The Dividend Cafe - A Different Kind of Mid-Year Report

Episode Date: July 3, 2026

Today's Post - https://bahnsen.co/4vddsCn In a midyear 2026 Dividend Cafe holiday episode, the host reviews surprises and themes shaping markets: despite the “Mag Seven” down about 2%, the S&P 493 is up roughly 15–16% and the overall index about 10%, reflecting a major rotation toward value, smaller caps, and sectors like industrials, utilities, and energy. Another surprise is the two-year Treasury yield rising from ~3.4% to nearly 4.25% as rate-cut expectations faded, flattening the curve without derailing equity valuations. He discusses AI “vulnerabilities,” noting hyperscalers’ surging CapEx and financing, dispersion across AI-related stocks, and froth signaled by a parabolic semiconductor run and tech’s heavy S&P weight, alongside speculation in meme stocks and levered single-stock ETFs. Economically, tariffs were partially removed, labor data remains mixed, M&A/SPAC activity is strong, energy and small caps have worked, housing has softened, and he reiterates disciplined, fundamental, value-oriented investing. 00:00 Holiday Weekend Welcome 00:36 Midyear Market Setup 01:21 Mag Seven Surprise 03:27 Rates Rise Yet Stocks 04:40 AI Theme Check In 05:28 Capex And Cash Flow 08:08 Valuations And Dispersion 09:50 Semiconductor Froth Warning 12:03 Speculation Beyond Crypto 14:36 Economic Tug Of War 17:14 M&A And SPAC Revival 18:26 Other Themes Scorecard 20:07 Midyear Closing Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the Dividend Cafe on this very special holiday weekend as we celebrate the 250th birth of our nation, the 250th anniversary of our freedom, of our independence, and commemorate what is this American experiment in the great. nation on God's Green Earth. I am a patriot. I am excited for the holiday. I hope you are all excited not only for the holiday weekend and the barbecues and events or whatever you have planned, but for what the holiday represents. But of course, in the meantime, we have some business in front of us. It's the midway point of the year. And I think that it's important for us to look at what has transpired so far in 2026 and see if we can draw any themes as to what may be in front of us for the rest of the year. There's going to be a handful of charts here today, but why don't we

dive right in and just sort of talk about what 2006 has represented so far? I'm going to use some of the themes and forecasts that I laid out at the beginning of the year as a reference point, and we'll kind of evaluate where some of those things stand. And like I said, draw some perspective on the second half of the year. I'm going to start off with this question. If I told you on January 1, we're at the beginning of the year, and I said to you at that time that the Mag 7, which is this magnificent 7 nomenclature around these mega, mega cap companies

that have become so unbelievably integral into the market. If you're curious what they are, It is Nvidia, Facebook, Amazon, Google, Microsoft, Tesla, and Apple, of course. And so if I told you at the beginning of year that whether it's equal weight or cap-weight that the Mag 7, as we get to the midway point of the year, was going to be down 2%. What would you have guessed the first half of the year had done in the stock market, considering the extremely disproportionate weight of Magus 7 in market? over what has been a robust bull market here over the last few years.

Well, the idea that we're sitting here with the Mag 7 down 2% at the midway point through the year, some of the names down a lot more than that. A couple obviously must be up a bit. And yet you have the S&P 493, the S&P 500 minus those seven companies, up 15 or 16%. And therefore, the total market index up about 10. But yes, that's right, seven companies are taking away six whole percentage points of performance just because of the math of their waiting. But that is a shock for a lot of people. And I think anyone who's thinking back to what the mentality would have been on January 1st would be, would have to admit that it's a shock.

But this rotation into certain financials, certain industrials, certain utilities, no question overall value versus growth. some of the smaller cap names. It's been a pretty significant rotation. And I'll add, too, it was a rotation that was heavy and prevalent at the beginning of the year that then went away and really kind of reversed and then reverted near the end of the second quarter. I would point out another issue too, and I'll frame it the same way. If I go back to January 1st and I just say to you, hey, the two-year treasury yield, which then was sitting around three-point, is going to pop to almost four and a quarter by the end of the year. I mean, on the short-term rate, that's a meaningful move higher.

