Portfolio Management Update Summer 2026

Asset Allocation Strategy

I continue to favor equities over bonds, with an emphasis on economically sensitive sectors while maintaining investment-grade bonds exposure for stability. I am trimming overweight positions in some AI-driven large-cap growth stocks and reallocating proceeds to U.S. mid- and small-cap stocks. I also continue to add commodity exposure, reflecting secular demand and inflation considerations.

Within equities, I favor cyclical stocks over defensive stocks. Cyclicals and small caps offer attractive growth potential at reasonable valuations because they are more sensitive to economic expansion. Analysts are most optimistic about Information Technology, Communication Services, Healthcare, Materials, and Energy—most of which are economically sensitive—while Consumer Staples, a defensive sector, has the most Sell ratings (FactSet). I prefer sectors that tend to perform well in an economic expansion. Ned Davis Research notes that stocks have risen more than twice as fast when cyclical sectors are in an uptrend versus defensive sectors, based on the 50-day moving average. A rotation back toward cyclicals in the second half would confirm that the economy continues to expand and this bull market has further room to run.

The U.S. remains my preferred market, supported by a resilient economy, the ability to withstand an oil shock, and exceptional earnings growth and profit margins.

Bond ETFs have attracted $300 billion in year-to-date inflows, according to State Street Global Advisors. Demand has been concentrated in short-duration bond ETFs, which help reduce inflation and interest-rate risk, and in funds with an overweight to credit. I agree with that positioning and have been investing similarly. Looking forward, I am adding duration to portfolios, as prices of long-term bonds have discounted upcoming rate cuts.

US Large-caps

CFRA expects the S&P 500 Growth Index to rise 36.6% in 2026 and 25.4% in 2027, while the S&P 500 Value Index is projected to gain 12.3% in 2026. The Magnificent 7 stocks are less expensive today than they were a year ago based on forward price-to-earnings ratios, yet investors are taking profits and rotating into other areas of the market. Earnings growth for the remaining 493 companies in the S&P 500 is expected to accelerate in 2026.

US Mid-to-Small-caps

I am diversifying beyond overweight exposure to large-cap growth stocks, including the Magnificent 7. The rollout of AI should benefit mid- and small-cap companies as well, not just the largest technology firms. I am increasing exposure to U.S. mid- and small-cap equities, which should benefit from productivity gains and margin expansion as AI technologies are adopted more broadly.

A stronger U.S. dollar supports broader equity-market performance beyond AI-focused technology stocks. Capital is likely to rotate into other areas of the market, including small- and mid-cap equities.

Sector Positioning

Favoring economically sensitive sectors over defensives ones.

Technology

I remain overweight the Technology sector. Technology is projected to generate the largest price gains over the next twelve months, at 27% (FactSet). Its 2027 earnings and revenue growth estimates exceed those of every other S&P 500 sector. Persistent demand for AI computing continues to support the AI investment theme. Taiwan Semiconductor reported 68% year-over-year revenue growth for the month ending in June, and demand for compute is expected to grow steadily as AI adoption expands.

Earnings strength continues to support Technology momentum, while defensive sectors lag. Technology has strong earnings visibility into 2027 across key industries, led by semiconductors, and forward 24-month valuations remain below their five-year median, according to State Street Global Advisors. This combination of earnings growth, margin expansion, and sustained investment explains why I remain overweight Technology despite periodic profit-taking selloffs.

I have core positions in Magnificent 7’s stocks whose annual earnings growth is 45% higher than that of the other 493 companies in the S&P 500. Its valuation premium to the remaining S&P 500 companies has fallen to 10%, the lowest level in more than a decade (Morgan Stanley).

Investors are concerned that rising capital expenditures are consuming free cash flow and pushing some firms to issue debt. They are questioning whether the massive AI-related spending will generate sufficient returns. As a result, the market is rotating into areas beyond Technology. I expect capital spending by these companies to remain steady into 2027, benefiting semiconductors and other AI-infrastructure beneficiaries, including grid companies. Demand for compute still exceeds supply and should remain durable. I also believe these investments will ultimately translate into greater market share and stronger profit margins.

I’m also selectively trimming AI stocks to raise cash to invest in other areas of the market. When the US dollar is appreciating, Large U.S. multinationals with significant foreign revenue face earnings pressure because foreign profits translate into fewer dollars. This is why strong-dollar periods can be challenging for sectors like Tech. I’m investing proceeds from Tech sales into US Industrial and Mid-Small cap stocks. Also, US Mid-to-Small cap stocks tend to benefit more from a stronger dollar because input cost declines and less sales are derived form international markets.

Communications

Continue to invest in communications sector based on valuations, and growth prospects. Sector bottom up price target is 29.1% for next 12 months (Factset).

Industrials & Aero-Defense

I continue to add incrementally to industrials, aerospace, and defense. Strong global defense demand makes earnings growth more dependable and visible, while geopolitical risks are rising in the Pacific and Eastern Europe. Defense and aerospace spending benefit from secular growth tailwinds, and major companies have order backlogs extending years into the future. With the U.S. manufacturing PMI reaching cycle highs, continued demand from AI capital spending and pro-investment policy should also support Industrials and Materials.

I am investing in industrial companies that benefit from a structural capital-expenditure super cycle driven by AI data-center buildouts, defense spending, robotics, materials, construction, engineering, industrial automation, and manufacturing reshoring. Analysts estimate 16.1% potential price appreciation over the next twelve months, based on FactSet target prices.

