Weekly Investment Update (07/10/2026)

Markets may be entering a healthier phase of the cycle. Leadership appears to be broadening beyond a narrow group of AI-linked companies into areas that had lagged the AI-driven rally, including parts of the healthcare sector, certain international markets, and more cyclical areas of the economy. While that does not mean the AI theme has run its course, it does suggest, however, that investors are beginning to place greater value on diversification, valuation, and earnings durability. In our view, this is a constructive development. Bull markets are more resilient when participation widens, even if the transition creates more short-term rotation and a less linear path for returns.

This broadening is supported by an economic backdrop that still looks healthy. Inflation pressures appear to be cooling at the margin in some of the most visible categories, while growth remains firm enough to support revenues and profit margins without forcing a dramatic change in Fed policy expectations. At the same time, some of the economy’s softer spots, such as housing, are a continued reminder that this is not a cycle of uniform strength. The result is an environment that still rewards patience and selectivity. This may be the point in the cycle when thoughtful portfolio construction matters most, especially after a long stretch in which perceived AI winners dominated both attention and flows.

Market Breadth Normalizing from Extremes

What is happening: Stock market concentration remained elevated for most of 2026, with index returns dependent on a smaller group of companies. More recently, market leadership has started to reflect a more balanced dynamic. At the end of May 2026, only 36% of S&P 500 constituents outperformed the broad index for the year. As of this Friday, that number has risen to 46%, approaching long-term historical averages.

Moreover, we have seen some leadership rotation among style factors in July, with the S&P 500 Momentum index underperforming the S&P 500 index by more than 5 percentage points month to date after outperforming by more than 25 percentage points through the end of June.

At the same time, the fundamental backdrop looks broader as well. Analysts expect all 11 S&P 500 sectors to deliver positive earnings growth in 2026, led by information technology, energy, and materials. Q1 results also pointed to widespread strength, with 85% of companies beating earnings-per-share (EPS) estimates, and 10 of 11 sectors posting positive earnings growth.

Why it matters: Increased market breadth is generally a constructive signal. When a larger share of market constituents outperform the index, that can make the overall market advance more durable. For instance, weakness in a handful of dominant stocks would be less likely to derail the entire index. From a portfolio construction perspective, this backdrop is consistent with our constructive equity view in certain discretionary strategies.

At the same time, the recent broadening of market leadership does not necessarily mean that the AI capex trade is over. Many of these companies continue to benefit from powerful secular tailwinds, including infrastructure spending, rising compute demand, and strong earnings growth. Instead, the broadening suggests that market returns may become more balanced going forward, with a wider range of sectors and companies contributing to performance rather than a small group of mega-cap leaders. In this environment, security selection becomes more important as investors may be more likely to favor strong company fundamentals.

Recent labor-market data could also play a key role in determining whether market breadth continues to improve. The June nonfarm payroll report showed payrolls rising by only 57,000 compared with expectations of a 115,000 increase. With jobs data for the previous two months also revised down by a combined 74,000, a gradual cooling in the labor market could support broader equity participation if it reduces pressure on interest rates without signaling a sharper slowdown in demand. If this trend continues without tipping into a sharper slowdown, it could help expand the number of stocks contributing meaningfully to returns. However, if labor market weakness begins to signal deteriorating demand, this could reinforce the market’s reliance on the largest, most resilient companies, and lead to a resurgence in return concentration.

Muted Market Reaction to Geopolitical Tensions as Defense Spending Momentum Continues

What is happening: Geopolitical tensions renewed this week as the U.S. and Iran exchanged strikes. The U.S. launched retaliatory airstrikes following Iranian attacks on vessels in the Strait of Hormuz. The renewed attacks occurred about three weeks after the 14-point Memorandum of Understanding was signed by both countries, which reopened the Strait and provided 60 days for further negotiations. Notably, however, the reaction in oil markets has been relatively muted, with WTI crude oil prices increasing to only $72/bbl, still 36% below its April peak. The relatively contained market response likely reflects expectations that the escalation will be short-lived, although oil and shipping markets remain sensitive and technical talks are still subject to meaningful uncertainty. Similarly, estimates suggest that oil transported through the Strait recovered to ~50% of pre-conflict volumes before the recent strikes, meaning a considerable amount of supply has come back to the market.

Meanwhile, North Atlantic Treaty Organization (NATO) leaders gathered in Ankara, Turkey, for the 2026 summit this week. While the meeting was slightly overshadowed by U.S.-Iran developments, NATO allies reaffirmed their commitment to collective defense and investment in innovation. Several new measures were announced, including an additional €70 billion in military equipment and assistance for Ukraine, along with more than $50 billion in new procurement plans. Allies also launched a new “Drone Edge” initiative, where $40 billion will be invested in uncrewed systems over the next five years. The new initiative reflects a broader focus on innovation to address an evolving security environment.

Why it matters: Despite the brief reescalation in U.S.-Iran tensions, a longer-term diplomatic resolution remains our base case, particularly given the market’s reaction and as negotiations persist. However, the events this week are a timely reminder that the geopolitical environment is still fragile and continues to evolve. In that context, the NATO summit reinforces a broader strategic shift that is already underway as global leaders continue to prioritize defense readiness, supply-chain resilience, and investment in innovative security capabilities. European allies and Canada increased defense investment by more than $139 billion last year, and this trend is unlikely to slow.

Market disruption from geopolitical volatility has been short-lived this year, with the S&P 500 up nearly 11% despite a 9% drawdown in March. This pattern is consistent with history, as markets often recover quickly once the initial shock fades. Therefore, while geopolitical events tend to not have a lasting impact on markets, the durable rise in global defense spending provides compelling long-term investment opportunities. Bessemer portfolios have exposure to select defense and aerospace companies, such as Boeing and Howmet Aerospace, that are positioned to benefit from this secular trend.