Meb Faber arrived in Omaha the week the Berkshire faithful descend on their patron's modest cottage, a ritual of pilgrimage that doubles as the world's most concentrated lecture on long-term investing. It was the right setting for Faber, co-founder and CIO of Cambria Investment Management, to take systematic aim at the investment orthodoxies that Berkshire Week tends to reinforce — including some attributed to Buffett himself.

Speaking with Jared Rohrer and Jeovany Zelaya¹, Faber runs through the full architecture of his thinking: global diversification, valuation cycles, shareholder yield, tax efficiency, and the cognitive failures that quietly destroy returns for ordinary investors. The conversation starts with a statistic few in the room had heard before.

The Gap That Compounds Forever

Before challenging Buffett's advice, Faber acknowledges the record. "My buddy Chris Bloomstran has a statistic that he says Berkshire Hathaway since inception relative to the S&P could decline 99% and still be outperforming the S&P since inception," Faber says. "Unbelievable, and I think it's actually like 99.5%, but I'm just rounding."

That framing — compounding as arithmetic destiny — set the table for the critique. Buffett has long told ordinary investors to simply buy the S&P 500 and hold. Faber's assessment: Buffett didn't follow that advice himself. "He did all sorts of fairly sophisticated trading. Even now in his late retiree years, he was gassing up the plane and going to Japan and buying stocks in companies over there. So he didn't really follow his own advice." Faber's read: Buffett advocates simplicity for people who cannot execute complexity — it's directionally sound, but not optimal. "If you're gonna close your eyes, hold your nose for 20, 50, 100 years, go for it, but most of us don't live that way."

The Home Country Bias Problem

The S&P concentrates not only in size but in geography. Faber's position on US-only investing is unambiguous: it is historically a "horrible, terrible, no good, very bad idea." The US now represents two-thirds of world market cap while generating only 25% of world GDP. The concentration, in Faber's framing, is not a feature — it's a late-cycle artifact.

"The long history of US versus ex-US markets is one of waxing and waning," he says. "We've just had a massive cycle, 17 years since the GFC, where the S&P has just creamed everything. So pat yourself on the back, drink some champagne, celebrate, but say, 'Look, I maybe shouldn't expect 15% returns forever in the US stock market.'"

His illustration: South Korea. "Close your eyes. There's no way you can possibly fathom how much the South Korean market is up in the past year. The answer is almost 200%, a triple." The mechanism is mean reversion — markets that go from "really depressed, no one wants them, they're cheap, they're hated" to "slightly less terrible" can generate explosive returns.

The Japan parallel is pointed. In the 1980s, Japan was the largest stock market in the world. "The narrative today about US tech companies — no one else can compete — it wasn't that long ago they said that about Japan." Japan's subsequent 30-year stagnation turned catastrophic overvaluation into opportunity. Today, Faber sees Japan and other international markets as attractively valued precisely because the prior narrative collapsed.

The Valuation Distinction: Business vs. Stock

Faber's treatment of AI and technology cycles is disciplined and historically grounded. The 1990s bubble, he argues, is the operative template. "At the peak of that bubble, you had companies like Cisco and Microsoft that did great for the next 10 to 20 years in business terms, and yet the stocks went nowhere because they just got too expensive." The lesson is explicit: "You have to make a distinction between the business and the stock."

His railroad analogy extends the point across centuries. The railroads were the defining technology of their era, generating P/E ratios of 50 and 60 before an 80% collapse. "The point there is not that you're gonna have a crash. Everyone's always crash fearful. But the point is, you have this resilience over very long periods, and this creative destruction of capital markets — it's great. It's a feature."

Shareholder Yield: The Dividend Myth

Faber's sharpest technical argument concerns how investors misread corporate cash return. Dividends are not income in the sense most investors believe. "If you are a $100 stock and you get a 5% dividend, that stock's gonna go down to 95. There's no free lunch in investing."

