Earnings Optimism, AI Financing, SpaceX Patience, Retail Rebound, Inflation Cooling, Crypto Selling, Mortgage Choices & More

Second Quarter Earnings Give Me Some Optimism

I call all my clients on their yearly anniversary with our firm to have a discussion about their past performance and where I see their portfolio going over the next six to 12 months. I’m very pleased to report that I expected a more subdued performance in 2026 than what we’re experiencing so far. However, stronger-than-expected returns can also make projecting what comes next a little more difficult. Even with the nice year-to-date returns we’ve seen, I’m still telling my clients that I believe we can add a little bit more to their portfolios by December 31 of this year.

So, what is giving me this optimism?

For one, many of the companies in our portfolios have not become overpriced. On top of that, second-quarter earnings have come in rather strong, and the guidance from many of the stocks we own has also been positive going forward.

When looking at the overall market, some people may think it’s simply AI and technology companies that are doing well. That is not the case. Recent numbers show that during the second-quarter earnings season, 86% of companies have beaten their earnings estimates. That is well above the recent average of 78%.

Historically, when good times seem to last too long, analysts often begin cutting their earnings estimates. But that doesn’t appear to be happening right now. In fact, earnings estimates for the next quarter have actually risen by 0.3%.

There are certainly some concerns. The consumer has been dipping into savings to keep spending going, and the recent jobs market has been somewhat lackluster. However, the vast majority of people still have jobs, and at this point, there doesn’t appear to be any sign of widespread layoffs in the near future.

With all that said, I think the green light is still on for investors to continue putting money to work. But, as always, I believe investors need to be very cautious about overpaying for public companies that are being bought based more on emotion and excitement than strong financial fundamentals.

For me, that remains one of the most important things to watch as we move through the rest of 2026. Strong earnings are encouraging, but valuation still matters.

The AI boom is getting increasingly dependent on financing

There is no question that AI is creating enormous demand for computing power, data centers and semiconductors. But the latest move from Nvidia and Wall Street raises an important question: How much of this growth is being driven by genuine economic demand, and how much is being enabled by increasingly creative financing?

Jensen Huang has been pushing the idea that AI data centers are essentially a new class of infrastructure or what Nvidia calls “AI factories.” Now Nvidia has partnered with some of the biggest names on Wall Street, including Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs and KKR, to create financing platforms that could provide more than $500 billion of capital for AI infrastructure.

On the surface, this makes a lot of sense. AI companies need enormous amounts of capital to build data centers and purchase Nvidia's chips, while investors are looking for ways to participate in the AI boom.

But there is a risk that deserves much more attention: circular financing.

If Nvidia helps finance the companies that buy Nvidia's products, and those purchases generate revenue for Nvidia, which in turn increases Nvidia's valuation and ability to support additional financing, the system can begin to reinforce itself.

That doesn't automatically make the investments bad. But it does make it more difficult to determine how much of the demand is truly coming from customers who can generate sufficient returns on the infrastructure they are building.

And that leads to the bigger question: Can the economy actually absorb this level of investment? We are talking about hundreds of billions of dollars going toward data centers, power generation, networking equipment and AI chips. The capital is available, but ultimately the infrastructure has to generate enough economic output and cash flow to justify the investment. That is where I become more cautious.

Another concern is details were extremely light as we don’t know who the borrowers will be, what the rates will look like, where facilities will be built, and when this is supposed to start.

Intel's announcement is another interesting piece of the puzzle. Intel originally announced a $15 billion stock offering, but quickly increased it to approximately $20 billion, selling shares at $95 each. The proceeds are earmarked for general corporate purposes, including capital expenditures and working capital.

There is also an interesting irony here. We are increasingly financing AI infrastructure as though these assets will have long, productive lives. But AI technology is improving incredibly quickly.

Today's most advanced GPU, server or data center configuration can become obsolete much faster than traditional infrastructure. A power plant or building might remain useful for decades. A generation of AI computing equipment may have a much shorter economic life. That creates a unique risk.