Health Care

Health Care continues to be supported by robust long-term growth drivers, including an aging global population, increased demand for managed care, and rising pharmaceutical consumption. Healthcare exposure has a defensive role in a portfolio as people still pay for healthcare services and goods even in a recession. The Government recently increased its Medicare Advantage payment to 2.5% from zero. The sector is an AI-beneficiary that will help with drug innovation and profit margin expansion. The sector’ forward price-to-earnings ratio stands at approximately 18.3 versus 20.1 for the S&P 500 Index. FactSet forecasts a 14.4% price appreciation for the latest analyst target price.

Utilities

Utilities provide current income and some growth potential, serving as a hedge against heavy tech exposure, and an economic slowdown. Independent utilities powering AI are showing growth characteristics, unlike traditional regulated firms. Rising US energy demand—especially for AI—and grid improvements support long-term revenue growth. The sector is expected to grow revenue at 8%. Analysts estimate a 12.4% sector gain in price compared to analyst’s target price.

Financials and Consumer Discretionary

Underweights in Financial stocks and Consumer Discretionary due to projected slower economic growth, higher borrowing cost, energy prices, and commodity cost.

Energy

I’ve added to positions in energy stocks because they can help protect against inflation, geopolitical risks, and capitalize on increasing energy demand fueled by AI growth in the U.S. economy. The world needs more energy to run their economies and deploy AI.

Oil-producing countries are exceeding quotas to offset lost Iranian supply, which is likely to weigh on oil prices. On the demand side, countries are restocking when prices decline. Energy security remains a long-term theme supporting the sector, as countries invest in grid development, expand energy capacity, and diversify away from reliance on the Strait. U.S. natural gas is likely to benefit as buyers favor U.S. exports, while pipeline infrastructure companies are also well positioned due to rising gas throughput for both LNG exports and AI-driven power demand. Energy stocks diversify portfolios, offer attractive yields, and often move independently from the broader market. They may also benefit from persistently higher oil prices.

Commodities

Accounts have exposure to materials and commodities such as gold, copper, and rare earth materials because they can hedge against inflation, geopolitical risk, national-security concerns, and fiscal uncertainty. The demand backdrop for commodities also remains favorable.

Gold has corrected as investors, including China and Russia, have taken profits to fund their economies and defense spending. A stronger dollar and higher real yields also make gold less attractive. In addition, the new Federal Reserve Chair appears focused on reducing inflation by removing excess liquidity from the economy. A shrinking Fed balance sheet and possible federal-funds-rate hikes are bearish for gold and supportive of the U.S. dollar. I am reducing gold exposure and using it as a source of funds for stocks that should benefit from the rollout of AI technology.

I am adding to copper exposure. Copper benefits from secular demand because it is used across many industries and applications, including grid buildouts, aerospace and defense, autos, AI semiconductors, and broader industrial activity.

International Equities

Overall, I favor quality U.S. stocks in a deglobalizing world marked by geopolitical and supply-chain risks over international equities. The U.S. dollar has strengthened as the flight-to-quality trade returns and the Fed may hike rates in September. Historically, periods of U.S. dollar appreciation often coincide with U.S. equities outperforming international equities. For U.S.-based investors, a stronger dollar is generally a tailwind for U.S. stocks and a headwind for international stocks. It lowers import costs for U.S. companies, can improve margins for firms sourcing inputs abroad, and may attract foreign capital into dollar-denominated assets. International companies selling into the U.S. may face reduced competitiveness as their goods become more expensive in dollar terms.

Fidelity research shows that when U.S. employment measures are in expansionary territory, as they are today, U.S. equities have historically outperformed international markets over the following year. A stronger U.S. economy and dollar should attract foreign investment and support earnings growth. I continue to hold international equities as a diversifier, but the U.S. economy remains more dynamic and resilient than other developed and emerging markets.

Bond Allocation Update

Bonds continue to play an essential portfolio-diversification role by helping mitigate equity-market risk. With yields now closer to normalized levels, bonds offer more attractive risk-adjusted returns. I favoring a tactical overweight investment-grade short- to intermediate-term corporate bonds, which helps manage interest-rate risk while preserving income potential. This part of the yield curve offers a better balance between yield and duration risk. I remain cautious on long-term bonds because inflation pressures have risen and the Federal Reserve may raise rates once or twice this year to address inflation concerns. However, Long term bonds are in oversold territory making them an attractive dollar-cost-averaging strategy. I am incrementally buying long-term credit bonds for accounts because I believe inflation will decline in 2027. Long term bonds outperform when inflation delcines. Also, long-term quality bonds are a hedge against slower economic growth.

Bond Sectors

I tactically favor investment-grade floating-rate notes, which tend to hold their value better during a restrictive but non-recessionary monetary-policy environment. I remain underweight non-investment-grade bonds because credit spreads are historically tight and do not offer enough compensation for default risk. I have also added Treasury Inflation-Protected Securities (TIPS), which help protect bond investors from inflation because their principal value is indexed to inflation. TIPS yields are attractive relative to long-term bonds, and historically, their best returns have occurred when yields were elevated, as they are today.

Cash Equivalents

I am reducing cash equivalents. Cash reserved for liquidity and expenses is being invested in vehicles that offer current income and price stability. I favor investment-grade floating-rate notes with minimal duration risk, which provide higher income than Treasury Bills that can adjust as inflation and short-term rates change.

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Past results are not predictive of results in future periods. While money market funds seek to maintain a net asset value of $1 per share, they are not guaranteed by the U.S. Federal government or any government agency. You could lose money by investing in money market funds. The market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. The S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks. The S&P 500 is a product of S&P Dow Jones Indices.