More consequentially, dividends have been surpassed by buybacks as the dominant mechanism of cash return since the late 1990s. "In the US, companies buy back more stock than they pay out in dividends. So if you don't account for that, you're ignoring half of the way the companies distribute their cash flow to shareholders." He illustrates the trap precisely: a stock paying a 4% dividend while issuing 5% in new shares annually has a negative yield. "How many people know that, who are buying the stock for that yield? Very few."

The shareholder yield framework — combining dividends and net buybacks — corrects this. It also screens for capital allocation discipline. "You want the cannibals," he says, invoking Munger, "the companies eating themselves, reducing the share count."

Tax Alpha Swamps the Rest

Faber's most underappreciated argument may be the simplest. "Your tax alpha is much, much easier and much more important than just trying to beat the market." The ETF structure — with its in-kind creation and redemption mechanism — eliminates the capital gains distributions that actively managed mutual funds impose annually on holders. "The SPDR ETF since the '90s has never paid a capital gains distribution. Thirty years." While investors debate valuations and interest rates, they leave tax alpha on the table.

On the proliferation of new ETFs — more ETFs than stocks now exist — Faber is sceptical but structured. He credits Bogle for enabling low-cost investing and the ETF for improving on the mutual fund structure. But the democratisation of the wrapper has produced "a lot of junk." His operating principle: "It's the best time ever to be an investor. It's also never been easier to totally implode your portfolio."

The Psychological Architecture of Failure

Running through every topic is a consistent behavioural thesis. The number one investor failure is not picking the wrong stock — it is getting taken out of the game. "We often say the best compliment you can give someone in our world of investing is that you make it to the finish line." Leverage, panic selling, hyperactive trading — all routes to the same outcome.

His framework for the current generation of retail investors is frank: they are learning markets through the casino. "Hey, let me teach you about hyperactive trading," he says, describing what Robinhood and prediction markets are implicitly selling. The lesson they should be absorbing instead: "Invest in the broad stock market, own parts of these businesses, and if you zoom out over 25 years, you're gonna 10X your money."

On humility as the investor's non-negotiable attribute, he cites Druckenmiller — "arguably the greatest investor alive" — who "talks about all his terrible losing trades. He says, 'I have so many scars, you wouldn't believe it.'" Faber's read on Buffett's annual letters echoes this: "He's always talking about his mistakes first. That's what he leads with. Very different than most managers."

5 Key Takeaways for Advisors and Investors

1. Buffett's simple advice is not his actual strategy. The "buy the S&P" instruction is directionally sound for passive long-term holders, but Buffett's actual record was built on sophisticated, global, valuation-driven investing. Advisors can use this distinction to frame active allocation decisions without discrediting the source.

2. Home country bias is a cycle, not a conviction. Seventeen years of US outperformance since the GFC has embedded structural overweighting of US equities across most portfolios. Historical patterns — including Japan's dominance in the 1980s — suggest this is a late-cycle positioning risk. International and value exposures deserve a structural case, not just a tactical one.

3. Dividends alone are an incomplete signal. The shareholder yield framework — dividends plus net buybacks minus share issuance — provides a more accurate picture of corporate cash return. A high-dividend stock that simultaneously issues equity may have a negative effective yield. Advisors should screen both sides of the capital allocation ledger.

4. Tax alpha is the most accessible source of outperformance. The ETF structure's tax efficiency — particularly the absence of capital gains distributions — compounds significantly over decades. For most clients, optimizing the tax wrapper is a more reliable lever than security selection or market timing.

5. Staying in the game is the primary performance objective. Leverage, panic at drawdowns, and hyperactive trading are the primary destroyers of long-term wealth — not poor stock selection. Advisors who build portfolios and behavioural frameworks that keep clients invested through volatility deliver more durable outcomes than those optimizing for the last basis point of return.

Footnote:

1 "Meb Faber: Warren Buffett Didn't Follow His Own Advice | #631 - The Meb Faber Show." Meb Faber Show, 25 May. 2026.

The question Pierre Daillie puts to Larry Swedroe near the top of the conversation¹ is direct: is AI making markets easier or harder to beat? Swedroe's answer is equally direct, and it sets the tone for everything that follows.

