Dear Clients,
This is our quarterly note on the markets and how we are positioning portfolios for the second half of 2026 and beyond. As always, it is educational and reflects our general philosophy; it is not individualized advice or a recommendation that you take any particular action. Your own portfolio is tailored to your circumstances, and we welcome a conversation about your situation at any time.
My aim here is not to offer a forecast, and certainly not a gloomy one. It is to lay out the facts as they stand, to be honest about what is genuinely uncertain, and to explain why the way we build portfolios is designed to hold up across a wide range of outcomes rather than depending on any one of them coming to pass.
The backdrop for the second half of 2026
A few conditions frame the months ahead. None is a reason for alarm; each is a reason for the kind of deliberate, diversified positioning we have long favored.
The first is geopolitical. The conflict involving Iran has continued through the spring and early summer, with periods of fighting interrupted by fragile pauses. Beyond the human toll, its most direct market effect has been on energy: disruptions in the region have pushed oil and gasoline prices sharply higher. Events like these are, by their nature, impossible to predict — which is precisely why we do not try to.
The second is inflation. After easing earlier, U.S. inflation has accelerated for three consecutive months, reaching 4.2% in May — its highest level in three years — driven largely by the energy shock tied to the Iran conflict. That is roughly double the Federal Reserve’s long-term target. Underlying inflation, which strips out food and energy, has been better behaved, but the headline number is a real pressure on households and on policy.
The third, and most structural, is debt and interest rates. U.S. government debt — and government debt across much of the developed world — sits at historically high levels. Large and rising debt tends to put upward pressure on the interest rates governments must pay to borrow, and those rates ripple through to mortgages, business loans, and the value of bonds. Higher inflation compounds this pressure, because it makes it harder for central banks to cut rates even when growth slows. We do not forecast where rates will go; we do position for the reality that the pressure is upward and persistent.
A market that is expensive — and may stay that way
Against that backdrop sits a stock market that, by most traditional measures, is richly valued. Several independent valuation gauges, taken together, place U.S. stocks well above their historical norms. We think that is a fact worth knowing. We also think it is important to be honest about what it does and does not tell you: an expensive market can become more expensive, and can remain elevated for years before it corrects. Valuation is a poor timing tool. It tells you something about the likely returns of the next decade and almost nothing about the next quarter.
Much of this elevated valuation traces to a single theme. A small number of very large companies, most associated with artificial intelligence, now make up an unusually high share of the major U.S. stock indexes. As of early June, the largest single company was nearly eight percent of a common S&P 500 index fund, and the ten largest were close to forty percent of it. When you account for related companies that ride the same wave under different sector labels, the share of the index tied to this one theme is higher still.
This matters because a popular index fund — which many people think of as the very definition of “diversified” — is today carrying a concentrated position in a single theme. Owning it is, in effect, a sizable bet on that theme, whether or not the owner thinks of it that way. That is not a criticism of indexing in general. It is an observation that the most familiar “safe, diversified” choice is, at this moment, less diversified than its reputation suggests.
Where the most extreme enthusiasm now lives
A useful illustration arrived this month. SpaceX became a public company on June 12, in one of the largest stock market debuts in history. It is a remarkable enterprise. It is also, at recent prices, valued at well over two trillion dollars on something in the range of twenty-odd billion dollars of revenue — a price relative to sales many times that of the established, profitable technology leaders that anchor the index. We mention this not as a view on the company, and certainly not as a recommendation — your portfolios are built around no such position — but as a marker of where the most speculative enthusiasm in this market now resides. The pattern is worth noticing: the largest public technology companies are expensive but profitable, while the most extreme valuations have migrated to the newest and least proven issues. That is a healthier configuration than the one that preceded the 2000 technology bust, when the speculative excess sat squarely in the large public names — but it is a reminder that enthusiasm and value are not the same thing.
