The letter below as well as the two essays that follow have been extracted from our 2026 Q2 Report.
Every market cycle develops its own logic.
During prolonged bull markets, investors gradually come to view prevailing conditions as normal and permanent. Assumptions that may have begun as observations evolve into articles of faith. Valuations once considered aggressive come to be seen as reasonable or ignored altogether. Risks that once demanded careful scrutiny are increasingly dismissed. The longer a particular environment persists, the easier it becomes to believe it will persist indefinitely.
History tells us it won’t.
Financial markets are shaped by regimes. Interest rates rise and fall. Business cycles swing from boom to bust. Technologies emerge, mature, and – believe it or not – sometimes even disappoint. Competitive advantages strengthen and weaken. Yet investor perception and behavior often adapt far more slowly than the environment itself. Obsolete assumptions have driven some of history’s most consequential busts.
Several examples of this phenomenon were on display during the second quarter of 2026. Artificial intelligence remained the dominant investment narrative. The surge in capital expenditures tied to AI infrastructure accelerated. Equity valuations remained extreme despite persistent fiscal concerns, heightened geopolitical uncertainty, and the lingering economic repercussions from the conflict with Iran, including its effects on global supply chains. At the same time, questions about the long-term economics underlying today’s AI buildout continued to grow. Nevertheless, investors remained remarkably willing to look beyond these near-term uncertainties and focus instead on a distant and highly uncertain future.
Coming into the second quarter, the forces that had been shaping markets since the emergence of ChatGPT reached a new level of intensity. By April and May, momentum itself had become one of the market's defining characteristics, reinforcing an increasingly narrow leadership driven by the AI buildout. Strong returns attracted additional capital, which in turn fueled further gains, encouraging even more crowding into a remarkably narrow group of companies perceived to be the primary beneficiaries of the AI investment boom. Momentum strategies delivered record relative outperformance, market leadership became increasingly concentrated, and skepticism became increasingly difficult to sustain as each new advance appeared to validate the prevailing narrative.
One of the more revealing developments of the quarter was not simply the continued strength of equity markets, but the extraordinary volume of new capital being raised. SpaceX completed the largest initial public offering in history before returning less than two weeks later for an additional $25 billion in debt financing. OpenAI and Anthropic filed for public offerings at valuations expected to exceed $1 trillion each. Alphabet raised approximately $85 billion through a secondary offering. At the same time, corporations including Amazon, Oracle, Meta, and others continued tapping debt and equity markets to finance the enormous infrastructure investments required to support artificial intelligence. Together, these transactions are emblematic of one of the largest capital-raising waves in modern market history.
These developments raise an obvious question. Many of these companies have existed for years, and in some cases decades. Most have enjoyed ample access to private capital. Several possess balance sheets that leave little doubt about their ability to finance future growth. Why, then, is so much stock suddenly appearing for sale?
While IPO activity by itself isn’t a reliable timing indicator, major market peaks have frequently been accompanied by a surge in new issuance as founders, venture capitalists, and corporate insiders seek to capitalize on favorable market conditions. There are plenty of reasons to sell stock. Thinking that prices will rise much further is generally not one of them. These dynamics tend to emerge late in market cycles.
The same conditions that encourage investors to buy frequently encourage insiders to sell. Throughout history, periods of extraordinary optimism have often been accompanied by surges in equity issuance, debt issuance, and other forms of capital raising. Railroads, radio networks, telecommunications infrastructure, internet companies, and housing developments all required enormous amounts of financing. The willingness of investors to supply that financing – through equity, credit, and an expanding array of financing structures – has frequently transformed promising innovations into speculative booms. All of which, I might add, were followed by busts.
None of this diminishes artificial intelligence’s transformative potential. History's greatest technological revolutions were always legitimate. Railroads reshaped transportation, electrification transformed industry, and the internet revolutionized communication and commerce. Speculation doesn’t diminish the significance of the underlying technology.
Investors have never struggled to identify important innovations. The challenge they seem to run into time and time again has been distinguishing between technological promise and investment reality. Financial history repeatedly demonstrates that revolutionary technologies often coexist with speculative excess. The most dangerous periods tend to emerge not when innovation is absent, but when enthusiasm and hype become so widespread that skepticism itself falls by the wayside.
The quarter's closing weeks also illustrated how quickly market psychology can shift. SpaceX's record-setting initial public offering may ultimately come to be remembered as the symbolic crescendo of the AI-driven momentum trade. Investors initially rushed into the largest IPO in history, driving the shares more than 50% above the offering price within days and briefly propelling the company to one of the world's largest market capitalizations. Yet almost as quickly as the enthusiasm emerged, it faded. As investors began reassessing valuations, financing requirements, and execution risk, the stock surrendered virtually all of those gains.
The change was subtle but meaningful. By late June, some of the year's strongest momentum stocks were coming under pressure, while capital was beginning to flow toward higher-quality and more attractively valued businesses that had largely been overlooked throughout the AI-led advance. Whether this ultimately proves to be the beginning of a more durable change in leadership or just another brief rotation remains to be seen. What it does illustrate, however, is how quickly investor preferences can change once a dominant market narrative comes under scrutiny.
The common thread running through many of today’s market dynamics is not simply valuation, artificial intelligence, or interest rates. It is the increasingly powerful interaction between narrative, momentum, and human behavior. Markets are shaped not just by economic fundamentals, but also by the stories investors tell themselves about the future and the psychological forces that influence how those stories are processed.
The two essays that follow examine the current environment through the lenses of behavioral finance and neuroscience. Together, they explore why speculative cycles become so psychologically compelling and why intelligent investors repeatedly find themselves lured into them when prudence should matter most.
They also mark the beginning of a short series of essays that I'll be publishing over the next couple of months. Inspired by the late Charlie Munger's concept of a latticework of mental models, each essay will examine many of the same market developments through a different analytical discipline. Most market commentary – including much of our own – naturally emphasizes a macroeconomic perspective. Inflation, interest rates, fiscal policy, geopolitics, and economic growth will always matter enormously.
Yet no single discipline fully explains financial markets. My objective is not to replace the macro perspective, but to complement it by exploring how behavioral finance, neuroscience, microeconomics, financial statement analysis, and financial theory each illuminate different aspects of the same underlying phenomena. As always, I'll also try to place today's events within their broader historical context, because understanding where we are often begins with understanding where we've been. My hope is that, taken together, they provide a more complete understanding of the financial world around us.