Second quarter equity market returns were driven by the continued strong performance of the technology, semiconductor and artificial intelligence sectors. AI infrastructure bottlenecks, most notably in memory chips, delivered extraordinary returns with the Philadelphia Semiconductor index up 88%.
While our technology positions were in line with market weightings, we did not (in hindsight) have a sufficiently high enough exposure to the dozen stocks that generated 100% of the overall equity index returns. The S&P 500 index is capitalization weighted, so the largest companies have a disproportionate impact (up or down) on index returns. These stocks have generated almost all of the positive stock markets’ returns over the past three calendar years and remain up for the first half of 2026.
Our investment strategy during a time of such high return and equity valuations is informed by our experience 30 years ago during the dotcom bubble. Then as now technology stocks generated most if not all the index returns. Fairview lagged the market substantially in the 1996-1999 period, only to regain our long-term performance advantage over the subsequent three years.
That period from 2000 through 2002 remains the best three-year period of relative returns Fairview has ever experienced. This excess performance was a result of our not chasing the ultra-highly valued technology and dotcom companies. We were blessed with clients’ patience and discipline to wait out the inevitable price correction. Over the three-year bear market, the S&P 500 index declined 47% and the more volatile NASDAQ index declined 77% in value peak to trough.
We are not expecting such a dismal outcome looking forward, but we are concerned that strong future share price returns will require an unusually high level of earnings growth amid uncertainties with the AI narrative. We are maintaining a risk profile appropriate for such a tricky environment.
As we enter the third quarter the economy and labor market remain resilient with GDP growth trending at 2.3%, the unemployment rate stable at 4.2% and consumer spending holding up well. Although the Iran conflict continues to impact global oil supplies, elevated inflation cooled with the CPI declining 0.4% from May to June. Also constructive for the inflation outlook is new Fed Chairman Warsh, who began his term with a clear mandate to deliver price stability with a long-term inflation target of 2.0%.
Equity market valuations remain extended, with investors focused on profit margins from the massive AI Infrastructure investments. We have taken steps to reduce portfolio risk by increasing portfolio diversification while modestly growing overall portfolio income yield.
The information contained in this communication is provided for general purposes only, and was prepared in reliance on independent, third-party sources that Fairview Capital Investment Management, LLC (“Fairview Capital”), an SEC-registered investment adviser, believes are reliable. Nevertheless, Fairview Capital does not guarantee its accuracy or timeliness of any information provided herein. The information reflects subjective judgments, assumptions and Fairview Capital’s opinion on the date made and may change without notice; Fairview Capital is not obligated to update this information. Nothing in this communication should be construed as investment or tax advice, a solicitation, offer, or recommendation, to buy or sell any security. Investment management services are offered only pursuant to a written investment management agreement, which investors are urged to carefully read and consider in determining whether such agreement is suitable for their individual needs and circumstances. The information in this communication should not be construed as an endorsement, recommendation or sponsorship of any company or security. If this post mentions a specific investment or security, we or our affiliates may have a position in that security (either long or short), and we may profit from a price change in that security.
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