Oh, add for color, not only just that the two-year did that, but the reason it did it is expectations of Fed rate cuts that were clearly priced into markets beginning of a year went away, and expectations for right or for wrong of rate increases came back, in, came into the fray. the notion that the two-year short-term treasury yield has moved up so much, and yet it hasn't had an impact on equity market valuation, is incredible to me. And it didn't push the long end of the curve up much either. You basically just saw a real flattening of the 210 spread. It went from about 75 basis points between the two and the 10 year down to about 30 basis points. So that's a significant amount of tightening.

I think those are the two biggest surprises through the first six months of the year. Now, I started off as my number one theme for 26 saying, and I quote, reading from our annual white paper came out beginning of the year, theme number one, AI vulnerabilities will become much more evident to the markets. And there's a part of it that, you know, you can say, look, some of this AI stuff is doing extraordinarily well. And yet the kind of mixed bag within the AI ecosystem is a crazy. curveball to a lot of people about how to think about this current market environment. You have the company spending the money into AI investment, if you will, that have been very, very volatile.

And I think that there's a lot of uncertainty as to how to think about it all, this amount of cash flow going to CAPX. I'm going to put a chart up right now on the screen to just show you when you look across some of these major hyperscalers that are huge purchasers of computer power for the AI story, what is happening to their free cash flow as more of it has to be diverted into capital expenditures after years and years of just being able to absorb and retain a massive amount of their earnings in the form of free cash flow. This percentage of cash flow has more than doubled in what it is now represented by CAPEX. The financing activity is skyrocketed, and that's both with debt

and equity. And I think investors understandably have to think about what this means now going forward. But then you can say, okay, well, that means they're spending more and more money, and so there's beneficiaries of it. And you're going to see in a moment, that's exactly right, the move higher in the semiconductor space and those that are basically the suppliers of the AI spenders, have had a heck of a first six months, but then not always. And you look at like by far, the mother of all the pick and shovel companies,

NVIDIA, if I had started, I keep doing this, if I had started on January 1st, but again, if I just told you, you know, at the beginning of the year, NVIDIA is going to be $10 per share lower than it was in late October. I don't think people would have predicted this market.

I don't think people would have predicted, a great response in a lot of the pick and shovel AI companies. And so this is the type of market you're in that some narratives are right, but then executing wrongly and other narratives have just not been precisely right. I mean, it's a very unique market environment. You look at the infrastructure companies of AI that have largely benefited first half of the year, but then you look at the cloud platforms, the hyper-scaler. have been much more volatile.

Some have done better than others. As a space, though, it hasn't been great. And then a lot of the language learning models and AI platforms are not public, so you can't really evaluate some of those things in terms of market valuation. But then I would even look at some of the application companies. And some would say that's where the real future has to lie.

I would say it even goes a step beyond that that you have to have the customers of the application companies. That's where the real, real, real future. ultimately is, but a lot of tech-minded people aren't going to think that way, which I understand. But when you think about the high-profile operating system, application companies, some of which just had their biggest quarters ever. I think of a company like Palantir, pretty remarkable company technologically in a lot of ways, but, you know, the stock was down almost 50%.

I don't think it technically got down 50%, but it was like 48%. And that was with just massive revenue growth. Then after this big drop, you go, okay, well, maybe it's gotten a lot cheaper, but then it's still like 240 times forward earnings, which is the highest forward market multiple for a company of that size of that market cap or bigger ever. And that's after a huge drop. So the valuation thing is very tricky. Look, some of these companies could go a lot higher, some could go a lot lower. what I guess I'm suggesting is that there's a big dispersion of results within the AI story and a lot more conversation about some of the vulnerabilities.

And it's not going to help you for me to go say, it's all our bubble, it's all about to crash, because I would have to tell you when, and I don't know, and I'm not even sure that that's the case. I feel pretty confident that there's some companies that are going to have significant troubles within the AI ecosystem. I've been saying that for a while. but you really do have the possibility of some companies doing quite well, but then six months, nine months, one year, five years later, having kind of a flattish stock price, even if it doesn't crash, just because of the challenge of how excessive a lot of the valuations had gotten.

