August 21, 2026
This is the first of these letters in a new place, so a word about what it is.
I have spent more than five decades in the securities business. I founded a brokerage firm and a registered investment advisory firm, and for thirty-five of those years I also taught investing and financial planning at Southern Methodist University, running the firms during the week and teaching on the side. What that combination taught me is that the point is not to predict the market. It is to recognize the patterns that repeat as one technology gives way to the next.
Rather than assert that, here is a passage from a client letter I wrote in January 2021.
That may all sound like a “this time it’s different” justification for a continuation of this secular bull market. This time probably is different. The paradigm for that logic is the current new “roaring twenties” model. Over the last ten years we have discussed this idea with clients and alluded to it in our letters. Our logic depends on an understanding of the post-Civil War economic history of the United States. During the period from 1870 thru 1895 many inventions were patented ranging from crop harvesters to railroad air brakes. The telephone was invented and practical methods for generating and distributing electricity were developed. However vast sums of capital were misallocated and lost on technologies that had no mass market applications. It was not until the 1920’s that telephones, electric lights, refrigeration and mass-produced automobiles were assimilated into the economy and economic changes truly made it “different this time.”
Earlier in that same letter I named what I thought was being absorbed: the internet, supercomputing, genetic engineering, and the application of artificial intelligence computing across all fields and industries. That was January of 2021, before most people had heard of a large language model.
I do not include it to take a victory lap. The letter got plenty wrong, and I will say so when it comes up. I include it because it shows what this letter is. Not a forecast of next quarter, but an argument about where we sit in a cycle that runs for decades.
The thesis has not changed. Invention comes first, capital gets misallocated for years chasing applications with no market, and the returns arrive only when the technology stops being a product and becomes infrastructure. That is what happened with electricity between 1915 and 1940, and it is what I believe is happening now with artificial intelligence. The longer version became a book, Investing in the Second Wave, published this fall by Greenleaf Book Group.
Which brings us to this week, where you can watch the assimilation happening in real time.
The Economy
The economy is running hotter than most people realize. The Philadelphia Fed survey, taken every month since 1968, just delivered one of the seven best readings in its history, with the six month outlook the strongest since 1983 and capital spending plans near record territory. You do not get numbers like that unless businesses believe the orders are coming, and this is the manufacturing sector we spent the better part of a decade writing off.
Keep one wrinkle in your back pocket. Good news for the economy and good news for stock prices are not the same thing. When that survey has run this hot before, the market has generally struggled over the following year. Peak confidence in the factories tends to arrive alongside peak pricing power, and multiples do not expand into that.
Housing is the one clear weak spot, and the trouble is supply rather than demand. Existing owners are welded to mortgages they will never see again, so nothing comes to market.
On rates, long yields are rising on real yields, not on fear of inflation. The five year forward five year breakeven sits around 2.25%, right where it has been since 2021. That is a market voting for a healthier economy and a credible Fed, which is a very different thing from a market losing faith.
Market Technical Conditions
The S&P closed Friday at 7,674 with the VIX at 15, and on the surface nothing happened. Underneath, plenty did. The cap weighted index made a new high, backed off, and found support at the top of its old range. The equal weighted index made a high of its own and faded. The Nasdaq confirmed neither, held back by technology, which has become everybody’s source of funds. Money is being raised in tech and spent in health care, energy, and industrials.
That is rotation, and it is the most important signal on the board. Semiconductors and memory sold off, bounced, and stalled at their declining 50-day averages. While that happened, health care traded to record highs and biotech broke out of a base it had been building for years. Leadership changed hands without the index going anywhere. That is not distribution. A bull market that can hand the baton from semiconductors to health care without losing a step has something left.
Industrials are the piece I would not overlook. Strip the AI story down to what the money is actually buying and you find transformers, switchgear, turbines, cooling systems, and grid. The headlines say technology but the invoices read heavy industry, and the buildout is measured in trillions over the next five years. If you want evidence that we are in the assimilation phase rather than the invention phase, that is it.
My two primary signals both confirm. The cumulative advance decline line made new highs again last week, and it has rarely let a major top happen without warning first. The 200-day moving average is rising smoothly, which after fifty-six years remains the most reliable trend filter I know.
Which brings me to the title. The dispersion index measures how independently individual stocks are expected to trade, and it hit one of the highest readings on record last month. It has since collapsed, one of the sharpest four week declines in its history, and the handful of prior instances all resolved higher, and materially so. Falling dispersion from a record high is the market’s way of saying participation is about to broaden.
Add it up and we have a correction in time rather than a correction in price. The index goes sideways, leadership rotates, and valuations get worked off by earnings rather than declines. A slower and far more pleasant way to reset a market, and the kind of tape that rewards patience and punishes the impulse to do something.
Prognostication for the Rest of 2026 and Early 2027
Mark Twain ranked September high on his list of peculiarly dangerous months in which to speculate in stocks, and the arithmetic backs him up. Going back to 1945, the stretch from here to year end has typically included a drawdown of around 6% somewhere along the way. That is the toll for the trip. But it has been more common for the market to sail through this window than to break in it, and the median finish has been a gain.
The pattern work agrees. Since 1928, the years whose trading most resembles 2026 consolidated in late summer and then finished strong, gaining ground about four times in five. Those years were also up more than twice as much as we are by this point on the calendar. We have been modest so far, and modest leaves room.
So: a choppy September, a firmer fourth quarter, and a market entering 2027 considerably broader than it entered 2026. Earnings, not sentiment, will do the work.
The risk, as always, is leverage. It is always leverage. Every serious break I have watched came from a new instrument combined with borrowed money, and the current candidate is sitting in plain sight over in the crypto complex, which just had its best week in two years. Not a forecast, just a place to keep one eye while the rest of the market gets healthier.
That is the format, and it will not change much: the economy, the market’s technical condition, and where I think this goes. Written the way I taught and the way I talked to clients, directly and without the hedged language that lets a forecaster be wrong in both directions at once.
Replies come straight to me and I read them.
CJ Brott
Chairman Emeritus
Capital Ideas
The material presented is for informational purposes only and is believed to be accurate. Sources include but are not limited to publications by FactSet, Dow Jones, Yardeni Research, and Bespoke Investment Group. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. The author may hold securities mentioned in this commentary. Nothing in this report should be construed as investment advice and does not take into consideration your specific situation. All investments involve risk. Past performance does not guarantee future results.