Weekly Mosaic Update

Top of Mind – Week of August 10, 2026

Second-quarter earnings growth has exceeded expectations, with nearly 90% of the S&P 500 reporting results above 50% compared to the second quarter of last year. This is well ahead of estimates at the beginning of this earnings season, which were slightly above 20%.
A large portion of this earnings growth can be attributed to a handful of large earnings surprises by a couple of stocks; however, when adjusted for this impact, earnings growth remains impressive at over 30%.
Either taken at face value or adjusted to remove the outsized impact, second quarter results mark the seventh consecutive quarter of double-digit earnings growth and the second consecutive quarter that has seen earnings growth above 25%. Further, the outlook for earnings growth in the third and fourth quarters of this year is above 20% as well.
Encouragingly, the earnings strength continues to be broad-based, with ten of the eleven sectors of the S&P 500 reporting year-over-year earnings growth in the second quarter, and results for the median stock in the index remain ahead of long-term averages as well.

Over the last year, sentiment around the impact of AI and capital expenditures (capex) has driven volatile shifts in market leadership.
Software stocks had been the market darlings for much of the past few years until late in the third quarter of 2025, when fear mounted that AI would disrupt existing software business models and sent the industry group lower by over 30%.
A few months later, semiconductor and memory stocks took the baton, as they are direct beneficiaries of the massive amount of capital being invested in the buildout of AI, sending many of these stocks to historic highs.
Sentiment has shifted since mid-June, and semiconductor and memory stocks have re-rated dramatically lower, with some having fallen over 50% from their recent highs, and the PHLX Semiconductor Index down over 20% from its mid-June high.
Despite this volatility, the broader market appears to be holding up well. The market-cap-weighted S&P 500 is within a few percent of its all-time high, and small cap stocks, as measured by the Russell 2000, have outperformed large cap stocks this year, an encouraging sign not only for the markets but also for the broader economy.

Interest rates moved sharply higher last week as tensions in the Middle East disrupted the flow of oil through the Strait of Hormuz, sending crude oil prices back above $90/bbl for the first time since June.
The uptick in energy prices threatens to put additional inflationary pressure on the US and global economies, which are already facing price pressures from the massive amounts of capital being invested in the buildout of AI.
In response, the bellwether US 10-year Treasury reached a new high for the year at 4.70%, and the 2-year Treasury rate, which closely follows market expectations for the Federal Funds Rate, also reached a new high at 4.35%.
Kevin Warsh presides over his second Federal Open Market Committee (FOMC) meeting as Fed Chair this week, and interest rate markets are currently pricing in a 1-in-3 probability of an interest rate hike.
With a labor market not showing imminent signs of weakness that would require Fed action, we anticipate the FOMC will hold rates steady while striking a cautionary tone regarding the inflationary threat posed by elevated energy prices.

Markets came under pressure last week as geopolitical tensions in the Middle East returned, while a new threat to the AI narrative emerged from China.
In response to the kinetic activity in and around the Strait of Hormuz, crude oil prices moved predictably higher. Developed market economies are in a precarious spot, as oil inventories have not been replenished following their drawdowns during the supply pinch earlier this year.
With mid-term elections looming and inventory levels already low, it is hard to imagine the administration wants the renewed conflict to linger for a prolonged period, as it likely wouldn’t be well received at the polls this November.
The AI narrative that has enthralled the markets came under scrutiny when a Chinese model, Kimi K3 from Moonshot AI, supposedly created at a fraction of the cost of similar models in the US and delivering stronger performance, sent shares of AI hardware providers decisively lower.
While newer, cheaper models are inevitable in any technology cycle, in these circumstances, we question the initial assumption of broad adoptability.

Emerging market equities have had a remarkable start to the year, outpacing both developed market and US equities.
The emerging market index was once heavily tied to commodities and susceptible to commodity cycles; however, over the last two decades, the composition of emerging markets has changed.
The index has transformed from a cyclical-heavy index to one dominated by Technology. Twenty years ago, Energy and Materials stocks represented 33% of the index; today, the figure has contracted to just 8.5%
Technology stocks made up 17% of the index, or roughly half the weight of Energy/Materials two decades ago. Today, Technology stands at a staggering 45% of the index.
This shift began with the buildout of internet companies across both China and India. More recently, it has been accelerated by the continued AI spending as the hardware providers in Taiwan and South Korea have benefited handsomely.
Similar to US equity markets, should the AI-related capital expenditure slow, emerging markets will be impacted as well.

Capital spending by the AI hyperscalers has been remarkable this year, driving both domestic economic growth and corporate earnings.
Typically, earnings growth estimates decline throughout the year as analysts revise their previously optimistic expectations lower. However, analyst estimates of capex spending by these hyperscalers have continued to rise this year, leading to upward revisions to earnings growth estimates.
The once-robust free-cash-flow profile of the hyperscalers has been eroded by this sustained, intense level of investment, raising questions about whether this pace of investment is sustainable.
With estimates assuming capex remains elevated and earnings growth stays robust, the margin for disappointment around this key driver has narrowed considerably.
While investment in AI is extensive, there are growing questions about when hyperscalers will begin to see a return on their outlays, and the possible broader economic and earnings implications should this level of investment begin to slow.

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