"In the very short term, AI makes markets a little more beatable," he says, "but that makes the market more efficient, in and of itself." This is Andrew Lo's (MIT, AlphaSimplex) adaptive markets hypothesis in its most practical form — inefficiencies attract capital, capital corrects pricing, the anomaly shrinks. The process is self-defeating for followers, and increasingly dominated by world-class institutions with the compute power and incentives to find every remaining penny.

Swedroe walks the room through the full arc. Before the CAPM, there were no finance programs in American universities. The single-factor model explained roughly two-thirds of portfolio variance — leaving one-third on the table for anyone paying attention. Fama and French's three-factor model pushed explanatory power to 93 percent. Carhart added momentum. Novy-Marx added profitability. By the time AQR's team had incorporated quality, the five-factor model explained 98 percent of cross-sectional returns — and Warren Buffett's alpha, which had survived decades of scrutiny, all but disappeared. "He hasn't outperformed the market in the last 17 years or so," Swedroe observes. Not a failure of genius, but a consequence of markets catching up.

The AI chapter in this story is continuous, not new. Renaissance Technology and Citadel have deployed machine learning for decades, Swedroe notes, "extracting tens of billions of dollars from the market by finding micro-inefficiency." What has changed is speed and sophistication. Earnings calls that once took hours to reprice are now repriced in seconds. Nonlinear relationships invisible to regression are now surfaced routinely. But the same mechanism that rewards early movers eliminates the opportunity: when AI discovers an anomaly, money flows in, prices adjust, and the premium compresses. The danger, Swedroe is careful to add, runs in both directions. "AI tools are great at data mining. They'll find a correlation, but it may not mean anything." His standard for a durable factor — persistent, pervasive, robust to definition, implementable, and grounded in either a risk or behavioural explanation — applies equally to machine-generated signals. "Without that, the odds are good that what you have found is a data mining outcome," he says, citing the notorious example: a researcher once found that the best statistical predictor of the S&P 500 was butter production in Bangladesh.

From efficiency, Swedroe moves to diversification — and here his message was blunter. The conventional 60/40 portfolio is not what most investors believe it to be. "Most people, if you ask them how much of their risk in a million-dollar portfolio with $600,000 in equities is in equities, and they say 60%. And I point out that's wrong — it's probably closer to 90, because the equities are much riskier." That single correction reframes the entire planning conversation. If investors believe they are balanced when they are not, they are carrying tail risk they have not measured, cannot articulate, and will almost certainly fail to endure when tested.

The solution is what Swedroe calls hyper-diversification: genuine exposure to reinsurance, private real estate, long-short factor strategies, private credit, and trend-following — assets with empirical evidence of premium persistence and, critically, near-zero correlation to equity and bond markets. "There's nothing more logical than investing in reinsurance, literally nothing," he says, "because there is no reason to believe that hurricanes or earthquakes cause bear markets or vice versa." He holds 50 percent of his own portfolio in illiquid alternatives. He was present through multi-year drawdowns in both reinsurance and AQR's long-short strategy — and watched most investors exit just before the recovery. The reinsurance fund he references returned 146 percent over three years. Two-thirds of investors were gone by then.

The behavioral problem is the portfolio problem, and Swedroe is unsparing about it. "Investors like to think they're financially rational, but they're psychologically rational. They end up making mistakes because their stomach is making decisions, not their head. And I've never met a stomach yet that makes good decisions." The practical test he applies is deliberately visceral: tell clients their $600,000 equity position just fell 60 percent, $360,000 is gone, and you now need them to buy more. "Are you going to be willing to do it? And don't lie to yourself for me." The exercise surfaces behavioural truth that abstract risk questionnaires never reach. Most advisors, in Swedroe's estimation, never run it.

Mike Philbrick's return stacking framework earned Swedroe's direct endorsement — qualified precisely where it matters. Two non-correlated 10-volatility assets don't produce 20 volatility; they produce roughly 14. The math is sound. But "you could get uncorrelated assets correlating at the wrong time," Swedroe cautioned, "and now your volatility isn't even 20 — it could be 30." Planning must account for worst-case correlation, not average-case correlation.