What happens if we finance billions of dollars of AI infrastructure over 10 or 15 years, but the technology improves so rapidly that the equipment becomes economically obsolete much sooner?

The financing doesn't disappear just because the technology does.

I am not saying that the technology isn't transformative. I believe AI could absolutely create enormous economic value, but economic value and investment returns are two very different things.

The biggest question for investors over the next several years may not be whether AI works. It may be whether the amount of capital being committed to AI infrastructure can ultimately earn an adequate return. When companies, investors and lenders all believe they need to keep spending because everyone else is spending, that is when I start paying very close attention to the financing structure. The technology may be revolutionary, but the financial engineering surrounding it deserves just as much scrutiny.

Will Investors Really Be Patient Holding Their SpaceX Stock?

The common advice I hear when it comes to SpaceX is simple: “Don’t worry about it. Just hold the shares, don’t look at them, and you’ll be glad you did 10 years from now.”

It’s certainly possible that this advice will prove to be correct. But I question whether human emotions can really handle that kind of long-term commitment when it comes to an investment as volatile and intangible as a stock like this.

Think about everything that can happen over the next 10 years. There will be negative news, disappointing developments, changing expectations and plenty of commentary that investors simply won’t be able to ignore.

And there’s another issue: a significant amount of additional stock could become available over the coming months. Even after the recent unlock of just over 911 million shares on August 6, which was greater than the 639 million shares sold in the IPO, there is still a substantial amount of potential supply coming to the market.

On August 20, another 319 million shares could become available, followed by roughly 700 million shares in September and another 700 million or so in October. In November, an additional 28% of shares will become available, and by December, all remaining shares held by standard pre-IPO investors and employees will be eligible for release.

The final major unlock comes from Elon Musk’s stake in June 2027.

That is a tremendous amount of potential supply entering the market in a relatively short period of time, and it raises an important question: Will investors have enough conviction to keep holding if the increased supply puts significant pressure on the stock?

The idea of investing alongside Elon Musk is certainly attractive, especially when you consider his ambitious vision for SpaceX from building data centers in space to eventually manufacturing on Mars. But ambitious visions don’t necessarily make it easy to hold a stock through extreme volatility.

We’re already seeing what can happen. Some investors appear to have panicked and sold shares for as little as $105 after the stock had climbed as high as $225.

It’s easy to say you’ll stay the course when the stock is going up. It’s a completely different experience when you watch it fall every day and start asking yourself: What if this isn’t going to work? What if SpaceX doesn’t look nearly as attractive 10 years from now?

I believe the investors who have already sold may be a preview of what we could see over the next nine months. I’m not convinced there are enough investors willing to look 10 years into the future and maintain that level of conviction while hundreds of millions of additional shares are released.

So, here’s the question: Can you honestly say you would hold SpaceX no matter what, even if the stock fell to $60 or $70 a share and stayed there for an extended period? I’d love to hear what you think. How much patience do you really have with an investment like SpaceX?

Retail sales look better than the headline suggests

The headlines are focused on the 0.6% month-over-month decline in retail sales in July, the first monthly decline in nine months and the largest drop since May 2025.

That sounds concerning, but there are some important factors behind the monthly decline that deserve attention. One of the biggest was nonstore retailers, which fell 2.2% from June. That category is heavily influenced by online shopping, and the decline appears to be largely a timing issue related to Amazon Prime Day.

Amazon moved Prime Day from July into June this year, creating a significant boost to June online sales and, consequently, a tougher comparison for July. U.S. consumers increased spending 9.3% year over year to roughly $26.4 billion online during the June 23–26 Prime Day period, and other retailers such as Walmart and Target also moved their promotional events earlier to compete. So, some of the July weakness is really a shift in spending between two months, rather than consumers suddenly deciding to stop spending.

Gas stations were another contributor.

Now look beyond the monthly number. Retail sales were still up 5.0% year over year in July. Even excluding gas stations which saw a 16.2% increase due to higher gas prices, sales were up approximately 4.2% year over year. That's a very different picture from the one you get by simply looking at the -0.6% headline.

