Benjamin Graham’s enduring image is that in the short run the market is a voting machine and in the long run a weighing machine. Rarely have six months illustrated both halves as vividly as the first six months of 2026. In the short run — and the first quarter was very much the short run — fear did the voting: a war in the Middle East, oil above $100 a barrel, inflation at a three-year high, and a change of leadership at the Federal Reserve combined to knock the S&P 500 down roughly 7% by late March 2026. Then the machine did its longer, quieter work. Companies reported, profits proved durable, and the same businesses that were marked down in fear were marked back up on their earnings. By June 30 the market had not merely recovered — it had made new all-time highs.
We want to be honest about what that round trip was and was not. It was not a change in the value of what you own; in aggregate, S&P 500 companies reported first-quarter earnings roughly 27% higher than in the same quarter a year earlier. It was a swing in what the crowd was willing to pay for those earnings — fear and greed moving prices in the short run, exactly as they always have. Our job through both halves of that swing was the same: to keep owning good businesses at sensible prices, to add where fear created value, and to trim where greed removed it. This letter tells you what happened, what drove it, what we did, and how it ties to the plan we manage for you.
What Happened Inside Your Portfolios
Both of our core models participated in the first half’s advance while staying true to their disciplines. Rather than dwell on figures here — your own results depend on when you invested and how your accounts are structured, and your statements remain the right place for them — we want to tell you what actually happened inside the portfolios: which strategies worked, and why.
A notable area of strength was our “second-derivative” positioning in the growth-oriented equity sleeve. Rather than chase the most crowded artificial-intelligence names, we have favored the picks-and-shovels of the build-out — the electrical, connectivity, cooling, and networking suppliers that sell into essentially every data center regardless of which model ultimately wins. Owning the infrastructure of a boom rather than paying the boom’s marquee prices is our philosophy working as designed. Our core of high-quality dividend growers, meanwhile, did what it is meant to do — compound steadily and pay us to wait. In fairness, not everything moved in step: our more defensive, income-oriented positions lagged the market’s fastest-moving names in a powerful rally — a trade-off we willingly accept for the stability they provide — and, as in any period, some individual holdings detracted even as the broader strategy worked.
Our income sleeve is built to do something different. These are options-income strategies — covered-call and related approaches that seek to generate income by selling options against underlying holdings. In plain terms, the strategy collects the premium that option buyers pay; because that premium tends to be greater when markets are more volatile, the approach seeks to turn volatility into income. Results will vary, and the trade-off is a real one: the strategy accepts limited upside participation in the strongest rallies — a deliberate choice in the part of the portfolio whose job is to generate cash flow rather than to capture every last point of a surge. A first half that delivered both fear and a strong rally is the kind of environment these strategies are designed for.
What Drove Markets: A War, an Energy Shock, and a Fed in Transition
The first quarter’s fear had a specific source: conflict with Iran and disruption around the Strait of Hormuz sent oil above $100 a barrel in the first quarter, and that energy shock fed straight into inflation. Consumer prices rose to a 4.2% annual rate in May 2026 — the highest in three years — even as the core measure that strips out food and energy sat far lower, near 2.9%. That gap is the whole story: this was an energy-driven inflation, not a wage-and-demand spiral, and energy shocks are the kind of shock central bankers are trained to look through.
The relief came as the conflict de-escalated. With an interim framework in place and the immediate threat to shipping easing, oil round-tripped violently — from above $100 in the spring back into the $70s by the half’s end (as of June 30, 2026). That easing put the energy contribution behind the recent inflation prints on course to fade over the second half, even as the inflation already in the system takes time to work through the year-over-year figures. (More on why that relief now looks fragile below.)
Over the same months, leadership of the Federal Reserve changed hands. Kevin Warsh was confirmed as Chair on May 13, 2026 and held his first meeting on June 16-17. The committee left rates unchanged at 3.50%-3.75%, but the tone shifted decisively. Mr. Warsh cut the policy statement to a fraction of its former length, removed the standing bias toward future cuts, and — most consequentially — the committee’s own projections flipped from penciling in a rate cut this year to signaling a possible rate hike, with the median view now looking for the funds rate to end 2026 slightly higher than today. We describe this in balls and strikes: the administration has been vocal about wanting lower rates, and got a chair widely expected to deliver them; what it got, at least at the first meeting, was a chair who told the country “the Fed will deliver price stability” and declined to promise anything about the path.
For your portfolios, the durable lesson is the one we have written before and will write again: the front end of the curve and the long end are two different animals. Even a Fed under pressure to cut controls only short rates; the long end is set by inflation expectations and the compensation investors demand to lend over time. Through all of this the 10-year Treasury rose only modestly, to about 4.44% by June 30, 2026, while the 30-year sat near 4.9%. Anyone who repositioned into long bonds expecting a “dovish” new chair to hand them a windfall did not get one. We continue to prefer businesses that grow their cash flows through cycles over locking in nominal yields whose real value depends on an inflation rate none of us can forecast.