The forward prescription Swedroe offered advisors was unambiguous. Pure asset management, he says, has no future. "I don't think those people really have a chance to exist much longer." What advisors must become are genuine wealth managers — integrating investment, estate, tax, insurance, and family governance into a coherent plan. The second obligation is competency in alternatives: understanding the instruments, performing real due diligence, and educating clients on the actual trade-off. "I believe a large part of the investor community is not being exposed to these alternatives," he says. That is not an access problem. It is a planning failure with compounding consequences. Monte Carlo analysis, run properly, translates the cost of avoidance into explicit probability: a 15 percent chance of portfolio failure on a conventional 60/40 at 4 percent withdrawal drops to 4 percent when uncorrelated alternatives are included. "You're trading off illiquidity risk, which you say you don't like, but your chance of failure fell in relative terms like 75 percent." Advisors who cannot make that argument will lose the clients who need it most.

Five Key Takeaways for Advisors and Investors

1. AI accelerates efficiency — it does not create durable alpha for followers. The institutions finding micro-inefficiencies are closing them as fast as they find them. For most investors, AI-adjacent investment products warrant the same scrutiny as any other factor: is the premium persistent, pervasive, robust, implementable, and logically explained? If not, it is data mining dressed as innovation.

2. The 60/40 portfolio is 90 percent equity risk, not 60. True diversification requires assets structurally uncorrelated with stocks and bonds — reinsurance, private credit, long-short factor strategies, trend-following. Owning all of these at modest allocations cuts left-tail risk in ways that no overweight to any single asset class can replicate.

3. Behavioural risk dwarfs market risk for most investors. The decision to sell in a drawdown and the subsequent failure to re-enter are the actual destroyers of wealth. Advisors must stress-test risk tolerance with absolute dollar numbers — real losses on real portfolio sizes — not percentage abstractions. The stomach is not a risk manager.

4. Self-healing assets reward only those who stay. Reinsurance, AQR-style factor strategies, and trend-following have all endured extended multi-year underperformance before delivering outsized recoveries. The investors who captured those recoveries are precisely those who did not exit. Sizing allocations appropriately — so underperformance is tolerable, not catastrophic — is what makes staying possible.

5. The advisory practice of the next decade is built on wealth management and alternatives literacy. Asset management alone is a diminishing business. Advisors who can run Monte Carlo simulations, explain illiquidity trade-offs in probabilistic terms, evaluate alternative vehicles with genuine due diligence, and integrate those recommendations into a full wealth plan will define the profession going forward. Those who cannot will be displaced by those who can.

Larry Swedroe is the author of 18 books on evidence-based investing and currently serves as an outsourced CIO and consultant to registered investment advisory firms. This episode aired on Raise Your Average, hosted by Pierre Daillie of AdvisorAnalyst.com and Mike Philbrick of ReSolve Asset Management.

Footnote:

1 "Larry Swedroe: The Adaptive Market & The Undiversified Investor." AdvisorAnalyst, 22 May. 2026.

That is the central finding of a May 2026 analysis by Dan Lefkovitz¹, strategist for Morningstar Indexes, who reviewed five years of global dividend ETF flow data to identify a recurring and costly pattern: investors rotating into dividend-paying equities precisely when those stocks have already outperformed — and just before they lag.

"Interest in dividend stocks seems less about income and more about playing defense in equities," Lefkovitz writes. "There's nothing inherently wrong with that. But recent years have shown that investors haven't done a great job of timing their dividend stock allocations."

The Income Premise Has Broken Down

The foundational argument for dividend stocks — income generation — has been materially weakened by the rate environment. Bond yields have now surpassed dividend yields by a significant margin. The Morningstar US Core Bond Index yielded 4.5% as of March 31, 2026, versus just 2.3% for the Morningstar US High Dividend Yield Index. Elevated borrowing costs, persistent inflation, rising equity prices, and a corporate capital allocation shift toward share buybacks and AI investment have all conspired to compress dividend yields. The income case for dividend equities over fixed income is, for now, structurally impaired.

