Q2 2026
Key Takeaways: When Noise Tests Discipline
Something weird happened this summer: After 44 years of insisting I wasn’t a soccer guy, I loved watching the World Cup.
I watched with my son. I bought him a World Cup shirt during a business trip to Los Angeles, and he loved it. We rooted for the United States, and somewhere along the way, I found myself completely pulled into Norway. The rowing chants, the energy, and Erling Haaland.
But I did not attend a match.
As much as I enjoyed the tournament, I could not justify spending more than $1,000 per ticket, or close to $10,000 for a single ticket to the final.
The World Cup was great. The price was not.
That turned out to be a pretty good metaphor for the first half of 2026.
In investing, a great story can still be a bad investment when too much future success is already reflected in the price.
The opposite is also true.
An industry surrounded by bad news can become attractive when investors have already priced in much of what could go wrong.
That distinction, between a great story and a great price, defined much of the first half of 2026.
The First Half: Uncomfortable Did Not Mean Unprofitable
The first six months of 2026 gave investors plenty to worry about:
The war in Iran.
Oil-price volatility.
Inflation concerns.
Historically weak consumer sentiment.
Questions about unprecedented AI spending.
And yet, several areas investors had largely ignored or abandoned produced some of the market’s strongest returns.
Notably, on a total return basis, emerging-market equities (MSCI Emerging Markets Index) gained ~26%, while US small-cap stocks (Russell 2000) rose ~23% in the first half of 2026 (Source: YCharts)
This mattered to us. We began adding to U.S. small caps during 2025. Near the end of the year, we also added emerging-market exposure across portfolios after being cautious on the asset class for more than a decade.
That positioning worked better, and much faster, than we expected. But the broader lesson matters more than the performance of any one period:
The best opportunities did not necessarily come from the places carrying the best stories. They came from areas where expectations had already become low enough to create opportunity.
Iran and Oil: The Cost of Pretending to Know
At the beginning of the quarter, the war in Iran appeared capable of reshaping the global economy.
WTI crude climbed to approximately $114 per barrel in April. Inflation fears intensified. Consumers became increasingly anxious. Businesses faced the prospect of higher transportation, production, and energy costs.
Then the narrative shifted.
As the conflict moved toward de-escalation and concerns about energy supplies eased, oil subsequently fell approximately 38% from its April peak by quarter-end. (Source: YCharts)
As I write this, tensions have escalated again and oil has moved higher. That does not invalidate the lesson. It reinforces it. Geopolitical narratives can reverse quickly in either direction, which is precisely why a long-term portfolio should not depend on correctly forecasting their next move.
Oil did not prove that we knew what would happen. It demonstrated why portfolios should not depend on knowing.
In Q1, we did not make major changes based on the oil spike because we did not believe frightening headlines had fundamentally altered the long-term investment case.
In Q2, we still did not attempt to predict the exact path of oil or geopolitics. Instead, we looked for areas where those fears had already pushed expectations, and prices, meaningfully lower.
That led us to the consumer.
Consumer Discretionary: Buying Known Problems
Consumer sentiment entered the quarter at deeply depressed levels.
By May, the University of Michigan’s Consumer Sentiment Index had fallen to its lowest level since the index began in 1952, just below its previous June 2022 trough. Sentiment recovered approximately 10% in June as gasoline prices moderated, but remains near historic lows. (Source: YCharts)
Consumers were worried about inflation. They were worried about gas prices. They were worried about the economy.
Those concerns were legitimate. But they were also widely known.
Our investment screens, which weigh return on invested capital relative to price-to-cash-flow, showed consumer discretionary companies moving toward the top of our opportunity set. When we examined the underlying businesses more closely, we found that most were trading below their own average valuations over the prior decade.
In other words:
The news was bad.
The sentiment was worse.
And prices increasingly reflected both.
We took this opportunity to add to our consumer discretionary exposure across portfolios. We made the change across all our strategies other than the most conservative ones.
We did not add because everything looked good. We added because everyone already knew what looked bad.
We do not need consumers to become euphoric. We need the gap between depressed expectations and the long-term prospects of these businesses to begin closing.
Our thesis could certainly be wrong, or take longer to unfold than expected.
A prolonged period of elevated oil prices could continue pressuring household budgets. A recession could weaken employment and cause consumers to cut nonessential spending more aggressively.
Those are real risks. That is why we built the position incrementally rather than treating low valuations as an all-clear signal.
But investing rarely offers both obvious opportunity and complete comfort. By the time everything feels safe, prices usually reflect it.
The Opposite Side of the Trade: AI Optimism
That stands in sharp contrast to the market’s treatment of artificial intelligence.
To be clear: We believe AI will be transformative. The technology is real. The productivity potential is real. The infrastructure demand is real.
But a transformative technology does not automatically make every investment connected to it attractive at every price.
During the quarter, U.S. hyperscalers continued raising their projected 2026 capital spending, with combined guidance approaching an estimated $700 billion. (J.P. Morgan)
That is an extraordinary amount of money, which creates an extraordinary hurdle.
