Don’t Believe the Hype: Sunpointe’s Q3 2026 Market Outlook Webinar

[00:00.3]
Welcome to the quarter’s Market Environment Report webinar. I’m Matt Zeigler, managing director at Sunpointe. Today I am joined by Michael Pompian, our founder and chief investment officer. Say hello, Michael. Good afternoon, everyone. Hope everyone’s doing well today or morning, in case.

[00:15.5]
As the case may be. Thank you for Time Zone Awareness. It’s just so empathetic of you. We appreciate it. Behavioral psychology of it all, I’m sure. In that training, we also have Lee Boudouris, our director of research. Say hello, Lee. Is there a, Time Zone Awareness Day?

[00:31.3]
There’s a day for everything else. Somewhere in that office, you have one of those little calendars with all the days. And probably right after Director of Research Appreciation Day is. Time’s unaware. Yeah, mine is a, this day in history. And it seems like every time I go play trivia the next week, the answer to one of the questions shows up.

[00:51.1]
Some of us call that fate, my friend. So, as a reminder, please feel free to enter your questions. We have a Q and A box or a chat below. Just look about your zoom screen. If you see it, you can enter a question there. We’ll answer what we can in any remaining time we have together. If you are watching this webinar on a recording, which we do record, you can share this recording with people.

[01:11.0]
If you come up with questions later, don’t fret. Send us an email. Go to sunpointeinvestments.com with any questions. We’ll be happy to get back to you with an answer there as well. Please also note we are recording this on July 29th. It’s in the morning.

[01:26.5]
The Federal Reserve is about to end their July meeting in about two hours. We’re going to talk about the Fed later, but any new information that comes out, it probably came out after you recorded this. So I say that with that caveat. Michael, I’m starting with you.

[01:42.8]
Q2 in the rearview mirror now. Pretty good one for markets. Why don’t you take us through what happened? Okay. Thanks, Matt. As you can see in, the first quarter, equities and bonds, really across the board. Had a great quarter.

[01:59.6]
We, started out with a strong rally early in April, as you may recall. Q1 was A. Was a bit of a challenging quarter. When it was. Thought that the Iran war wasn’t going to be, as lengthy as we thought. Stocks rallied. That’s changing a little bit right now, as we may know.

[02:17.1]
But, looking in the rearview mirror, that’s what happened. And then really rally to all time highs. Really across the board. It was a, a great first half of the year. One of the big topics we saw in 2026 so far, and I have whiplash on this one, but it’s the topic of inflation stats.

[02:35.3]
Looked better before March, but now we’ve got a full quarter’s worth of what I’ll call the Straight of Hormuz, Iran impacted data that’s been coming in. I went to Turkey Hill the other day. I got my ice cream. I think shrinkflation is upon us because it was gone it in like, two nights.

[02:51.9]
Should have at least taken three nights. What’s going on with the inflation data? Right. So this chart is a bit busy. I do like it, because it breaks out the major categories of inflation. The green bars show the impact of energy.

[03:07.6]
So you can see over the past few months, It went up earlier in the year and then dropped, last month in June. You know, gas prices have creeped back up, energy prices in general, this month. So we’ll have to see what happens there, with the Iran conflict.

[03:24.0]
Continuing. But, the one thing to note generally on inflation is that core inflation. Is still at around 3% and the Fed target is 2%. So we are watching that. And vis a vis interest rate, the potential for, rate increases going forward.

[03:43.3]
So that’s, going to be a key factor. As we go forward here. I know we like to say that markets climb a wall of worry, and this just feels like one of the more extreme walls of worries we’ve experienced. Certainly in my career, there’s all this overhang.

[03:59.6]
How why do you think market resilience was. Well, as has been the case for decades and decades and decades, it’s all about earnings. Markets don’t like uncertainty, as we know. And you can look on this chart and see that earnings, in 2,026 have been.

[04:21.2]
Quite solid with, earnings growth, in the US at about 10%. Emerging markets. Really strong, as you can see. And then the returns of em, have been quite good this year. But on the S&P 500, earnings were expected to be 13% year over year, year over year, and ended up being, up 27% in the second quarter, which is, phenomenal.

[04:45.4]
So, At the same time with markets. You know, with that earnings increase and markets have been, coming down a bit. The forward PE has come down from 22 to 20. And perhaps the most telling, stat of all, with related to, The S and P.

