Cornerstone 2nd Quarter 2026 Commentary

Known Unknowns

Of course, none of this fully addresses the elephant in the room, “Is AI a bubble?”  That question must continue to go unanswered, or at least our crystal ball has yet to fully provide an answer to that question!  However, we do believe AI is a very real and significant technology. We also believe it has already and will continue to help enhance the productivity of the global workforce.  Productivity is the pixie dust of the modern economy.  With the same number of workers, we can enhance output, lowering potential inflation and raising standards of living.  In this way productivity growth becomes the holy grail of the modern economy.  While the road to the future may be mostly paved with good intentions, unfortunately, many companies loosely tied to the ongoing development, support, and distribution of AI may be significantly overvalued today or left in the dust by changing technology tomorrow.  Consequently, care must be taken to avoid too much concentration in any one sector or even any one thematic opportunity.  A couple of recent examples come to mind.  Take, for example, Lumentum Holdings.

Lumentum is a global leader in optical and photonic technologies that power the networks and infrastructure behind AI and cloud computing. In a recent manager search we conducted in the small cap growth space, Lumentum was a primary contributor to several of our finalists’ portfolios.  What is interesting to note is that due to the stock’s meteoric rise it has moved from being a small cap company to a large cap company in the space of 18 months.  Many small cap growth managers have yet to divest themselves of this security, and it remains to be seen how significant its products will prove to be in the AI supply chain.  However, as can be seen from the chart above, the market is valuing the company as though its future earnings are secure and its products will be in very high demand in upcoming years.

On the other hand, Super Micro Computer, a company also heavily involved in the AI infrastructure trade, has experienced a different trajectory. It initially spiked, moving up 30x in a 12-month period, then encountered “accounting anomalies,” sold off quickly, and has yet to regain its previous high. Super Micro is now trading at approximately one third of the level it reached in late 2023.

These two companies are indicative of the waves of capital chasing the latest connection points to the AI supply chain and the broader AI trade.  Further, there has been a great deal of hype regarding new IPO opportunities like Space X and SK Hynix.  SK Hynix is, of course, tied directly to the AI trade. Space X is less direct but is linked to Elon Musk and has generated an incredible following over recent years. Both stocks rocketed following their initial debut but have since declined significantly from their highs.  These examples highlight both the opportunity and the challenge posed to investors by thematic or thematically linked opportunities.  While the broader market has marched higher, individual stock variance has been significant, and that variance has compounded challenges for investors due to the significant effect these changes have had on index constitution.   These changes have a dramatic impact on relative performance and demonstrate the challenge that investors have with both understanding major indexes and the “context/comparison” of their portfolio results.  The following bullet points are not exhaustive but provide a summary of some of these issues:

• Mega cap IPOs and style migration: Several large cap companies previously classified as value have moved into growth, and vice versa, reflecting evolving corporate fundamentals such as AI-driven earnings growth in traditionally cyclical sectors.[i]
• Semiconductor realignment: Key chipmakers including SanDisk, Micron, and Advanced Micro Devices shifted from the Russell 1000 Value Index to the Russell 1000 Growth Index, moving from an industrial-cyclical profile to a growth profile driven by AI infrastructure spending.[ii]
• AI-adjacent sector dominance: The Russell 1000 Growth Index remains technology-heavy, with information technology and communication services (Alphabet, Meta) accounting for nearly 70% of holdings and semiconductors making up about one third of index weight.[iii]
• Blurred growth-value lines: Many of the Magnificent Seven (Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, Tesla) now exhibit both growth and value traits — paying dividends, trading at less stretched valuations, and benefiting from infrastructure growth.[iv]

As noted, these factors blur the definition of comparative benchmarks and make it more difficult for both individuals and institutional fiduciaries to review their portfolio results.  The primary Russell reconstitution took place on June 26, and, of course, the IPO of Space X along with other large IPOs further impacts index constitution.  As we evaluate performance for the second quarter, all of these factors come into sharp relief, but the chief takeaway remains that primary technology stocks and AI-related names continue to dominate both U.S. markets and U.S. GDP growth.  Globally diversified portfolios remain at a disadvantage in more concentrated markets, and many managers utilizing more traditional fundamental security evaluation techniques have been negatively affected on a relative basis.