There are also some areas showing impressive strength. Food services and drinking places saw sales climb 5% and even with the monthly decline in nonstore retailers, the annual increase was still quite impressive at 7.7%. Building material and garden equipment & supplies dealers are particularly interesting. This category remains strong, suggesting consumers are continuing to spend money improving and maintaining their homes. This led to an annual increase of 6.7%. There could be more room for the category to grow based on a recent UBS housing survey, which found that 34% of respondents intend to buy a home during the next 12 months, compared with a historical average of 30%. Even more interestingly, 61% expect to begin a repair or remodeling project, slightly above the historical average of 59%.

That's important because the housing market doesn't only generate economic activity when someone buys a house. Existing homeowners spending money on renovations, repairs, landscaping and other improvements can also provide a meaningful economic boost.

Ultimately, sales growth was spread throughout the report and furniture and home furnishing stores were the only major category that produced an annual decline as the group saw sales fall 1.2%. So, while I wouldn't dismiss the July retail report and the decline in the control group does suggest some moderation, I also don't think it's accurate to look at -0.6% and conclude that the consumer is suddenly falling apart. The consumer may be slowing, but the data doesn't yet suggest the consumer has stopped spending.

Inflation Is Cooling, But Energy Is Muddying the Picture

The CPI report was better than the headline number might suggest, and I don't believe it gives the Federal Reserve a compelling reason to raise interest rates.

Headline CPI increased 3.4% year over year in July, down from 3.5% in June. More importantly, core CPI increased just 2.5% year over year, down from 2.6% in June.

The biggest contributor to the elevated headline number continues to be energy. Energy prices are up 14.7% from a year ago, including a massive 24.6% increase in gasoline prices. That's a significant increase and is keeping headline inflation well above the Fed's 2% target.

But here's the problem I have with using higher interest rates to combat this inflation: higher rates aren't going to produce more oil or lower gasoline prices.

If anything, rate hikes could create demand destruction. Higher borrowing costs make it more expensive for consumers to buy homes and cars and for businesses to invest and expand. At a time when there are already concerns about economic growth and the labor market, I don't think weakening demand is the right prescription for an inflation problem being driven heavily by energy prices.

I'm also encouraged by what we're seeing in shelter inflation. Shelter increased 3.2% year over year, continuing its gradual improvement. However, because shelter is such a large component of CPI, 3.2% inflation is still putting meaningful upward pressure on core CPI.

One of the most interesting numbers in the report is airline fares, which were up 25.5% from a year ago. There is an important connection here to energy. Airlines are highly sensitive to fuel costs, so when energy prices rise dramatically, some of those costs eventually get passed along to consumers. There are certainly other factors influencing airfare, but it's another example of how higher energy prices can ripple through the economy.

The bottom line for me is pretty simple: 2.5% core inflation doesn't scare me. It's above the Fed's 2% target, but it's moving in the right direction. Meanwhile, some of the biggest sources of inflation are areas where monetary policy has limited ability to help. I would rather see the Fed remain patient and allow the economy to absorb these price pressures than raise rates and potentially create unnecessary demand destruction. Not every inflation problem can be solved by raising interest rates and I think this is becoming an increasingly important distinction for the Fed.

A new tax requirement could create another source of selling pressure for Crypto

There was an important change in the way the IRS tracks cryptocurrency transactions, and I think investors should pay attention to the potential impact on the crypto market.

Beginning with the 2025 tax year, crypto brokers are required to issue Form 1099-DA, which reports digital asset sales and exchanges directly to the IRS. For 2026 transactions, the reporting becomes even more detailed, including cost-basis information for covered assets.

The significance is that crypto is increasingly being treated more like traditional investments from a tax-reporting standpoint. The IRS will have much more information to compare against what investors report on their tax returns.

But there is another potential consequence that I don't think gets enough attention: the tax bill itself could create additional selling pressure.

Remember, you can owe taxes on a crypto gain even if you haven't converted all of your holdings into cash. Selling Bitcoin for dollars is taxable, but so can be exchanging one cryptocurrency for another.

