost ground. In the second quarter, however, performance was very narrow as investors regained their appetite for AI-related exposure. Momentum and high-beta factors firmly took control. Technology was the top-performing S&P 500 sector by a wide margin, heavily driven by the semiconductor industry. Industrials followed at distant second, and much of those gains were also attributable to the AI capex story. Earnings power from a handful of semiconductor industry names drove the narrative. It appears to be warranted for now, but we question the sustainability of these dynamics.
The dominance of high-beta momentum stocks, particularly in the second quarter, broadly presented a challenging environment for risk-aware active investors. We prefer more value-oriented names with sound fundamentals and a demonstrated commitment to shareholder yield through dividends and stock-buybacks. We also look for special situations that may be under-appreciated by other investors. During the second quarter, our long exposure to miners was a headwind as a pull-back in gold prices weighed on the group. Our short technology positions were also a drag. Through the first half of 2026 our long positions have contributed positive gains, while the short book has modestly detracted. We expect the second half of 2026 to be more like the first quarter, with volatility heading into the midterm elections. Recent history has shown the last two midterm years (2022 and 2018) were volatile and challenged investors. We remain constructive on equities overall, and we foresee a scenario where broader participation resumes among some of the less-loved sectors and companies with sound fundamentals.
AI capex has been the dominant theme of 20261:
Earnings have been strong, but free cash flow has not:
POSITIONING
Keurig Dr Pepper (KDP). This was the portfolio's top contributor in the second quarter. Shares rose after the company's strong first-quarter results and management reaffirmed full-year guidance.2 KDP completed its acquisition of JDE Peet's in early April and plans to split into two independent companies, one focused on beverages and the other on coffee with management targeting completion in early 2027. We see this as an interesting event-driven setup and expect additional upside. The company maintains a nice dividend yield of just under 3%, which we find attractive.
Honeywell International Inc (HON). We discussed Honeywell in our February Insights after we had recently added to our position. At that time the company was in the process of breaking up into three standalone businesses: aerospace, automation, and advanced materials. The first spinoff of the advanced materials business, now trading under the ticker Solstice (SOLS), was completed in October of 2025. The Honeywell Aerospace spinoff was completed on June 29 and began trading under (HONA). After receiving shares in the corporate action, we took the opportunity to add to our Aerospace position. Following the HONA spinoff, Honeywell Technologies completed a reverse stock split 3, and management raised its full-year profit guidance.
Barrick Mining Corporation (B). We bought shares of the mining giant early in the second quarter after the company advanced with plans to spinoff its North American gold assets through an IPO by the end of this year. The remaining company will be focused on copper production. The strategic rationale is to isolate low‑risk, high‑yield North American gold assets to capture a valuation premium and separate them from Barrick’s international copper expansion. The company is well-into the IPO process, and progress has accelerated since management confirmed the timeline during its update in late April. We believe this presents an attractive opportunity, combined with Barrick’s more than 4% dividend yield as we wait for the spinoff to close.
Global Payments (GPN). We initiated a position in the payments technology firm as it advances through a transformational process to focus the business as a pure‑play merchant‑payments technology leader. By shedding its legacy issuer‑processing arm and absorbing a major global acquiring franchise, GPN has emerged with cleaner lines of business, broader reach, and a more coherent growth narrative. In June, shares rebounded on strong guidance, while improving earnings expectations signaled that the transformation was taking hold.4 We think the company’s streamlined model and the expected synergies from its corporate actions support an upside case. Additionally, Global Payments announced an attractive capital return plan, with over $7B expected to be returned to shareholders in 2026 through share repurchases and dividends.
Home Depot (HD). We recently bought shares of Home Depot, which offers an opportunity to gain quality consumer exposure, with the Trump administration’s intense housing focus as added support. The company has demonstrated its ability to execute despite high mortgage rates, reporting steady demand and improving comps. Management reaffirmed its annual guidance, supported by stable professional‑customer strength and a recovery in weather‑driven categories. We view HD as a defensive, high-quality way to participate in an eventual housing-market normalization, backed by a continued record of capital return to shareholders. The company recently paid its 157th consecutive quarterly cash dividend. 5
On the short side, we broadly tend to look for over-leveraged names that we believe are fads, or story stocks with promotional managements. We maintained our short positions in Rigetti Computing (RGTI) and IONQ as we think their share prices are not substantiated by the minimal amount of revenue these companies generate. We also remain skeptical of private credit, expressed in our KKR & Co. (KKR) and Carlyle Group (CG) positions. We covered our Bitmine (BMNR) and Coinbase (COIN) positions with significant gains but continue to hold Strategy (MSTR) short.
POSITIONING NOTES AS OF 6/30/2026
We see plenty of opportunities both long and short in this environment. Momentum has had a profound long run, creating market distortions, in our opinion. Valuations appear rich in certain areas, and there seems to be a high level of complacency among investors. While we cannot predict when it will occur, we expect mean reversion.