We’re almost halfway through the year already so let’s take a few minutes to review how markets have been doing thus far. We’re not investing for only six months, and short-term performance isn’t that important in the grand scheme of things, but it’s still informative (and fun!) to keep track.
The typical benchmark for the US stock market is the S&P 500. This index “weights” its holdings by the total value of the shares that are publicly available of each company, referred to as a company’s market capitalization. The 500 companies are then sorted into 11 sectors that broadly reflect the economy. As of last Friday, 39% of the index’s value is in one sector, Technology. That’s a record due mostly to growth from the AI industry. And if you add the nearly 11% in Communication Services where other AI players live, half of the S&P 500 is now in these two sectors.
The sector weighting evolution is important because it increases volatility, both on the upside and the downside. We saw this last week, especially on Friday, with the S&P 500 dropping 2.5% as some air was let out of the AI balloon. The Tech sector dropped by over 5% and Communication Services dropped by over 3%. Other sectors like Energy, Healthcare, and Real Estate had good weeks but that positive performance was dwarfed at the index level since those three sectors barely make up 15% of the index combined. Weightings within indexes matter, as do the weights across your personal portfolio.
I mention this because while daily, weekly, even monthly performance has been at times driven by war and other headlines, the overriding catalysts for the market have been AI-related.
Along these lines, here’s some high-level information about various types of investments through last Friday and some notes about near-term expectations.
The S&P 500 was up 8.4% year-to-date through last Friday. At our 2026 high point a little over a week ago we had been up almost 12%.
The NASDAQ, where about 70% of the index is now comprised of Tech and Communication Services, is up about 11%. Its annual high point was almost 22%, also about a week ago.
The typical index for stocks of small companies, the Russell 2000, is up nearly 15%.
Foreign stocks, as measured by the MSCI EAFE and MSCI EM, are up 8% and 23%, respectively. Emerging Markets as an index are also doing so well lately because of AI, except it’s mostly due to chip manufacturing in countries like Taiwan and South Korea.
In terms of cash flow, the S&P 500’s dividend yield is barely over 1%. This has fallen in part due to the sector weightings as well, since tech companies pay little or no dividends. Longer-term, the average dividend yield has been closer to 2%.
That said, dividend-oriented large company stock funds are paying over a 3% dividend yield. These funds seek out dividend payers and, consequently, own a lot less Tech and Communication services.
In the bond market, the Bloomberg US Bond Index, sort of the S&P 500 for bonds, is down about 0.2% this year. Investment-grade corporate bonds, municipals, and high-yield bonds are each doing better but have still only generated around a percent. Generally speaking, bonds continue to underwhelm when it comes to overall performance, but their utility as ballast that generates cash flow remains.
Funds tracking the bond Index mentioned above are paying over a 4% dividend yield.
Money market mutual funds are (or should be) paying around 3.3 to 3.5% right now.
Regarding interest rates, the “yield curve” is steepening and is back to being normally sloped, meaning shorter-term bonds are yielding less than longer term. The 10yr Treasury yield is a typical benchmark and has risen to about 4.5%. 30yr bonds are yielding over 5%. Among various impacts, the national average for a 30yr mortgage has been stuck around 6.5%, about the middle of its range over the last year.
As I type, investors are expecting about one or two rate increases from the Fed this year and into early next year because inflation (caused by a number of factors) remains peskily high. In short, interest rates aren’t expected to go down anytime soon. This can change, of course, but is what the market is currently “pricing in”.
Okay, so what does all this mean? The stock market (as a weighted average of its parts) is expensive but that doesn’t mean don’t buy, it means be careful. Companies across the economy, not just AI-related, continue to do well. So remember there are other sectors, watch your weightings, and rebalance as needed.
And as I mentioned at the outset, this short-term information loses relevance as we stretch our investment time horizons. We always want to remain invested so it’s less about whether we should or shouldn’t, as how much and into what. And it’s useful to pay attention to the details along the way, even if it sometimes makes us want to cover our eyes.
Have questions? Ask us. We can help.
