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Global stocks ended up seeing great gains in the second quarter. After selling off sharply in March after the U.S. and Israel began bombing Iran, investors said, ‘what war’ and decided that tech spending on the AI rollout was a bigger support for the economy than the threat of $100 oil was a deterrent. Tech stocks then lead the rally over the next two months, supported in large part by the exceptional earnings growth seen across S&P500 companies, which tallied to the 28% level for annual gains. While April and May were both rally months lead by the biggest tech stocks, June 2026 has been defined by a striking divergence in U.S. equity markets. While the Dow Jones Industrial Average marched to record highs, the tech-heavy Nasdaq 100 underwent a sharp, volatile and spastic repricing. The tech giants broke off from the rest of the market because the artificial-intelligence buildout has been getting worrisomely expensive. So many microchips are being diverted to AI data centres that there aren’t enough left for consumer devices, and it’s starting to affect the price of tech products. Apple hiked prices on computers and iPads by hundreds of dollars as the company says it can no longer absorb the price increases. While the major semiconductor (chip) stocks, particularly those involved in HBM (high bandwidth memory chips) continued to rally sharply on this increase, shares of other tech giants have been reeling. Prior leaders were aggressively sold and results in June for some of these names was their worst since the beginning of the pandemic, with declines of 11% for Amazon, 12% for Meta, 17% for Microsoft and a staggering 34% decline for Oracle. Clearly investors are becoming less patient with the excessive spending of these massive hyperscalers and the additional equity and debt financings they have used to fund this new negative free cash flow. Hardware stocks, on the other hand, continued to rally as they benefit from higher pricing and increased volumes to support the massive data centre expansions. But chip and memory manufacturers (i.e. the sellers) cannot escape indefinitely the misfortune of their clients, U.S. hyperscalers (i.e. the buyers). Already, the market seems to be telling hyperscalers that it does not like their capex spree at whatever prices semis are charging for memory and GPUs. Bottom line, as we saw through the dotcom bubble in 2000, telecom equipment makers such as Cisco could not escape worsening telecom company fundamentals. Thus, we believe the rout in hyperscaler stocks lately is a yellow flag for semis. The upcoming quarterly reports from industry giants such as Amazon, Microsoft, Alphabet and Oracle will be more important than ever. We already know that their capex will have to increase because the prices they are paying for existing order rates has been rising, but will they also add further to this spending?
Despite the breakdown in the past month by the ‘former fabulous seven’, the rest of the market seems to be doing fine for now as the sales by investors in those big index stocks has found its way into some of the laggard groups in the ‘S&P493’ (i.e. the S&P500 less the ‘fab 7’). Financial industry stocks were prominent winners, particularly in Canada where the bank stocks have seen buying reminiscent of the binge we saw way back in 1996, despite that fact that the banks themselves are trading at record high price valuations and record low dividend yields. Analysts are now scrambling to redo their valuation models for Canadian bank stocks, arguing that earnings are now coming from more stable, growth-oriented sources such as capital markets and wealth management that should support earnings multiples in the 13-15 times range, rather than the historical levels of 10-12 times. Maybe their businesses are more ‘recession resilient’ and growth oriented than they have been in the past, but it might be better to see how navigate their way through the inevitable recessions and bear markets that will occur before crowning a ‘new era in banking.’
One bear in the woods has been spotted! Prominent Wall Street strategists aren’t usually outright bearish because it can get in the way of business and being bearish and wrong is a good way to threaten your own job security. This makes Bank of America Securities U.S. equity and quant strategist Savita Subramanian’s last report even more remarkable as it is titled “Too many red flags. Take profits”. Fully 70% of the strategist’s bear market signposts have now been triggered showing U.S. stocks expensive on 17 of the 20 metrics the strategist tracks. The bullish story is that earnings support higher stock prices to a much greater degree and debt is much lower than the ‘tech bubble’ in the late 1990s. However, there has been a deterioration in the health of the rally since 2026 began. Cash flow generation has failed to grow, equity and debt issuance have climbed, and share buybacks have slowed. The massive capital expenditure accompanying the data centre arms race is pushing hyperscaler profit margins lower while weakening the balance sheets. Nothing in the report is new or remarkable. It just simply states what many of us who have seen down markets in the past are getting concerned about in the current environment. Maybe the good times will continue as investors keep buying every dip in prices and maybe the most bullish prognosticators are right in saying that we are seeing a ‘5th industrial revolution’ that will lead to a decade of exceptional economic growth, low inflation and rising stock prices. But are most investors really ready to risk their capital and savings on the hope of such an outcome? Having seen some similar cycles in the past, I know they never end well and that some hedging of invested positions and moderating expectations is not the worst strategy to have right now!
Making matters worse, investor sentiment is wildly bullish, and that is always negative from a contrarian perspective. The Market Vane bullish consensus index came in at 77% in June, according to Barron’s. That is the second-highest level since 1997. The ratio of put options relative to call options tied to stocks recently hit its lowest level outside of the 2021 meme stock frenzy and the Tech bubble in the late-1990s, meaning that investors are taking more levered positions to the upside rather than buying some downside protection. Cash ratios in institutional and retails accounts are near all-time lows. While the one-year forward P/E multiple is 21x is not radically higher than the long-term average of around 16 times, the ‘cyclically adjusted’ (CAPE) earnings multiple is 41 times, which is a record. This also comes at a time of elevated bond yields and a radically compressed equity risk premium, meaning that investors are basically treating stocks as risk free assets, which seems to be a ‘bit of a stretch.’ Finally, more than half of the S&P500 market cap membership now trades at a price-to-sales multiple of over 10 times, wildly above the long-term average of under 2 times. Of course that seems like pretty cheap when compared to the recent IPO of Elon Musk’s SpaceX, which is trading around 90 times revenue!
Market Vane Bullish Consensus Stock Index | United States (index)
How these stock purchases are being financed is also of concern. While savings rates have been wound down to fund consumer expenditures and the ‘wealth effect’ of the gain in financial markets has given consumers the confidence to keep spending, the investment side of the equation has had a more dubious source as margin debt growth has outstripped the pace of gains in the S&P500 by a factor of two over the past year. Excessive leverage is a classic sign of a market bubble, and yet very few in the investment community seem to believe we are in one. Retail investor stock market leverage continue to rise as total margin debt first crossed over the $1 trillion mark in June 2025 and has ballooned another 40% since that time. Two-thirds of all the margin debt outstanding has been created since March 2020 alone, so this has clearly been a trend associated with the ‘work and trade and home’ mantra that has been in place since the beginning of the pandemic.