It's happened in history many, many times. We'll put another chart up now. I want to talk to you about some of the froth that exist in markets, and it's a different subject than just the general AI conversation. But this chart here is of the Semiconductor Index. And you look in a 14-month period, as we've ended this June 2026 period, the semiconductors are up 237 percent, and 90 percent of this has been in the last six months. And the last time you saw a move like that was right going into February of 2000.

So out of the go-go moment of 1999, in early 2000, and obviously we know what kind of happened from there. This is not to suggest that it repeats. It is to say that a parabolic rise like that, it's not very normal for it to end well. It generally is not a great thing for stuff to move that quickly that much. But even if you strip out what is happening inside the semiconductor index, I would just say that technology being at 36% of the S&P 500 is a problem. I mean, it's certainly a different risk profile than it has historically meant for index investors.

You go, well, no, in 1999 it was 34%. Well, first of all, that didn't end very well. You may recall is the NASDAQ took 15 years to recover what it dropped. But it also wasn't really 34% because back then that was total, where now the 36%, we have a separate sector that they created in 2000. 2018 called Communication Services. So if you kind of attempt to construct an apples-to-apples comparison, you're sitting here very close to 50% of the S&P 500 in what would have been the 1999 equivalent

of the technology telecom-type space. So I think that you have a lot of great companies here that are experiencing record revenues as suppliers of the AI moment, but I think it's perfectly reasonable to, to wonder what kind of froth is there when you see a chart like the one we just had up. But I wouldn't suggest to you that that's the only evidence of froth. What's interesting is one of the places where you've seen kind of some of the most speculation and excess and shiny object mentality of us for years is in that crypto Bitcoin world. And we'll put a chart up now showing that that's been obviously abysmal.

It's down 50% from its 2025 high, down another 33% just in the first half of this year. And so Bitcoin is not really the space where people are acting kind of frothy and excessive, but there are places they are. There's this thing called meme stocks that really represent a sort of gamification of markets. And some of these mean stock ETFs are up 50, 60, 70 percent, and it's not related to any sort of investment fundamentals whatsoever. Momentum and beta factors are up 35, 40 percent, year to be. date. We've had over 400 issuances of single stock ETFs, levered, double levered, inverse levered. And again, people are allowed to go have a point of view and get speculative and have fun

with it or whatever you want to call it. But what I would suggest to you is that these are behaviors indicative of a very low regard for risk and seriousness in markets. And I wrote a Dividy Cafe earlier in the year about the gamification of markets, I think this represents. But, you know, before shiny object stuff melts down, sometimes it could be up a great deal. And, you know, you don't have to look at the details on this chart here, but we'll put another chart up where you see some of the returns of a lot of these companies in 2020 that were just high flyers. They were on fire.

They were in different tech sectors or COVID moment things, whatever, you know, application software, etc. And then they just got pummeled after that. And then you look at the returns even with their 100, 200, 250 percent returns. Then after the drops, you see that many of them just basically ended in a kind of graveyard, if you will. And I think it is important to point out the math of it all. Our approach is not to go do shiny object speculation, make a bunch, but then have a lot of confidence in our ability to time and exit, is to avoid those. things to begin with. I would suggest there's a lot of things out there that right now are indicative of some of this 2020, 2021 type behavior. All right, I'm going to start to move it on, even outside

of markets. The second big theme I had coming into the new year was this economic tug of war. And I talked about in the context of there being two unknowns that there was a lot of incentive for companies to be investing in capital expenditures with certain tax breaks. On the supply side, incentives to business investment from the Big Beautiful Bill Act. But then on the other side, there was uncertainty around tariffs and a sort of drag as a lot of the corporate economy was dealing with a much higher cost of business for American importers. And the Supreme Court did rule unconstitutional, about $120 billion. with the tariffs. A lot of those got replaced with a different rationale, but they took about $70 billion. I think we don't know the exact number. Our projections right now are about $70 billion

of cost to the corporate economy out. And I think that's a big benefit. This investment levels XAI, though, have been very, very, very low. Business investment levels with AI have been massive, as in historically unprecedented. Labor markets have been in this tug of war. There's not been robust hiring, but we did not see the acceleration of firing. And I was all ready to kind of write up for this week's Dividing Cafe,