[05:01.0]
Is that the Mag? 7 names in the first half of the year. Were, Essentially flat, while the S and p returned over 10%. So there’s been some broadening of market returns, which is great, and. You know, for. For those other names. Let’s drill into emerging markets, because I think that’s one of the surprising parts on this chart, probably for.

[05:21.5]
For many we know when we see statements, especially from other people at other firms, when they bring stuff in, just how low the historical allocation to this space have been. So maybe there’s a forthcoming return chase here. That’s part of what I’m scared of. But with how well they’ve done in the first half of 2026, even though they’ve struggled a bit in the last few weeks, let’s dig deeper into em.

[05:44.6]
Yeah, that’s true, Matt. I mean, one of the things that’s really driven returns in the, emerging market space has been, the tech names. So tsmc, you know, the. Taiwan semi. Sk. Hanks, et cetera. These MAG3, Samsung, these are sort of the.

[06:03.4]
Mag 3 of the of the EM space, have produced a lot of the returns, as you can see on this page, and have, have been coming back down to Earth over the past month or so. So we have to be careful with the You know, we, with, with the kind of returns we saw in the first half, at 20 plus percent returns.

[06:23.5]
You might think. Why don’t we have a bigger allocation there? Well, there is quite a bit of volatility in the EM space. So we want to have. Some control over that allocation. So we do like em. We want to be positioned there. But, we’re not overweight.

[06:39.6]
Em right now. Well, you know, Mag 7 was a great movie. Nobody ever talks about Mag 3. Don’t see that anywhere on Turner Classic Movies. So we can’t talk about Q2 without SpaceX. The sheer size, audacity of this IPO with more to follow because we have anthropic, we have open AI, we have others chasing along that are going to come to the market.

[07:02.2]
Talk about the House stance or perspective, at least on initial public offerings. And I’ve written about this in my books and so forth on behavioral finance. One of the things is that there was a lot of excitement, around the SpaceX IPO, and we saw the stock rally.

[07:18.4]
A lot, over the first several weeks, but has dropped below it’s. IPO price. And this is very common. And if you could look on the chart, you can see there’s quite a few names here of stocks that, you know, started out very strongly on the one month return or the three month, only to see it f.

[07:38.4]
Falter. Not every, in every case. But there’s been some pretty significant, you know, Meta, for example, was down 50% after three months. So, so, it’s just we want to be cognizant of the fact that there can be hype, with these IPOs.

[08:00.9]
And as you said Matt, there’s going to be others going forward, anthropic, et cetera. So just want our clients and investors to be cognizant that there are likely opportunities to buy IPOs below the offering price, which is the case right now with SpaceX. Michael Pompian, the flava flav of Sunpointe Investments.

[08:19.5]
Don’t believe the hype. Lee, you’re up. You’re my Chuck D today. I’ve got questions for you. What are we doing? Not what’s the meaning of life? What are we doing? But what are we doing at the portfolio level? Because it feels like there is a ton of noise. Give me the risk O meter first. Let’s start here.

[08:35.8]
The meaning of life. That’s what you asked for, right? Sorry, I can’t help you with that one. The 47, the craziest one I saw this morning. SK Hynix’s earnings year over year were 557% growth and the market didn’t like it because they didn’t think it was enough.

[08:51.5]
I’ll take 557% earnings growth wherever I can find it. In general, the risk O meter was neutral last quarter. It remains so this quarter just with the balance of risks on both sides. Earnings growth again really strong.

[09:07.5]
And it’s we’ve seen broadening of markets which we’ve been waiting for for a while. However, we still have the overhang of Iran and. We have an election this fall. There’s. Valuations still on the above average? In the US not by as much, but.

[09:25.6]
Tom Still a little bit. So with that balance of risks, we kept the risk O meter neutral. Some other themes in the table on the right that we’ve been paying attention to. We’re a little bit more neutral on mid caps and small caps as we continue to see companies like SpaceX just skip them and go straight to the mega caps.

[09:42.5]
Fixed income a little bit. A nuanced view of duration. Taking a little bit more duration on the beauty side. With very different yield curve. That also has been relevant for more conservative clients with big cash positions. Now, there’s a big spread if you move just ever so slightly past cash, towards ultra short bonds.