This matters because it reframes the investor motivation. If the income argument no longer holds in isolation, the implicit thesis becomes a defensive equity bet — and defensive bets, like all tactical rotations, are subject to timing risk.

The HALO Trade and Its Reversal

The Q1 2026 surge in dividend flows was not irrational in isolation. Lefkovitz traces the conditions that preceded it: a shift in sentiment away from AI enthusiasm toward fear over AI disruption, a sharp selloff in software-linked sectors, and the geopolitical boost to oil prices from the Iran conflict. "The shares of companies characterized by Heavy Assets, Low Obsolescence led the market in early 2026," he notes, referring to the HALO trade. Utilities, basic materials, industrials, consumer defensives, and energy — all dividend-rich — outperformed.

But Q1's inflows arrived just in time for the thesis to reverse. April brought a bullish sentiment shift, a technology rebound, and a refocusing on AI and strong corporate fundamentals. Dividend payers lagged. The capital that rotated in defensively was immediately underwater on a relative basis.

2022 Déjà Vu

The 2026 episode mirrors a structurally identical event in 2022. Rate shock drove a severe equity selloff, with technology stocks hardest hit and dividend-rich sectors — healthcare, consumer staples, energy — holding up. Russia's invasion of Ukraine boosted energy prices and further flattering dividend-sector performance. More than $50 billion flowed into dividend ETFs in the first half of 2022 alone.

Then ChatGPT launched. The AI bull market rewarded growth and technology while leaving dividend stocks looking sluggish through 2023 and 2024. "That money came in just in time for dividend stocks to lag," Lefkovitz observes flatly. US flows into dividend ETFs turned net negative in 2023 and early 2024.

The pattern held in 2024's third quarter as well: an unexpected Bank of Japan rate hike, US macro concerns, and valuation anxiety produced volatility, which renewed dividend interest heading into 2025. The cycle repeated itself.

The Structural Case Remains Intact

None of this invalidates dividend investing as a long-term strategy. Lefkovitz is careful to separate the timing problem from the asset class fundamentals. "As a group, dividend-paying companies tend to be more established, stable, and lower priced than nonpayers." The utilities sector in 2025 was a case in point — a standout performer as AI-driven power demand created an unexpected catalyst entirely independent of defensive positioning. Non-US financials, another dividend-heavy sector, also delivered exceptional returns.

The issue is not the category. The issue is the motivation and the moment. "Clearly, for many investors, dividend stocks are less about the income they generate and more about the defensive traits they possess," Lefkovitz notes. "That's fine." But defensive traits only help when they are held before volatility materializes — not after it has already driven relative outperformance.

The Prescription

Lefkovitz's conclusion is clean and unambiguous: "It's best to be invested in dividend stocks before you need defense, not after. Like any deviation from the broad market, a portfolio of dividend stocks will go through periods of both outperformance and underperformance. Rather than trying to time rotations, investors are best served holding dividend stocks for the long term."

Key Takeaways for Advisors and Investors

1. The income argument needs reexamination. With US core bonds yielding 4.5% versus 2.3% for high dividend equity, the traditional income rationale requires explicit justification. Advisors should be prepared to articulate why dividend equities are held if fixed income is generating superior current yield.

2. Flows data is a contrarian signal. Five years of Morningstar data show that peak inflows to dividend ETFs have consistently coincided with inflection points in relative performance — to the downside. Heavy defensive positioning by the crowd is not a confirmation; it is a warning.

3. Tactical rotation into dividends has a poor track record. The 2022 and 2026 episodes are nearly identical in structure. The clients most likely to feel disappointed are those who shifted into dividend ETFs reactively after a defensive run — precisely the population that drove Q1 2026 flows.

4. Strategic allocation, not tactical rotation, is the appropriate framework. If dividend equities belong in a portfolio for diversification, income, or quality-factor exposure, they should be held through full cycles — not added when they feel safest.