Along with these more market-specific issues, the potential resolution of the Iranian conflict added volatility but also added strength to the rally.  An initial ceasefire was agreed upon in April, followed in June by a memorandum of understanding between the two countries ending hostilities.  This positive movement undoubtedly helped boost markets as the end of the quarter approached.  Of course, events following the end of the quarter have called the end of the conflict into question, and we find ourselves once again in the midst of a conflict without clarity on a full re-opening of the Strait of Hormuz.  Despite the lack of clarity and the potential for increased oil and gas prices, markets continue to look through the conflict and remain relatively unconcerned about either escalation or longer-term stress brought about by higher oil prices.  How long this will continue remains one of the most significant sources of concern in our view.  It is entirely possible that a significant amount of oil becomes “shut in” across the Middle East, resulting a sudden rise in spot oil prices and the oil futures curve as well.  Such an event could lead to a significant “de-risking” event or even recession in major economies around the world.     

Interest rates and the Fed also played a part in the market dynamics of the second quarter.  Fed Chairman Kevin Warsh followed Chairman Powell and surprised markets by his hawkish tone.  Warsh also indicated he believes the Fed focus on forward guidance is not helpful and he intends for the Fed to be less transparent regarding the future direction of interest rate moves.  He noted the Fed must get inflation down and that this objective would remain the primary objective of the Fed in upcoming months.  Taken with his more hawkish comments, the yield curve adjusted higher and at the end of the quarter was pricing in one to two rate hikes vs the two rate cuts that were anticipated by the market coming into 2026.  Most of the adjustment followed the end of the quarter, and, consequently, bonds performed reasonably well during the second quarter.   

Large cap U.S. stocks were, once again, the drivers of performance during the second quarter of 2026.  The S&P 500 took off in April and was up over 15% for the quarter, reversing first quarter declines and bringing its year-to-date performance to 10.21%.  As we noted, the technology sector remains the key driver of the index.  The top seven companies have changed slightly with Tesla dropping out of this elite group and Broadcom moving in.  (The current top seven companies in the S&P 500 are NVIDIA, Apple, Alphabet, Microsoft, Amazon, Broadcom, and Meta Platforms.)  The Russell 1000 Growth Index outperformed the Russell 1000 Value Index by approximately 300 basis points, but both indexes were up in double digits for the quarter.  However, the Russell 1000 Value Index ended the first half of the year up 16.26% while the Russell 1000 Growth Index, despite a fantastic second quarter, was only up 5.33% on a year-to-date basis.  Again, this differential and the challenge to many fundamentally strong stocks made it difficult for many value managers to outperform their index during the second quarter. 

Small caps continued their dominance in the second quarter of 2026.  The momentum factor continued to dominate, and small cap growth stocks were up nearly 26% during the second quarter, bringing their year-to-date performance back in line with small cap value.  The Russell 2000 Value Index trailed its counterpart during the quarter but was still up an impressive 17.19%.  Both indexes are up between 22-23% on a year-to-date basis.  Small cap stocks have had their best trailing one-year returns in many years. 

International equity performance also remained positive during the quarter.  The MSCI EAFE Index was up over 10% for the quarter and is up just a bit over 9% on a year-to-date basis.  Similar to the S&P 500, emerging markets were dominated by tech names with Taiwan Semiconductor and Samsung making up over 22% of the index.  Given the strong performance of tech and AI-related names, it comes as no surprise that the MSCI EM Index was up 24% for the quarter and approximately 24% on a year-to-date basis as well.  When one considers SK Hynix, the concentration of the index further illustrates the concentration risk we have been highlighting and explains why emerging markets managers also struggled to keep up during the second quarter. 