[10:02.3]
And then within equities, you know, us, and emerging vis a vis, Next slide. We didn’t change any asset class rankings. We still. Like more things than we don’t, but, We did do a little bit rebalancing, as markets bumped around for clients, for whom we.

[10:21.4]
Manage portfolios on a daily basis. So we’re going to talk about the Fed. It is Fed day. That is happening again. Happy Friday to those who celebrate. It is happening after we record this conversation. But it’s been a bizarre one, not just because we have a new Fed chair.

[10:36.8]
So Borsch is now in, but it’s important to talk about the lens through which he’s dealing with it. The, the change in forward guidance, the fact that we had 30 odd percent of a potential hike coming into this on the problem. A lot of non normal stuff is happening right now. So Lee, what do you think of the interest rate market and Warsh’s Fed?

[10:57.6]
Yeah, I keep, I keep trying to remind myself his name is Warsh. Lots of Midwestern people like to add that R to the word wash to get the wash. But no, his name is Warsh. For as many people wanted that Fed chair job, it doesn’t seem that fun right now.

[11:14.5]
We have a chart here. Interest rates moved up in the second quarter as rising inflation sparked by Iran made the one, made the prospect of cuts less likely and two, at least put the idea of hikes on the table. Whether or not they occur, they’re at least being discussed.

[11:30.6]
And the biggest change was on the short end, the orange line, June 30, the black dashed line, the end of last year. And then the blue line in the middle is conveniently in the middle. It’s March. As we can see, they’ve moved, rates have moved up with the biggest move on the short end, especially those 2, 3, 4, 5 year part of the curve for more conservative clients.

[11:52.5]
You know that spread between money market and ultra short bonds, about the widest, it can probably go about, you know, 50, 60 basis points depending on which tenor which fund. I’ll be watching what Warsh says like everyone else. But Fed can’t really do much about energy sparks, inflation that supply chalk.

[12:13.6]
They, they can’t end the war. They know that, but they can’t do it. And then the other side of their dual mandate, not on the chart here, is you full employment. They can’t do anything about job gains or job losses rel relative to AI either. They also know that, but they can’t do anything about it.

[12:31.9]
You reference forward guidance. Jerome Powell is much more focused on providing it, trying not to spook the market. War says you know, they’re going to provide a little bit less but you know, interest rates just might provide that forward guidance for us. Especially at the front end of the curve where There, there may be a few things going on there that he’s going to, we’ll find out if he changes his tune or not.

[12:53.3]
Let’s talk about munis for a second. I do think that tax exempt bonds are in a whole other place right now, which is very, very interesting to see this development. Yeah, so different, different market, different view. So investor demand has been really strong, supply has been really strong and it’s been able to handle it.

[13:11.9]
But the supply growth, even though it’s, it’s very high, it’s, you know, it’s, it’s not like munis are borrowing $2 trillion a year of new debt like the federal government is. You can also just tell, so here the red line is as of June 30, that it’s got a slope to it, much more so than the taxable treasury yield curve we just looked at, which doesn’t have much, slope.

[13:35.1]
You can’t really fall down a flat line, but you can fall down a slope line. So we’re a little bit willing, more willing to take duration in intermediate term, munis, and don’t see a lot of value in, in the shorter term part of the muni curve because the after tax yield isn’t as good, relative to Treasuries.

[13:55.2]
I myself have fallen down many a flat line. So we’ll see, we’ll see how that actually tells the story. That’s your problem. That is my problem. Let’s talk about small caps. I think the non cap weighted large cap and small are two standout stars of this year as of now.

[14:10.5]
But very, very specific to small. Why is small working as well as it’s working? So small caps have performed well, at the most macro level. They tend to be smaller companies and more domestically focused. The geopolitics at the whole tends to matter a little bit less.

[14:28.8]
Of course it happen, it matters to individual companies. They also started at much more attractive valuations than, than large caps. Those valuations haven’t moved a whole lot as earnings have been good there too. The thing of interest and what we’re showing here on this chart is that the strongest part of the returning cohort, small caps are companies that don’t make any money.

[14:53.2]
The green line here is stocks with negative earnings per share. And then the tan line at the bottom is companies that have, you know, do make money, in the second quarter. The spread between those two is about 12 percentage points over the last five quarters, which is roughly the time period.

[15:11.3]
This chart, it’s about 31 percentage points. If you take a longer term view 10, 20, 30 years, profitable small caps have performed at least as well, if not better than the broad small cap market and with a little bit of a smoother ride.