That creates an interesting situation. Imagine someone bought Bitcoin several years ago at a much lower price and now has a large unrealized gain. If they realize gains during the year and don't have enough cash set aside to pay the resulting tax bill, they may be forced to sell additional crypto simply to raise the money needed to pay their taxes. That selling creates another taxable event and potentially another tax liability.

I'm not suggesting this will cause a major crypto selloff by itself. But it is another factor investors should consider when thinking about the supply and demand dynamics of the market. It’s especially important to consider this information because it has been estimated that just 32% to 56% of U.S. taxpayers with crypto holdings report their transactions to the federal government and data suggests that a large number of taxpayers may be out of compliance.

While accounting for crypto transactions in the past can be complicated, the IRS doesn’t count confusion as a reason for not paying taxes. With the increased reporting standards, we could see more back taxes, penalties and interest for people that intentionally or even unintentionally failed to file the crypto transactions properly.

Crypto investors have spent years benefiting from significant price appreciation. Now, as the tax-reporting system becomes more sophisticated, the IRS is going to have a much clearer view of those gains and investors are going to have to figure out how to pay the bill.

That could mean more selling pressure than many investors realize, particularly around tax-payment periods.

Financial Planning: 15- or 30-year mortgages?

A 30-year mortgage is often the better financial choice for a disciplined investor because the lower monthly payment frees up more money to invest. Although a 15-year mortgage typically has a lower interest rate and saves more interest over the life of the loan, the higher payments mean more money is tied up in home equity rather than invested. The financial benefit of those higher payments is the additional principal being paid down, providing a return equal to the after-tax cost of the mortgage interest. For a 6% mortgage, the after-tax cost could be approximately 4%. With a 30-year mortgage, if the extra cash flow can be invested to earn a higher long-term return than the mortgage rate, the investment growth can more than offset the additional mortgage interest. This can be even more attractive when investing in tax-advantaged retirement accounts. A 15-year mortgage becomes more compelling when interest rates are extremely high, making it difficult for investment returns to beat the mortgage rate. Ultimately, for someone who can comfortably afford the payment and consistently invests the difference, the 30-year mortgage generally provides greater flexibility and potentially greater long-term wealth.

SpaceX Will Not Destroy the Big Three Mobile Providers

Elon Musk talks about a lot of things. Some of his predictions eventually come true, while others don’t. When it comes to the mobile industry, there is growing concern that SpaceX’s Starlink could eventually disrupt or even destroy the three major U.S. wireless providers: AT&T, T-Mobile, and Verizon.

However, I don’t believe that is going to happen anytime soon.

Currently, SpaceX has roughly 12 million Starlink subscribers, compared with approximately 125 million for AT&T, 144 million for T-Mobile, and 147 million for Verizon. That is a significant difference in scale, and Starlink still has a long way to go before it can compete directly with the established wireless carriers.

SpaceX’s most advanced satellite, known as V3, is expected to cover an area hundreds of miles wide, compared with a traditional cell tower that typically covers only a few square miles. That sounds like a tremendous advantage, but coverage area is only part of the equation. The bigger issue is bandwidth.

V3 satellites will not initially be able to handle the enormous amount of bandwidth required to serve millions of customers simultaneously. This is one of the biggest challenges Starlink faces. To reach the scale necessary to become a major threat to the existing carriers, some estimates suggest SpaceX could ultimately need to spend more than $100 billion putting enough satellites into orbit to provide adequate capacity.

Until that happens, customers using Starlink’s direct-to-cell service could experience dropped calls, spotty connections, or situations where there simply isn’t enough capacity available.

One potential solution would be for Starlink to partner with or potentially acquire one of the major wireless carriers. The question is, which one?

Could it be Verizon, which currently has the lowest forward price-to-earnings ratio of the three at around 9 times and approximately 147 million subscribers? Or could it be T-Mobile, which has roughly 144 million subscribers but trades at a much higher forward P/E of approximately 12.7 times?

There is also AT&T, which has a large customer base and an extensive wireless network that could potentially complement Starlink’s satellite capabilities. They currently have a forward P/E of about 9.3.