On the fixed income front, returns were positive but a bit muted.  The Bloomberg U.S. Aggregate Bond Index was up 67 basis points during the quarter, and the Bloomberg Global Aggregate was up 87 basis points.  However, due to currency appreciation on the part of the U.S. dollar, the Bloomberg Global Aggregate Index remains slightly negative on a year-to-date basis.  As indicated, shifts in the yield curve have largely eliminated any price appreciation in the bond space in 2026, and the yield has barely been enough to keep the Bloomberg U.S. Aggregate Index in the black on a year-to-date basis.  REITs are also normally affected by interest rates, but trends in the AI space have helped the REIT complex as well, and the NAREIT Index was up 10.73% for the quarter and nearly 15% on a year-to-date basis. 

Market performance across the spectrum continues to benefit portfolios in 2026, and as we reached the midpoint of the year, most portfolios have experienced strong returns.  Earnings remain quite strong, the unemployment rate remains low, and while the Fed is more hawkish, many would argue that monetary policy remains favorable.  This backdrop remains supportive for a positive second half of 2026 and potentially another strong year of equity performance.  As we evaluate markets and the economy, a few factors stand out to us.

One, overall earnings growth remains a strong support for equities across the market not just in technology.  As we complete the first week of August, approximately 86% of S&P 500 companies have exceeded earnings expectations according to FactSet.  This is well above the median earnings beat rate of the last few years.

Two, the economic outlook in the U.S. remains relatively strong.  Unemployment remains low and does not show significant signs of weakening.  Further, productivity growth is solid, and GDP remains firmly in the black.  While inflation remains a concern, nominal growth is strong, and the Fed seems to be determined to address inflationary concerns.

Three, the AI ecosystem continues to power markets, and as chokepoints are found, capital flows toward these areas resulting in sudden and often unexpected waves of positive performance.

Four, the Iranian and Ukrainian conflicts both pose significant risks to equity markets and the global economy.  Should the Strait of Hormuz remain closed and/or the conflicts spread and further affect the Bab el-Mandeb Strait, Middle East oil production may be more significantly affected.  This would likely result in a significant rise in the price of oil and a corresponding spike in fuel and other distillate prices.  An oil shock would likely result in sharp market decline, and a more pronounced shortage could result in a rolling wave of recessions around the world, negatively affecting stock prices in a more pronounced fashion. 

Five, fixed income markets have adjusted and now expect the Fed to tighten.  Given current yields, it is likely that interest income will be quite positive during the second half, and any loosening by the Fed could result in a nice price bump prior to the end of the year.  Regardless, it is likely that fixed income returns will remain in the green during the latter half of 2026.

Six, the U.S. midterms are coming!  Markets tend to look through shorter-term political issues, but elections and the rhetoric surrounding them often add to volatility in the short run.

As we head into the second half of 2026, Cornerstone remains cautiously optimistic.  We believe the underlying factors point to continued equity appreciation and solid economic results.  The “known unknowns” are fully in the view of markets, and so while they do represent substantial risks to future appreciation potential, it seems, at the current time, they are simply more likely to add volatility during the upcoming quarter rather than fully derailing the bull market. 

We look forward to seeing how the second half of 2026 plays out.  We continue to remain well diversified, and should markets remain broad, relative performance should be solid.  However, if tech and AI continue to dominate the second half of 2026, then it is likely that more diversified portfolios like ours will underperform well known but more concentrated benchmarks. 

For additional information about Cornerstone Management or this report, please contact Bryan Taylor or
Chad Crawford.     
770-449-7799    
bryan@cornerstonemgt.net    
chad@cornerstonemgt.net

Cornerstone Management Inc. is a Registered Investment Advisory Firm. Although the information in this report has been obtained from sources that the Firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report may only be dispensed with this disclosure attached.

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[i] Banse, Chris and Russo, Angelo. (2026, June 29). FTSE Russell Reconstitution Signals Benchmark Evolution. russellinvestments.com

[ii] Wubbena, Nicole. (2026, June 30). Big Changes After the 2026 Russell June Reconstitution. callan.com

[iii] Wubbena, Nicole.

[iv] Morahan, C. (2026, June) Growth, Value or Both? What the 2026 Russell Reconstitution Means for Investors. Morgan Stanley Investment Management. morganstanley.com