[15:26.6]
That’s where we prefer to allocate in small caps, and in large caps for that matter. We like profits, as Michael touched on earlier. But we can realize that when junk quotes rallies, these lines can diverge. But we’re trying to take a longer term view here.

[15:43.7]
So Lee, I’ve also heard from around the way during our beloved World cup season that is no longer with us, that you were unaware of how many teams or games were in the, the cup itself. I, apparently it changed. It did. I wanted to make sure you knew this. It’s not your fault. I I saw round of 32 on A, on a scorebox and said aren’t there only 32 teams?

[16:07.2]
generally am oblivious to soccer. I did learn of some new countries though that I didn’t really know existed that almost beat some really big countries. Well, if you get your Cape Verde hat on for the next one, we’ll all know it’s stuck in the mail.

[16:25.2]
Stuck in the mail. I bet they were on backorder. Not too many people saw that one coming. Now Michael, you’re first rate soccer fanatic, right? I think I’ve seen pictures of you playing the sport played in college. Love, love the sport. So I thought I would touch on that on the behavioral slide, this quarter.

[16:43.1]
And what, what has happened over the years, there’s been some studies on this is that when a soccer team loses that, you know, in the, in the, particularly in the knockout round of the World cup, their stock market goes down the next day more than it should based on how the markets did, you know, that day you know, globally.

[17:05.6]
what, you know, why does that happen? Because, investors get influenced by macro ideas. You can think of it as jumping on a bandwagon. So we want to make sure we’re making an analogy between that and other things that can happen such as, you know, wars, elections, IPOs, just jumping on the bandwagon, getting caught up in what’s going on from a macro perspective and not paying attention to fundamentals.

[17:35.2]
So we want to make this point that you know, you always want to have a long term investment strategy, that can withstand various economic conditions and don’t get influenced by these sort of big ideas, herd mentality is another way to look at it.

[17:53.5]
That can happen in markets. So we want to just point that out to our clients and investors that are listening. Excellent. So last call for questions. If anybody has one, drop it in the Q and A. I’ve got one. Lee, I’m going to direct this one to you. We saw this switch from market cap concentration to earnings concentration.

[18:13.4]
That’s happened. So everybody was Talking about the Mag 7 and the Mag 3 apparently, but the Mag 7 mostly and stuff like that. But now an increasing concentration of the earnings. We talk about earnings at the index level seems pointed at a slimmer list of names than it’s been. Any perspective on that?

[18:28.8]
Just how to think about earnings at the index level versus the whole market in. When you’re, I assume you’re talking us large caps when you’re thinking through. I think that’s what the question is asking. Yes. So when. Just because, these largest companies, whether it’s Mag7 or Pick Whatever number you’d like, are such a large part of the index that they’re obviously going to drive the earnings projections of the whole thing.

[18:55.2]
But we, and we showed the charts in prior webinars and prior versions of our market environment report where the MAG7 earnings looked awesome and the, S&P 493 looked really good, but just not as awesome.

[19:11.9]
So, and there’s a, there’s still a valuation spread. At the time that valuation spread has compressed, I’m not even sure it exists anymore. So the math of everybody else catching up, just translates to that more broad earnings.

[19:28.7]
So it’s, really what we were looking to see happen as happening as we’re not subject to only the whims of seven stocks and large cap equities. That is a good thing. I think that broad, it’s just math, you know that broadening is a very important point because we’ve been talking about that for a while.

[19:48.3]
Any, Anything else to add to that one, Michael? No, I think that’s right. I mean, you know, the, the big point is stay diversified. Do not load up in any one particular area. And you know, a smoother ride will, will help from a behavioral perspective.

[20:04.7]
Keep clients invested for the long term. And that’s the key. Just be disciplined. Be disciplined. That’s the message. Guys, thank you so much for doing this. If you are watching this live, thanks for joining us. If you’re watching this on a recording, remember you can share this with somebody else.

[20:21.3]
That’s what these replays are for. This replay is coming to anybody watching pretty soon via email. Lee. Michael, thanks for doing that. Thank you. Always a pleasure. Sunpointe Investments is on the website. Here’s the important disclosures so I don’t forget to click that slide.

[20:38.8]
I know you already read all of them, so we’ll see everybody in a quarter. Thank you, Matt.