and I've been saying this over the last several weeks, that more and more of the data has looked better than we expected, and that's good. We're not out of the woods, but the unemployment rate has not moved higher. And in fact, firings have not accelerated, and hirings have good. gone higher, not at a really rapid rate, but at a healthy rate. But then this morning, the June report

comes out and you see revisions in the month of May that it wasn't as good as it been expected. You see a much below expected result for June. And now I start wondering, okay, are we headed into another summer where we have to revise a lot of what we thought was good news that we had had prior? Because that certainly would happen at the end of last summer. So there's still this question in a kind of push-pull context about the labor market. Tons of questions about business investment, capital spending. We see a robust growth of business applications, of entrepreneurial startups. A lot of them are very likely, AI-oriented, and I think that's a good thing.

But there's still a certain lack of clarity in the economy, and I really believe that we're going to get better picture of where we stand into the later months of the summer. One of our big themes was this M&A idea. I'll put a chart up right now. You can see that over the last year, almost $2 trillion of corporate activity. There have been 44 SPAC mergers year to date. There were about 33 at this point last year, but it had been $37 billion of value of IPO specs this year. It was only $15 billion year to date last year.

There's another 350 SPACs out there holding $57 billion. of dry powder, M&A, corporate activity, even apart from IPO stuff like the massive SpaceX, which skews everything. But my point being, there's a healthy appetite for corporate activity. And that's all so far, pretty much apart from the fact that there's a number of private equity holdings that are in need of an exit. So we think this theme is going to be there for quite some time. The midterms continue to be a question, but I don't believe it's changed much from where I started beginning of the year. The consensus view is still my view that I think the Democrats are very, very, very likely to keep the House, to take the House, and the Republicans are very likely

to keep the Senate. And I've commented on that enough throughout the year. I won't bore you with more now. You look at some of the other plays that we brought up in our themes at the beginning of the year. There's still six more months to go. But the idea of energy was a contrarian idea beginning of the year, and now it's up 20 percent year to date. I think that's played out well. that housing markets, housing prices were likely to soften that's definitely played out, but it has a long way to go, you know, to get to where I think it needs to to recreate some affordability. The idea that small cap was in a better position fundamentally and with earnings growth than big cap that's definitely played out. I think that a lot of those themes and calls

I had are on track right now to have been pretty astute. I don't think they were necessarily super bold calls in some cases. One of them, about... my belief around foreign appetite for U.S. assets continuing. I want to revisit later in the year because there's too much nuance in that to address here. So at the end of the day, small cap emerging markets have been leading performing asset classes. Most boring bonds year to date are up, but barely treasuries, high grade corporates, muni bonds, all up between one and two percent on the year. Gold and silver down on the year, even though they started up up so much, but commodities are up quite a bit, despite the fact that precious metals are not. Oil was down and then it was

up huge and then it's been down now more recently. Within equity markets, you have technology up to about 20%, but not led by Mag 7. You have industrials and energy up about 20%. And then, you know, financials, consumer discretionary, they're down, but basically right at 1% or around 0%, not much. I'll conclude with this. I continue. to believe that it's impossible to time when certain irrational things may end. And I continue to believe that it's inevitable that certain irrational things will end. And I hold both of those truths to be self-evident and I hold both those truths simultaneously. Irrationality has begun to face reckoning in some pockets, but not all. I don't know if we're going to get a repeat of the 1999

excess. I don't know if we're going to get a repeat of 2000 correction. Right now, markets are pulling in different ways. It's almost like trying to avoid some of the same bad behavior we've seen in the past, but touch it around the edges. There's plenty of room to grow here this year. Truth be told, there's plenty of room for a relapse in bad behavior as well. And that's what I think the mid-year point of 2026 is at. And we look forward to continuing to do on behalf of our clients what we have done in the first half of the year and what we will continue to believe in in the second half and beyond, which is disciplined, fundamental, value-oriented investing, devoid of shiny objects and bad behavior. Have a very happy weekend celebrating our country's independence.

Thank you for listening. Thank you for watching. And thank you for reading the Dividing Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member Finra and SIPC, and with Hightower Advisors, and with Hightower Advisors, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy ourselves securities. No investment process is free risk. There is no guarantee that the investment process or investment opportunities referenced

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