For many, summer marks a welcome change of pace. Schools dismiss for the season, folks head off on vacation, and the calendar offers a brief reprieve before the routines of autumn return. For the team at Verger, however, there is no summer recess. While the calendar may signal "break," our investment team remains fully engaged – continuing to meet with investment managers, challenge our own assumptions, evaluate new opportunities, and test whether each investment still deserves its place in client portfolios. Markets never stop teaching, and successful investors never stop learning.
This summer our team had the opportunity to share these musings in a literal classroom, when Jim Dunn and Scott Clancy continued the Verger tradition of volunteering to teach a fundamental of finance and investing class to high school students. Explaining concepts such as portfolio construction, risk tolerance, and diversification to students reinforced something we often remind ourselves: mastering the basics remains as important as understanding the latest innovations.
While every market cycle presents new technologies, new narratives, and new reasons why "this time is different," the fundamental principles of successful investing—discipline, valuation, patience, diversification, and sound risk management—have endured for generations. The market's curriculum evolves, but its core lessons rarely do.
As we begin the second half of 2026, we remain grounded in these lessons. Markets will continue to evolve. Technology will continue to advance. Human behavior, however, has a remarkable tendency to repeat itself. As long-term, disciplined investors it is our job to distinguish between what is changing and what remains timeless.
Lessons from Last Semester
Despite bouts of geopolitical uncertainty, U.S. equities produced their strongest quarterly advance since 2020, fueled once again by extraordinary enthusiasm surrounding artificial intelligence (AI). One of the quarter's most notable developments was the expanding role of memory manufacturers. While graphics processors have understandably received much of the previous attention, AI also requires enormous quantities of increasingly sophisticated memory. Companies such as Micron, SanDisk, and Western Digital became meaningful contributors to market performance as demand for high-bandwidth memory accelerated alongside the construction of AI data centers.
The public debut of SpaceX added yet another dimension to investors' enthusiasm for potentially transformational technologies. Capital continues to flow toward companies perceived to possess durable competitive advantages and long growth runways, particularly those operating at the intersection of AI technology, space, and advanced computing.
For the quarter, the S&P 500 advanced 15% while international equities (e.g., the MSCI EAFE) also delivered double digit returns. For the twelve months, it was another outstanding year for public equities, with both U.S. and international markets returning more than 20%.
Fixed income returns were much more subdued for the quarter (e.g., the Bloomberg Aggregate returned less than 1%.) Commodities were negative for the quarter with gold experiencing one of its weakest quarters in many years, declining approximately 13%. However, for the trailing one year, commodities had a very solid year, returning 25%.
Overall, the second quarter served as another reminder that—over the short-term—markets rarely move in neat, predictable patterns. Few investors began this quarter expecting one of the strongest advances in U.S. equities in decades alongside heightened geopolitical tensions, elevated interest rates, and persistent questions surrounding inflation. But markets have a habit of confounding consensus expectations. That is why we place greater emphasis on building durable portfolios than in attempting to forecast every short-term development.
Source: Bloomberg
The Questions on the Next Exam
Our investment team spends less time asking, "What just happened?" than asking, "What really matters going forward?"
Looking backward is relatively easy. The headlines have already been written, the market returns have already been recorded, and countless commentators have expounded on why events unfolded as they did.
Looking forward, however, requires a different discipline. It requires separating signal from noise, distinguishing temporary narratives from lasting trends, and identifying the questions that will ultimately shape long-term investment outcomes. While we make no claim to know all the answers, we believe our responsibility is to continually ask the right questions.
As we begin the second half of the year, three important questions stand out.
Question #1: Can U.S. equity valuations remain this elevated?
By almost every traditional valuation measure, U.S. equities remain quite expensive relative to their history (see chart below). High valuations do not cause markets to decline, nor do they determine what happens over the next six or twelve months. History does, however, suggest that starting valuation has been a strong predictor of prospective, long-term investment returns.
Source: The Daily Shot
Simply put, the higher the price paid today, the lower the return investors have historically earned over the following decade. Could the next decade prove different? Certainly. However, many market participants have been historically hurt by repeatedly assuming that this current moment is the one that bucks the trend.
Verger’s view: It is prudent to continue to stay diversified within public equities, both geographically and by style (e.g., growth, value).
Question #2: Who ultimately benefits from AI?
As we’ve noted in previous commentaries, we have little doubt that AI will reshape industries, improve productivity, and have a notable impact on the global economy. We are not focused on questioning whether AI succeeds. Instead, we are wondering who will ultimately capture the economic value.