5. Understand what you are actually buying. Dividend ETFs come in meaningfully different varieties — high-yield versus dividend-growth have different risk profiles, sector exposures, and return characteristics. The defensive assumption is not uniformly valid across both categories.

Footnote:

1 "Investors Piled Into Dividend Stocks in Q1. Here’s Why They Might Be Disappointed." 21 May. 2026.

Kevin Warsh was confirmed this week as the next Chair of the Federal Reserve’s Board of Governors.  As we discussed in a recent article, his transition comes at a delicate time; inflation is rising, and questions about the Fed’s independence are pressing.  The honeymoon period will be brief.

One of the topics that Kevin Warsh has raised is the proper size of the Federal Reserve’s balance sheet.  Crisis-era programs found the Fed purchasing copious amounts of government securities, the majority of which remain in position.  Warsh has questioned whether this level of support is still needed.  We covered this in our essay “Will Kevin Warsh Rebalance the Fed?”

It may take time to formulate and secure endorsement for such an effort.  One consideration surrounding the decision would be that reduced ownership of Treasury securities by the Fed would require other investors to absorb more of the national debt.

Finding new demand for Treasury issuance is therefore critical.  Help may come from two evolving forces.

The first is demographics.  As people age, their investment time horizons shorten and their risk appetites ebb.  This results in a collective shift away from equities and into bonds and cash equivalents like money market funds.  This is illustrated by target date funds, whose allocations become more conservative as the account owner ages.

In the United States, the Pew Center estimates that Baby Boomers hold $86 trillion of wealth.  Even a 1% shift into Treasuries would translate into substantial incremental demand for government debt.  Of course, that trend would reverse when wealth transfers to the next generation.

The second source of support for government borrowing could come from stablecoins.  The GENIUS Act establishes standards for stablecoins to evidence their value; backing the coins with Treasury securities is a preferred approach.  It is estimated that stablecoins already account for $150 billion of government bond ownership; a recent study from the Brookings Institution suggests that this could grow considerably if stablecoins are adopted more widely.

The advance of demographics is well-understood and easy to predict.  The advance of stablecoins is much less certain, but has significant potential.

Finding new buyers for Treasury debt won’t solve America’s fiscal problems.  But it could save a few basis points of interest and buy a little time.

Copyright © Northern Trust

Macro

• Our real gross domestic product (GDP) growth rate forecast for 2026 is 2.5% (based on Franklin Templeton Institute’s Global Investment Management Survey), versus the Federal Reserve’s forecast of 2.3% and the Wall Street consensus view of around 2%. The main drivers of our GDP forecast are the continued capital expenditures (capex) by big technology firms to build out artificial intelligence (AI) infrastructure, the resilient consumer and fiscal stimulus connected to the One Big Beautiful Bill Act of 2025. The duration of the US-Iran conflict is the primary risk to our forecast. Higher oil prices work like a tax on the consumer, and the negative impacts of higher oil/gas prices will broaden over time. Nevertheless, we believe the US economy is in a strong position to weather this storm.
• We expect the Federal Reserve (Fed) to stand pat as we work through this conflict. This view is also supported by the relationship of two-year yields relative to the federal funds (FF) rate. Two-year yields historically have led the Fed and right now, the two-year yield is 4.07%, above the FF rate. FF futures are now pricing in an interest-rate hike by next March (2027). The last tick for core Personal Consumption Expenditures (PCE) data came in at 3.2%, the highest reading since November of 2023. Higher oil prices will bleed through to core PCE if oil prices stay elevated. We also had hot Producer Price Index (PPI) and Consumer Price Index (CPI) reports for April last week. The combination of higher oil prices and higher-than-expected inflation prints are serving to push rates up. The US unemployment rate (U3) is 4.3%, just off the recent high print in November of 4.5% and essentially flat for the trailing 12-month period. Jobs are fine, in our view, but real wages are starting to come under pressure.
• Inflation expectations were up a touch last week. As of this writing, one-year breakeven rates are at 3.12% and have effectively been tracking oil prices. Two-year breakeven rates are 2.89%, also up on the week. Finally, five-year breakeven rates are 2.70% and have been hovering between 2.60% and 2.70% for the last two months. These numbers represent the bond markets pricing of annualized inflation out one, two and five years.
• On the currency front, we are expecting the US dollar to be essentially flat for the year despite the recent volatility. The US Dollar Index (DXY) is trading at US$99.20 now, near the high of its 12-month range, defined as US$96—US$100.