What history counsels — and what it does not
Periods of transformative new technology have come before: the railroads, the automobile and radio era of the 1920s, the internet at the turn of the century. In each, the technology genuinely changed the world. And in each, a great many investors who concentrated in the leading companies of the day still fared poorly, because being right about a technology and being right about the stocks are not the same thing. Even companies that ultimately succeeded passed through severe declines along the way.
We hold this lesson alongside an honest acknowledgment of how today differs. The leading companies now are, for the most part, genuinely profitable, which was not true of most of the marquee names at the peak in 2000. On comparable measures, today’s leaders are expensive but not as extreme as that earlier peak. We take these differences seriously; we do not assume that history will repeat in detail. And we do not make market-timing bets — this memo should not be read as a forecast of market direction.
Why we do not try to predict the turn
The most honest thing we can say about the present is that no one can reliably know whether we are early in this cycle or late in it. The same conditions that look worrying have, in the past, persisted and even intensified for years before resolving. We think the disciplined response to that genuine uncertainty is not to guess at the timing, but to build portfolios that do not depend on guessing correctly.
How that conviction shows up in your portfolio
Our guiding mandate is preservation of principal first, and then the best return we can pursue for a given level of risk. The conditions above — geopolitical uncertainty, persistent inflation, pressure on interest rates, and a concentrated, richly valued stock market — are not a list of new worries. They are the very conditions we have been building portfolios to withstand. In practice, that leads us to a few deliberate choices.
We keep meaningful participation in the stock market, so that if it continues to rise, your portfolio participates. We do not sit in cash waiting for a signal we don’t believe anyone can reliably read.
At the same time, within the stock portion, we deliberately avoid concentrating in the handful of names that dominate the index. We hold a broad mix that includes high-quality, dividend-oriented, and value-leaning positions alongside broad-market exposure. One consequence worth naming in advance: during stretches when only the largest technology names are rising, this balanced approach can lag a concentrated index. We regard that as the cost of the protection it is intended to provide, not as a flaw — but it is real, and you may see it on a statement from time to time.
We pair the stock holdings with assets that have historically tended to behave differently from stocks in difficult periods, and that are particularly suited to an environment of inflation and rising rates — including gold, real-asset and real-estate positions, inflation-protected securities, and a fixed-income approach built largely around individual bonds held to maturity. Holding bonds to maturity is intended to reduce the price swings you experience when rates move, which we believe helps clients stay the course rather than sell at the worst moment.
No combination of these can guarantee a particular outcome, and we make no such promise. Diversification does not assure a profit or protect against loss in a declining market. What this structure is designed to do is let you participate when markets rise while seeking to cushion the impact when they fall — across geopolitical shocks, inflation, and rate pressure alike — without requiring us to predict, correctly, when any of those will come.
A change in how we provide performance reports
Going forward, we will no longer send semi-annual performance reports automatically. Many of you have told us that a single annual report — one you can sit with, review, and discuss together at your Annual Review — is more useful than a semi-annual report that often arrives and goes unread. As the attached piece explains, we think that instinct is the right one: reviewing performance on a thoughtful annual rhythm, in the context of a conversation, serves you far better than checking it on someone else’s calendar.
So an annual report, timed to your Annual Review where we can walk through it together, will be our standard going forward. If you would prefer to receive reports more often than that, you need only tell us, and we will make that your standing preference — your personal default — for as long as you like. And if you would ever like a report for a particular period or purpose, simply email, text, or call us and we will prepare it promptly. Your account remains fully visible to you at all times through Charles Schwab, our custodian, including online account access at any hour, and nothing about this change affects your access to your accounts, your statements, or your ability to reach us.
What we are doing now
Largely, we are doing what we already do: holding to a diversified structure built for exactly this kind of uncertainty. We are reviewing each client’s allocation against their own time horizon and tolerance for interim declines, because the right balance for one client is not the right balance for another. If your circumstances have changed, that is precisely the conversation to have, and we would welcome it.
Thank you for your continued trust.
Warmest regards,
Lee E. Kerr
Co-Founder and Chief Investment Officer
Crosswalk Investment Advisory, Inc.