Monthly Market Update - July 2026

“It is not the strongest or the most intelligent who will survive, but those who can best manage change.” – Leon Megginson (on Darwin’s theory)

It’s been a while since portfolio diversification has proven important to an investor’s portfolio. For more than a decade, the U.S. stock market (particularly U.S. large‑cap growth stocks) has consistently outperformed almost every asset class and rewarded investors who were heavily tilted to a relatively small group of dominant companies. In hindsight, this makes sense. Coming out of the 2008 recession, U.S. technology giants had few international peer equivalents and were free cash flow machines, with high margins and low capital expenditure requirements. Originally called “FANG stocks” as they emerged from the rubble of 2008, the current colloquialism is “Magnificent Seven” after a few more joined the band (and one quit!). Now, those same companies are at the forefront of consumer breakthroughs that will bring artificial intelligence (AI) and machine learning to the masses, which seems likely to change the global economic landscape considerably, to varying degrees of optimism depending on who you ask or what day you ask them.

Magnificent Seven Stocks Are Lagging Most Asset Classes in 2026

source: Morningstar

To support this next wave of innovation, these massive technology companies are evolving their business models in meaningful ways. They are moving from historically capital‑light models (i.e., low capital expenditure and reinvestment needs for recurring revenue) toward more capital‑intensive ones, building out data centers, specialized hardware, and infrastructure that depend on an ever-increasing power need from the heavily regulated energy industry. Demand for both AI hardware (most notably, memory), and the energy/infrastructure to power a rapidly expanding AI industry has overwhelmed supply to start the year. When that bottleneck clears is anyone’s guess. Until then, these companies have been selling shares and debt in a race for AI market leadership because profits don’t cover reinvestment needs anymore.

The point of belaboring this has little to do with the investment merit of these companies going forward, but rather it serves to illustrate the value of a diversified portfolio. When the economics of a business change, what seemed inevitable suddenly seems uncertain. Uncertainty doesn’t change how much these businesses will earn, per se, it changes how much investors are willing to pay for those earnings. S&P 500 companies are estimated to grow earnings by +24%, on average, in 2026, in large part because of tech companies. That’s fantastic, but if the bottleneck on hardware and energy doesn’t open then capital expenditure growth rates of +50-200% in one year, depending on the company, seems unsustainable.

Historically, when capital expenditure cycles are nearing or have reached their apex for a given industry, there is often a change in performance leadership within investment markets, i.e. the best performing investments of recent years are not the leaders in the coming years. They could still be reasonable investments in the long term, but the outlook gets more uncertain in the short term because the companies are trying to build a new growth channel. From a behavioral perspective, investors just need to be aware that volatility for the AI industry will continue to be elevated. Avoidance is not the path, as that amounts to market timing, but investors should plan for this reality in a way that will help avoid emotional decisions amidst volatility.

We’re already beginning to see what that might look like if this trend continues. We’re midway through the year now, and it has been a bumpy ride for U.S. Large Cap Growth stocks, especially the Magnificent Seven. On the other hand, nobody has wanted to talk about U.S. Small Cap stocks or Non-U.S. stocks for a long time. Yet, through June 2026, Emerging Markets and U.S. Small Cap are easily the two best performing major asset classes in 2026. International Developed stocks have continued their outperformance of U.S. from last year. Investors who hold a diversified portfolio benefited from both past market leadership and current market leadership.

Over the last few years, the financial media has droned on about the ever-increasing, and historic, concentration risk within the S&P 500, but it is hard for the typical investor to understand the risk when it’s been a few years of the same talking points. This year provides an example though. The S&P 500 Index is up +10.1% through the end of June, but if you remove the Magnificent Seven stocks that return goes up to +15.9%. That’s how much influence a few of the largest companies have on S&P 500 index returns, where the return for a basket of seven stocks lowered the return of the broader index by more than one third. This is a microcosm of what financial advisors mean when they talk about concentration risk, and it is why the tenets of portfolio diversification are preached so often. Even with an admittedly short sample size, it paints a good picture of what concentration risk looks like. Risk isn’t just about what happens in down markets because down markets are the result of excesses that build during up markets.

Ultimately, as counterintuitive as it sounds, the goal of investing for retirement isn’t getting the absolute highest return possible. That’s a hedonic treadmill of ever-increasing investment risk, and the emotions that come with it. The goal is to achieve a reasonably high return with an acceptable level of risk that will allow you to more predictably model out how well your potential nest egg will meet your needs and wants in retirement, knowing that things don’t always go according to plan. That’s what portfolio diversification across geographies, asset classes, sectors, and company sizes helps with. Better predictability of outcomes. Asset allocation and investor behavior are the two primary determinants of investor success in the long run, which is filled with change. Those who adapt best to change are those who can manage their emotions enough to not chase past performance.

Market Index Performance: As of June 30, 2026

DISCLAIMERS-intellicents investment solutions, inc., has exercised reasonable professional care in the preparation of this material.  We cannot, however, guarantee the accuracy of all information contained herein.  Indices are unmanaged and are not available for direct investment.  Past performance is not a guarantee of future results.  Investment advisory services offered through intellicents investment solutions, inc., an SEC registered investment adviser.  The Bloomberg Barclays Capital Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type.  Municipal bonds, and Treasury Inflation-Protected Securities are excluded from the index. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, corporate bonds, and a small amount of foreign bonds traded in U.S.  The Barclays Capital Aggregate Bond Index is an intermediate term index.  The MSCI All Country World Index – Ex U.S. is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world (except the United States). The MSCI ACWI – Ex U.S. is maintained by Morgan Stanley Capital International and is comprised of stocks from both developed and emerging markets. The Russell 2000 Index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for U.S. small-cap stocks. The S&P 500 Index is comprised of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.  Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. S&P 500 is a market value-weighted index - each stock's weight is proportionate to its market value.