The Anchor: Earnings. The Warning: Labor.
If fear explained the first quarter, earnings explained the second. First-quarter reporting season was one of the strongest in years: roughly 84% of S&P 500 companies beat estimates — the highest share since 2021 — results came in about 20% above expectations, blended earnings growth ran near 27%, and net profit margins reached the highest level on record. A market that re-rates to new highs on numbers like those is being weighed, not merely voted upon. This is the single most important fact of the half, because it is the one that concerns what you actually own.
The labor market told a subtler, more cautionary story — and it is one where we owe you an honest revision. For much of the spring the monthly payroll headlines looked strong, even accelerating. We cautioned in our monthly letters that the internals were softer than the headlines: the hiring was concentrated in lower-wage service jobs, and the rate at which workers voluntarily quit — the truest sign of confidence — had fallen to multi-year lows. By June, the headline itself gave way. The economy added just 57,000 jobs, well below expectations; the prior two months were revised down by a combined 74,000; and while the unemployment rate ticked down to 4.2%, it did so for the wrong reason — people leaving the labor force entirely, with participation falling to its lowest since 2021. A falling unemployment rate driven by a shrinking workforce is not strength; it is cooling. The consumer who has a job is still spending, which supports the earnings above — but the labor market beneath the headline is softening, and that will matter a great deal to the second half.
How Markets Reacted: Records, Concentration, and a Familiar Safe Haven
The path from fear to records was not a straight line, and the detours are instructive. After bottoming in late March, the market rallied hard through April and May to a high above 7,600 on the S&P 500 in early June, then wobbled twice — once on a semiconductor scare when a bellwether chipmaker’s outlook disappointed, and again when the Fed’s hawkish turn jolted short-term rates — before steadying near its highs into quarter-end. Records, in other words, arrived with turbulence, as they almost always do.
Two features of this rally deserve your attention because they shape risk going forward. First, concentration: the market’s gains remain unusually dependent on a small number of very large technology and AI-related companies. That can persist longer than skeptics expect, but it is a fragility, and it is one reason we hold quality across sectors rather than crowding into the same handful of names. Second, the behavior of gold. Gold set an all-time high near $5,600 in late January and had fallen to about $4,100 as of early July 2026 — down on the year, and roughly 27% below its peak — even though the half contained a Middle East war and a sharp equity drawdown, precisely the conditions in which a “safe haven” is often expected to earn its keep. It did not. Gold carries real volatility of its own, it pays nothing while you wait, and its protection can be unreliable when you most expect it. We would rather draw resilience from businesses with pricing power and from genuinely diversifying strategies than from an asset whose only job is to sit and wait.
The Event We Were Watching: The SpaceX IPO
On June 12, 2026, SpaceX became a public company in the largest initial public offering in history. Priced at $135 a share, the stock opened at $150 and closed its first day near $161, valuing the company above $2.1 trillion. We had written to you about this offering on May 26, and our position did not change: we have not purchased it for client portfolios — not at the offering and not since — because its valuation does not meet the discipline we apply to everything we own.
That discipline is worth restating, because it is the same one that governs everything in your portfolios. This is a company that lost roughly $4.3 billion in the first quarter alone and trades at many multiples of its revenue; independent valuation work published around the listing ranged from a discounted-cash-flow estimate near $63 a share to a “sell” target around $115 — both well below where the stock traded on debut. The price rests on confidence in a decade or more of ambitious execution, not on the cash the business generates today. That may prove visionary or it may prove expensive; either way, it is not a margin of safety, and it is not how we invest your money. We watch the achievement with genuine respect and decline the price with equal conviction. Sometimes the discipline is simply declining to pay.
The offering matters beyond itself for two reasons. It is the first of what may be several enormous AI-related listings — with others reportedly preparing to follow this fall — and it is a live illustration of a market mechanic worth understanding: because index rules were changed to fast-track very large companies, index funds can be compelled to buy such names mechanically, funded by selling companies they already hold. A meaningful share of the buying and selling around these events is therefore automatic rather than considered. We are not in the business of front-running index reshuffles; we are in the business of owning good companies at sensible prices, and the distinction has rarely mattered more.
What We Did as Active Value Investors
“Long-term investor” is too often heard as “never does anything.” We did not trade the headlines — not the war, not the oil spike, not the Fed drama. But we were continuously weighing what we own against the alternatives, and we acted where the gap between price and value opened up. When the first-quarter fear marked quality businesses down, we treated it as opportunity: rebalancing toward equities into weakness, and, where accounts had losses to capture, harvesting them for tax benefit without leaving the market. As the second-quarter advance richened certain names, we trimmed where forward risk-adjusted returns no longer compared favorably and redeployed into better values — the ordinary, unglamorous work of active capital allocation.
