Markets—State of Play 

Several factors are currently converging in the economy and markets that are worth highlighting, as they could provide insight into potential market behavior going forward.

Both the S&P and Nasdaq continue marching higher toward record levels and seem poised to climb further, despite clear risks in AI-linked names, including:

• Circular financing (Nvidia-OpenAI, Google-Anthropic, Oracle-OpenAI-Nvidia; see chart below) [i]
• Hyperscaler capex (Alphabet, Amazon, Microsoft, Meta, and Oracle), estimated at a combined $725B in 2026—up 77% from ~$410B in 2025 [ii] [ii]

Regarding AI-related valuations:

• The bull case: This isn't the dot-com era's revenue-less speculation—2026's leading tech names trade at 26-30x earnings, versus the ~55x the dot-com-era tech sector carried, backed by real profits and cash flow.
• The bear case: The S&P 500's forward multiple has approached levels last seen at the 2000 peak, leaving little margin for error if major earnings disappoint or the AI capex narrative stalls. [v]

Another key risk in the AI sphere is competition from Chinese models, which use less compute power and are therefore less expensive to train and run.

Further, underlying inflation risk and historical seasonality may also become important.

Inflation persists, and the Federal Reserve may be late in acting to tame it.

• There have been inflation spikes tied to the Iran conflict and resulting energy costs. However, inflation stemming from tariffs remains unresolved.
• The Fed's decision to hold rates steady was expected, but the press conference that followed created confusion about how—or whether—the Fed intends to act on inflation.
• Complicating matters further, the joint US-Japan currency intervention to prop up the yen and discourage Japanese sales of US bonds has kicked the can down the road on the Japanese economy—and could mean higher long-bond yields ahead.

Historically, August and September have been the weakest back-to-back months for the S&P since 1950: average monthly returns are 0.03% for August and -0.48% for September. This is often attributed to thinner summer liquidity, along with institutional portfolio rebalancing and tax-loss positioning around Q3-end. Given the current bullish environment, this effect may not materialize this year.

That said, stronger-than-average gains typically follow for the remainder of the year, with average returns of 0.76% in October, 1.72% in November, and 1.51% in December.

While everything looks rosy at present, AI-related valuations, capex, debt issuance, and off-balance-sheet borrowing—along with inflation risk and potential seasonality—give me pause. The market hasn't had a healthy correction in several years. This unusual absence of corrections, even as the market seemingly shrugs off significant concerns, leads me to suspect that more is happening beneath the surface than has yet come to light. Nevertheless, we are well positioned to manage any volatility we may encounter.

At Hg Capital, we are monitoring conditions and taking necessary action to protect client portfolios from market shocks and the possibility of below-average performance in the August-September timeframe, while remaining ready to capitalize on upside when it appears.

While all of this reflects biases shaped by 35 years in this business, it remains my strong opinion that we are due for some sort of market correction. Still, markets sometimes move for reasons beyond what experience and analysis can predict. That said, I believe caution is appropriate for those with near-term cash flow needs, or for investors concerned about short- and intermediate-term loss. We continually weigh the promise of outsized returns against appropriate risk, tailored to your unique situation.

This summary is for informational purposes only and shall not constitute advice, an offer to sell, or a solicitation of an offer to buy any securities and may not be relied upon in connection with any offer or sale of securities.  The contents of this report should not be relied upon in making investment decisions.  The accompanying performance statistics are based upon historical performance and are not indicative of future performance.  Past performance is no guarantee of future performance or profitability.  The types of investments discussed also do not represent all the securities purchased, sold or recommended for clients.  Stated information is derived from proprietary and non-proprietary sources that have not been verified for accuracy or completeness.  While the firm believes this information to be correct, we do not claim or have responsibility for its completeness, accuracy or reliability.  The firm also assumes no duty to update any information in this presentation for subsequent changes of any kind. Advisory services offered through HG Advisors, LLC.