Equities

• We are constructive on US equities and have established a year-end target range of 7,000–7,400 for the S&P 500 Index, driven by 8%–13% year-over-year (y/y) earnings-per-share (EPS) growth (based on Franklin Templeton Institute’s Global Investment Management Survey). A note of caution here—after a 17% rip upward from the March market lows, the relative strength index (RSI) on the S&P 500 hit 75 before easing down now to 70; it is still up from 28 when the CBOE Volatility Index (VIX) weekly change hit a recent of high of 31, just as the S&P hit a low point of 6,316 (the VIX indicator is an important buy signal to technical analysts). Analysts interpret the new RSI reading of 70 as short-term overbought conditions for stocks. The S&P 500 has also risen to the high side of our 2026 target (which we will review as we survey Franklin Templeton investment professionals in coming weeks). I’d expect some consolidation of the market’s move either in terms of price (smaller price movements), time (slower price movements), or both. We expect volatility to persist until the Strait of Hormuz is fully open again to shipping traffic.
• What a market move! I need to admit, this rip has me worried in the short-term. The fundamental drivers remain in place, with reported first-quarter earnings significantly above the market consensus expectations. That’s the good news. Actually, it’s great news, but my work in technical analysis makes me think the market needs to consolidate from this move. I’ll admit that the semiconductor sector stocks are giving me flashbacks to the first quarter of 2000. What worries me is the parabolic shape (ascending slope) of the move, along with a new exchange-traded fund launch that raised US$10 billion in six weeks. Call me old-fashioned, but that smells like speculation. Maybe I’m just old. Maybe I’m just wrong. But I am not looking to commit new capital until this tape takes a break.
• We reiterate our “broadening” call on equities and emphasize our bullish call on small- and mid-cap stocks in the United States and also continue to favor emerging market (EM) equities and Japan. Additionally, the risk/reward profile of the Magnificent 7 names (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) looks more appealing today versus the start of the year. The earnings estimate for the S&P 500 Index now sits at US$336.58, up another $1 on the week, and it represents year-over-year (y/y) EPS growth of 21%, which is above the high end of our forecast. Earnings estimates have steadily ticked up all year, and in the long term, history shows earnings drive stock prices—not geopolitics.
• Franklin Templeton Institute Market Strategist Taylor Topousis tells us that S&P 500 earnings estimates have risen about 8% from January 1, 2026. At the sector level, energy earnings estimates lead the pack, up 46% since January 1, with materials and technology both up about 16% and communication services up 12%.
• For a global comparison, S&P 500 estimates are up 8% from January 1, European equity estimates are up about 4%, and emerging markets EM estimates are up a whopping 25%.
• We observe broad sector strength year-to-date (YTD). Six of 11 Global Industry Classification (GIC) sectors are outperforming the S&P 500 YTD. Energy is leading at 31%, while information technology is at 18%, communication services is at 11%, consumer staples is at 11%, materials at 10%, and industrials at 10%. Financial services is the laggard at -7%, with health care at -6%.
• Here’s an interesting statistic: YTD there are 170 names, or 34% of the index components, outperforming the S&P 500. There are 333 names, or 66% of the index components, underperforming the S&P 500. And believe it or not—there are 242 names, or 41% of the components, down on the year. Talk about stock picking!
• I received many questions last week about the old Wall Street adage, “sell in May and go away.” Namely, does it work/is it a good maxim? I can tell you that it has not worked in nine of the last 10 years. Over the last 10 years (2016-2025), for periods from May 1 through to December 31, the S&P 500 has a mean return of 7% with a 90% hit rate. The only down May-December period was in 2022 with a 6% loss.
• Midterm election years are historically volatile with sub-standard returns. Franklin Templeton Institute Market Strategist Lukasz Kalwak tells us that the average peak-to-trough decline in the S&P 500 in midterm years since 1930 was about 20%. What you might not know is that in the third year of the presidential cycle, the market has bounced back. Since 1950, the average S&P 500 rally from the midterm lows is about 32%. The hit rate of positive returns is 100%. Ergo, we would consider investing during any significant drawdowns, just like we highlighted the opportunity in March. See our paper “From US concentration to global opportunity” and exhibits 11-13 for historical midterm data.
• Bottom line: We find it attractive to have a diversified equity playbook that includes US large-, mid-, and small-cap stock exposure, with a balance of growth and value. The same can be said for ex-US equity exposure; we favor a mix of both EM and developed international markets. In my view, it makes sense to reduce concentration and diversify. Broad strength is your friend.