History offers numerous examples where revolutionary innovations transformed society while producing uneven outcomes for investors. Railroads connected continents, yet many railroad investors earned disappointing returns. The internet permanently changed commerce and communication, yet countless companies that dominated headlines in 1999 no longer exist today.
Today's AI race carries echoes of these earlier periods. Many of today’s large cap technology companies are investing hundreds of billions of dollars building AI infrastructure, which has significantly reduced their free cash flow (FCF). However, as outlined in the following charts, Wall Street analysts are assuming that, even as capital expenditures remain elevated going forward, these companies will generate multiples of their current FCF within a few years. In our view, those investments may indeed generate exceptional returns. Alternatively, they may simply accelerate competition, reduce costs, and deliver most of the economic benefit to customers rather than shareholders.
Sources: BCA Research, Bloomberg Finance L.P.
At this point, investors seem to agree that AI will change the world. However, we’re more curious about who will ultimately earn the attractive returns associated with this transformation.
Verger’s view: We continue to stay diversified across the AI value chain, while also focusing on other, less crowded parts of the capital markets where we believe we (and our managers) have more of an edge (e.g., biotech, Japan, natural resources, and emerging market debt).
Question #3: Is "higher for longer" becoming the new normal?
Interest rates remain one of the most important variables facing financial markets. The 10-year Treasury yield remains near levels not seen in well over a decade, reflecting a market that increasingly expects structurally higher borrowing costs.
Several forces appear to support that view. The chart below highlights various factors impacting different points on the yield curve.
On the front end of the curve, inflation continues to remain above the Fed’s long-term target of 2.0%. For example, within the technology sector, demand for advanced semiconductors and memory chips has increased costs throughout portions of the technology supply chain, prompting companies such as Apple and Microsoft to raise prices on certain products.
In the middle of the curve, the hyperscaler companies continue issuing substantial amounts of debt to finance unprecedented capital expenditures.
Finally, at the long end of the curve, the federal government's fiscal position continues to deteriorate. Annual deficits remain historically large, especially for a non-recessionary economy, while interest expense on outstanding federal debt has climbed to approximately $1.2 trillion annually and continues to rise.
Verger’s view: We do not claim to have an edge in predicting the level and direction of interest rates. However, we do believe that, given the risks cited above, Treasuries’ role as a good hedge against equity risk is potentially waning. As such, we continue to believe it is crucial to further diversify equity hedges through real assets and absolute return-oriented strategies.
Lessons Worth Remembering
Periods of significant and narrow market enthusiasm often distract from attractive opportunities elsewhere.
One lesson history consistently teaches is clear: the price you pay for an asset matters. As we explained last quarter, many software companies have experienced substantial share price declines as investors worry that AI will permanently impair software business models. While we believe AI will likely have an impact on the business models of many companies, including some software businesses, we also believe the market may still be painting with too broad a brush.
Companies that provide mission-critical software, serve as systems of record for their customers, and benefit from significant switching costs still, we feel, occupy strong competitive positions. Rather than being displaced by AI, our managers believe that many are well positioned to integrate AI capabilities into existing platforms and thereby strengthen customer relationships while improving productivity.
With many of these software companies now trading at valuations that are considerably more attractive than they have been in recent years (see chart), some of our managers have been selectively increasing their exposure.
Bloomberg, Apollo Chief Economist
Don’t forget about the importance of downside capture.
Our view continues to be that successful long-term investing is a combination of good upside capture during strong markets and minimized portfolio drawdowns during difficult ones. One way to protect capital on the downside is through the “short book” of long/short equity strategies.
Higher interest rates create growing challenges for highly leveraged companies, particularly within the small-cap universe. As illustrated in the chart below, interest expense as a percentage of EBITDA has more than doubled for small-cap companies in the Russell 2000 Index over the past six years.
Companies facing rising financing costs, deteriorating balance sheets, and weakening competitive positions can become attractive short candidates. We continue to believe that thoughtfully implemented long/short strategies can help minimize portfolio volatility and drawdowns, allowing investors to efficiently reallocate capital to more attractive risk assets following a market downturn.
The best students understand that learning does not stop when the bell rings. The same is true in investing. Every market cycle introduces new technologies, new risks, and new opportunities beyond the original syllabus.
Our responsibility is not to predict tomorrow's headlines or guess every question that will appear on the market's next exam. Our responsibility is to continue asking thoughtful questions, challenge our own assumptions, and, importantly, learn from history without becoming captive to it. The result? Our focus on building portfolios capable of succeeding across a wide range of future outcomes.
Summer may bring recess for many, but in our profession, class is always in session. We remain committed to building robust, all-weather portfolios that are well positioned to help our clients achieve their long-term objectives for years to come.
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