No one knows for sure how this will ultimately play out, but one thing I am fairly confident about is that Starlink is not going to destroy the major wireless carriers over the next year or two. Building enough satellite capacity to compete with these companies on a massive scale will take enormous amounts of capital and time.

In my opinion, Starlink will eventually need to partner with, invest in, or potentially acquire one of the major carriers if Elon Musk wants to turn Starlink into a truly dominant global mobile communications network.

The technology is impressive, but replacing the Big Three is a much bigger challenge than simply putting satellites in the sky.

More Bad News for Holders of Private Credit Funds

The managers running private credit funds, including Blackstone, Ares Management and Blue Owl Capital, continue to reassure investors that everything will be fine. But a recent analysis from The Wall Street Journal is raising some disturbing questions about the health of this market.

If you’re unfamiliar with private credit, these funds invest client money in loans to companies that are often highly leveraged. This strategy, known as direct lending, allows companies to borrow directly from private lenders rather than traditional banks.

For the past several years, investors were attracted to private credit because these funds could generate returns around 10%. But those returns are starting to decline, with many investments now producing closer to 8%. KKR, another major player in private credit, saw a 9.2% decline in the previous year and is down another 6.6% over the past 12 months.

Perhaps more concerning is what is happening with the industry's so-called watchlists. Private credit managers maintain watchlists of borrowers that are showing signs of financial stress. According to the Wall Street Journal analysis, watchlists at many firms are reaching levels not seen since 2022 and 2023.

Why does that matter? The longer these watchlists become, the greater the potential for loan defaults. A borrower doesn't necessarily default simply because it appears on a watchlist, but a growing number of troubled borrowers is clearly something investors should be paying attention to.

Investors also need to understand exactly what they are getting into. Many of the companies borrowing through private credit are higher-risk businesses that may have difficulty obtaining financing from traditional banks. That is precisely why they are willing to pay significantly higher interest rates. Once fees and other charges are included, the cost of this borrowing can reach 12% to 14% or more.

For years, investors have been told that private credit offers attractive yields with relatively low risk. I think investors need to start asking a much harder question: Are you really being adequately compensated for the risk you are taking?

Our recommendation remains the same: If you don't currently own private credit funds, we would not recommend putting money into them. If you already own them, understand the liquidity restrictions and risks involved and consider reducing your exposure while you still have the ability to do so.

The biggest mistake investors can make is assuming that a high yield automatically means a good investment. Sometimes a high yield is simply the market's way of telling you that the underlying risk is much higher than it appears.

Why Is No One Talking About Bitcoin Anymore?

Well, to be rather blunt, Bitcoin has become boring. Even many of the investors who were once heavily focused on Bitcoin seem to be finding other areas of fast-moving investing that excite them more. The returns certainly haven’t helped. Bitcoin is down close to 30% so far in 2026, and if you’ve held it for the past year, you’re down close to 50%. I know some people said years ago, “I’ll buy Bitcoin, hold it for the long term, and not worry about the day-to-day price.”

Well, if you did that, your five-year return is only about 35%. On an annualized basis, that works out to just a little over 6% per year, hardly an extraordinary return when you consider the risk and volatility associated with an intangible asset like Bitcoin.

Interestingly, some of the risk-seeking investors who once loved Bitcoin have moved into chip stocks and other AI-related investments, including Intel. Some popular crypto trading platforms are now even offering AI-related derivatives, making it easier for traders to move into equities and options.

I’ve also seen reports of former Bitcoin traders saying they’re simply bored with crypto and are looking for other exciting markets like prediction markets. Some have even moved into Pokémon trading cards.

And here’s the other side of the Bitcoin story that often gets overlooked: for every Bitcoin trader who became incredibly successful, there are probably hundreds, if not thousands, of people who lost substantial amounts of money trading it.

I don’t currently see an obvious catalyst that could reignite Bitcoin the way we’ve seen in previous cycles. That doesn’t mean it can’t rally again and it certainly could, but it’s possible that Bitcoin doesn’t go out with a bang. It could simply fade into the sunset very quietly.