Fixed income

• We expect the US 10-year Treasury bond yield to trade in a range of 4.0% and 4.25% for the year. Yields traded through the high end of our range and are currently 4.58%. Much like we have the S&P 500 target under review, we also have the 10-year yield call under review. I have been writing that investors should consider adding duration risk if the yield goes north of 4.50%—well, here it is. The US yield curve has flattened recently, with the two-year‒10-year spread at 51 basis points (bps); that’s pretty much unchanged for the last six weeks. We expect more bull steepening of the yield curve in 2026 but are on the wrong side of that call at the moment.
• We expect short-duration fixed income mandates and corporate credit to outperform cash again this year. Considering our views on US 10-year yields, we do not expect duration to be a significant driver of total return this year. Rather, all-in yield capture seems to be the play, although recent spread widening might create an opportunity for additional total return. For now, we consider it attractive to clip coupons.
• Credit spreads have made big moves in the past month. Investment-grade IG spreads (one-year/three-year option-adjusted spreads, or OAS, are 49 bps over, three turns tighter on the week. High-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 264 bps over, out 2 bps on the week.
• Historically, when IG credit spreads have traded 200 bps over Treasuries, forward returns for the Bloomberg US Aggregate Index have been positive. Rick Polsinello, Senior Market Strategist-Fixed Income, tells us that in such periods historically, the Bloomberg US Aggregate Bond Index had median forward returns looking out three months of 1.92%, out six months of 4.19%, out nine months of 4.75% and out 12 months of 3.97%. Spreads are not there, but if the market trades there it is a potential opportunity.
• Similarly, when HY credit spreads traded 600 bps over, forward returns have been positive out three months with a median return of 12.82%, out six months with 22.35%, out nine months with 26.75%, and out 12 months with 29.98%. Again, spreads are not there but we would be ready to act if they rise there.
• We are bullish on municipal bonds and find taxable-equivalent yields to be attractive, along with robust fundamentals. Importantly, municipal bonds offer potential diversification benefits relative to most fixed income mandates. Consider the potential tax advantages of deploying cash to muni exposure in taxable accounts.

Sentiment

• The percentage of bullish investors in the latest AAII Investor Sentiment survey is 39%. The percentage of bearish investors in the AAII survey is 36%. We see no technical signal in these numbers.
• Bull markets typically peak on euphoria. We think the market is a long way from that.

I will continue to analyze the markets and will offer insights again next week.

Source of data (except where noted) is Bloomberg and Franklin Templeton Institute, as of May 15, 2026. Important data provider notices and terms available at www.franklintempletondatasources.com.

The Franklin Templeton Institute Global Investment Management Survey is a biannual outlook survey designed to give a view across our investment teams. The Franklin Templeton Institute identifies the median across the survey answers and develops the outlook. The survey received responses from around 200 portfolio managers, directors of research and chief investment officers, representing participation across equity, private equity, fixed income, private debt, real estate, digital assets, hedge funds and secondary private markets. Each of our investment teams is independent and has its own views.

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