Investors are finally beginning to ask harder questions:
Who ultimately earns an acceptable return on all this spending?
Do the companies building the models capture the economics, or do those models become increasingly commoditized?
Does the lasting value accrue to chipmakers, cloud providers, software companies, their customers, or someone not yet visible?
Can today’s leaders maintain their advantages after competitors spend hundreds of billions of dollars trying to catch them?
And perhaps most importantly: How much future success is already reflected in today’s prices?
Those questions are no longer coming only from skeptical investors.
In June, Microsoft CEO Satya Nadella argued that companies cannot afford to become passive renters of intelligence from a handful of foundation models. Businesses still need to preserve the connections between their people, proprietary knowledge, judgment, and technology. Otherwise, they risk surrendering the very learning and differentiation that make them valuable. (Source)
Just after quarter-end, Palantir CEO Alex Karp raised a related concern: AI providers may gain enormous insight from their customers’ data, workflows, and decision-making while many of those customers remain unsure whether the costs are producing enough measurable value. (The Wall Street Journal)
Nadella and Karp approach the issue from different positions, and both have business interests tied to the outcome. But they are circling the same question:
Who owns what AI learns, and who ultimately captures the value it creates?
If models become commoditized, the companies spending billions to build them may struggle to earn the expected returns. If a handful of model providers capture most of the value, their customers risk weakening their own advantages.
AI can succeed spectacularly without every company funding it, or every investor chasing it, earning spectacular returns.
That distinction matters. Investment returns are not determined solely by whether a technology changes the world. They depend on:
Who owns the lasting competitive advantage.
Who captures the resulting cash flow.
How much capital was required to produce it.
And what investors paid before those returns arrived.
As we discussed in our Q3 2025 Commentary, our concern is not that AI fails. It is that many investors are pricing companies connected to AI primarily around what could go right, while assigning too little weight to what could go wrong.
That is almost the exact opposite of what we see in consumer discretionary. In AI, investors have focused heavily on the upside. In the consumer sector, they have focused heavily on the downside.
Opportunity often appears when the market stops asking both questions.
Technology changes. The basic arithmetic of investing does not.
Competitive advantages still matter.
Cash flow still matters.
Return on capital still matters.
And price always matters.
Process Does Not Mean Perfection
Investing has a way of keeping you humble. While we got some things right, the first half also reminded us that getting the broad idea right does not mean every investment will work exactly as expected.
Our emerging-market allocation performed better and sooner than anticipated. Our small-cap positioning was more mixed.
Small-cap stocks rallied strongly, but one of the strategies we use materially lagged the broader move. We expected it to trail somewhat during such a powerful rally. We did not expect it to trail by as much as it did.
That deserves scrutiny. A disciplined process is not one where every decision immediately works. That does not exist.
A disciplined process is one where you evaluate what worked, acknowledge what did not, and determine whether both the original thesis and the investment used to express it remain sound.
That is the work we will continue doing.
What We Are Watching
As we enter the second half of 2026, three guideposts matter most:
The Consumer: Does sentiment begin catching up to still-resilient fundamentals, or does weakness spread into employment, earnings, and actual spending?
Oil and Iran: Does energy pressure continue easing, or does another sustained shock place renewed pressure on household budgets and corporate margins?
AI’s Return on Capital: Do cash flow and productivity begin justifying the enormous spending, and which companies actually retain the knowledge, customer relationships, and economics?
These are not predictions. They are the questions that will help determine whether today’s prices are too optimistic, too pessimistic, or approximately right.
The Bigger Lesson: Invest in What Endures
Watching the World Cup with my son reminded me of something larger.
The flags were different.
The languages were different.
The histories, cultures, and politics were different.
But the emotions were the same.
Hope. Pride. Fear. Disappointment. Joy.
Despite everything that divides the world, people generally want many of the same things.
We want to improve our lives.
We want to create opportunities for our families.
We want to build, compete, solve problems, and leave something better behind.
That does not eliminate wars, recessions, bubbles, or costly mistakes. But it is one reason human progress, and long-term investing in productive businesses, has endured through all of them.
Investment intelligence is often less about predicting everything that will change. It is about understanding what is unlikely to change, and owning the disconnect when prices forget it.
The World Cup did not become less exciting because I refused to pay $10,000 to attend the final. I simply decided the experience was not worth that price.
Investing requires the same distinction.
A great story can become too expensive. A difficult story can become attractively priced. And some of the best opportunities emerge when price and long-term value stop telling the same story.
We cannot know exactly what changes next. But we can remain disciplined about what we pay, and thoughtful about what is unlikely to change.
That is how wealth is built.
By Choice, Not Chance.
If this quarter made you question whether your portfolio is paying for too much optimism, or avoiding too much pessimism, that is a conversation worth having.
Truly Yours,
Jason Blumstein, CFA
CEO & Founder
Julius Wealth Advisors, LLC
Disclosures:
This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. Past performance does not guarantee any future results. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.