At the portfolio level, two initiatives occupied much of our attention. First, we have been deepening and reinforcing the income sleeve — adding depth and diversification to the strategies that generate your cash flow, so that income is drawn from more than one approach and is less dependent on any single market condition. Second, we have been building a multi-factor return sleeve designed to help the portfolio remain resilient across a range of market environments, not merely the friendly ones. This is the discipline of building a portfolio to weather a range of economic regimes — an approach long associated with the investor Ray Dalio: rather than stake the outcome on any single environment, we assemble complementary, lowly-correlated return streams that tend to behave differently from one another, so the whole portfolio is better positioned to hold its footing whether the next chapter brings growth, inflation, or stress. We fund each of these deliberately, and only as it earns its place. The purpose throughout is the one that animates the equity work as well: a portfolio built to endure. It sits alongside our insistence on owning high-quality businesses — durable, well-run companies, in the tradition of investors Warren Buffett and Charlie Munger — purchased with a margin of safety, meaning at a meaningful discount to what a business is worth, a discipline associated with the investor Seth Klarman.
How This Ties to Your Plan
A semi-annual letter is a natural moment to lift our eyes from the day-to-day market and reconnect with the reason we invest at all: your financial plan. The plan is built to account for a wide range of market environments — including quarters of fear like the one that opened this year — so that decisions are driven by your goals, time horizon, and circumstances rather than by the headline of the moment. That discipline is the entire point: it is what lets us keep working a long-term strategy instead of reacting to short-term moves in either direction. When markets fall, the plan is what keeps us from selling into fear; when they surge, it is what keeps us from chasing.
Concretely, three threads connect the half to your plan. The first-quarter decline was, for many of you, a rebalancing and tax-management opportunity — a chance to add to quality at more attractive valuations and, where appropriate, to harvest losses that may reduce future taxes. The income work is about the durability of your cash flow — making the income your plan relies on more robust across a wider range of markets. And our hurdle discipline ties directly to rates: with the 10-year Treasury near 4.44% as of June 30, 2026, every dollar we commit to an equity must clear a higher bar than it did two years ago, which keeps us selective and keeps a margin of safety in front of your capital. If your circumstances have changed — a liquidity need, a tax event, a shift in goals or time horizon — that is the conversation we want to have, and it matters far more than any single month’s market move.
Since June 30, and the Themes for the Rest of 2026
The second half opened near the highs, but it did not stay quiet for long. The central tension of the year is now clearly drawn, and it may define the rest of 2026: a cooling labor market pulling one way, and still-elevated inflation pulling the other. June’s weak jobs report argues against rate hikes; May’s 4.2% inflation argues for them. A Fed that has just told us it leans toward hiking must now weigh a labor market that is plainly softening. Which way it resolves will depend on the incoming data, not on any promise from the Fed — and we would expect volatility around each release.
The single biggest swing factor arrived in the first days of July: the conflict with Iran has re-escalated. The interim understanding reached in June has frayed, and the two sides have exchanged strikes centered on the Strait of Hormuz — the channel through which a large share of the world’s seaborne oil must pass. Oil, which had fallen back into the $70s, began to climb again on the news, though as of this writing it remains well below its springtime peak. We describe this the way we describe all of it — in balls and strikes, without taking sides — but the investment question is unavoidable, and every client is right to be asking it: how does this play out? The honest answer is that it forks. If diplomacy holds and the strait stays open, the energy shock stays contained and the disinflation we had expected can resume. If shipping is genuinely disrupted for any length of time, oil could spike, the headline inflation that was set to fade could re-ignite, and a Fed already leaning toward a hike would be handed exactly the wrong backdrop. We do not position on a guess about which branch prevails; we seek to be positioned to withstand either — which is the entire point of the resilience work described above.
Three further themes will shape the half. Earnings come first: second-quarter reporting season begins in mid-July, and it is the real test of whether profits continue to justify prices that, on forward earnings, sit toward the higher end of their historical range. The AI mega-cycle comes second: SpaceX may not be the last enormous, richly valued, cash-burning listing to test investors’ appetite this year, and the enthusiasm around such offerings is both an opportunity for the disciplined and a hazard for the crowd. And politics comes third: a midterm election in November tends to bring its own volatility and its own fiscal noise, and we will treat it the way we treat all such episodes — as background to a process built on the durability of businesses, not on the outcome of a vote.
Our posture into the second half is unchanged in principle and sharpened in practice: own high-quality businesses with pricing power and strong balance sheets; favor the picks-and-shovels over the crowded trade; build the resilience streams that help the portfolio hold up across regimes; and demand a margin of safety before committing a dollar of your capital. The first half rewarded patience and penalized reaction, as such periods often do. As always, please call with any questions — we would far rather walk you through our thinking than have you wonder. To that end, we work!
Best,
-Justin
Justin Pelletier