The Golden Roar
Clients of the Firm,
"Stocks reached record peaks, and Wall Street boomed a steady golden roar."- Nick Carraway in F. Scott Fitzgerald’s The Great Gatsby.
Every year seems to arrive with its own collection of reasons to be cautious; the second half of 2026 is no different. Investors are weighing several important questions simultaneously. These include earnings growth for the companies we invest in, the impact of the ongoing Iran conflict and consequent oil price volatility, political uncertainty and the path of inflation and interest rates.
None of these questions has a definitive answer today. Yet history teaches us that periods of uncertainty can create opportunities for disciplined long-term investors.
Earnings Continue to Drive the Market
Ultimately, stock prices follow earnings and reflect prevailing sentiment regarding future earnings growth. After another year of remarkable resilience from the American economy, corporate America has generally exceeded expectations. Productivity gains from artificial intelligence, continued capital investment, resilient consumer spending, and healthy corporate balance sheets have supported profit growth despite interest rates remaining well above the levels of the previous decade.
Consensus expectations continue to call for healthy earnings growth into 2027 and 2028. While valuation multiples for many large technology companies remain above historical averages, earnings have largely justified much of that premium. More importantly, earnings growth is broadening beyond a handful of mega-cap tech companies.
For long-term investors, earnings remain the single most important variable in long-term investing success. Sentiment and political headlines can dominate the news cycle for weeks, but over periods measured in years rather than months, the trajectory of corporate profits has overwhelmingly determined investment returns.
The Federal Reserve Stands Pat
The July Federal Reserve meeting reinforced what many investors already suspected that policymakers are becoming increasingly determined to maintain rate policy to combat inflation. The new Fed Chair Kevin Warsh reinforced the Fed’s 2% inflation target and the recognition that inflation persists above that target. Ensuring inflation and rate expectations in the market reflect their intentions remains a focus of the FOMC.
Federal Reserve officials continue to emphasize that future policy decisions will remain data dependent. Inflation has moderated substantially from its peak while the labor market has gradually cooled without experiencing significant deterioration. This combination provides the Fed with some flexibility.
If inflation persists and employment remains stable, the direction of policy over the next year is likely to be higher to steady rather than lower interest rates.
Stable to higher interest rates would provide several headwinds for financial markets. Financing costs for businesses would increase, housing activity could worsen, consumer confidence might weaken, and equity valuations will need to reflect discount rates that move higher. However, we believe investors should avoid trying to precisely time Federal Reserve decisions. Markets often anticipate policy changes months before they occur. A case in point is the significant increase in rates in the intra FOMC meeting period between June and July.
Geopolitical Risk Remains Elevated
The conflict involving Iran continues to represent one of the largest external risks facing global financial markets. While geopolitical events are impossible to forecast with confidence, investors should recognize that markets have historically demonstrated remarkable resilience through wars, regional conflicts, terrorist attacks, and political crises. These events often produce short-term volatility, but they have rarely altered the long-term trajectory of high-quality businesses.
The primary economic concern remains energy prices. Any prolonged disruption to global oil supplies could temporarily reignite inflationary pressures and complicate the Federal Reserve's policy on interest rates. That possibility deserves monitoring, but not emotional decision making.
Successful investing requires distinguishing between developments that permanently impair corporate earning power and those that simply create temporary uncertainty. History suggests most geopolitical events fall into the latter category.
Discipline Remains the Greatest Competitive Advantage
As we begin the 2nd half of 2026, we are in an uncertain environment characterized by sustained inflation above 2% and interest rates that are elevated relative to the past 20 years. Simultaneously, we find ourselves in a record profit boom with stock markets near all-time highs in the US. GDP continues to grow at over 2.5% and unemployment remains below 5%. In short, we are in a growth environment with some inflation versus the feared stagflation outcome some predicted. Markets have never required certainty to produce attractive long-term returns. They simply require businesses to continue creating value over time. Huge investment by hyperscalers in the previously discussed AI Build Supercycle is intended to bring that earnings growth. This outcome would be made possible through productivity gains, innovation in products and services and the new markets created by that innovation. This will be at least partially offset by employment change which could involve job losses. This will likely manifest in knowledge work fields and manufacturing moving to AI robotic automation.
At Wernau Asset Management, we remain focused on owning exceptional companies with durable competitive advantages, strong balance sheets, capable management teams, and the ability to compound earnings over many years. Short-term uncertainty is unavoidable. Periods of change tend to result in periods of elevated volatility.
Fitzgerald's "golden roar" narrative reminds us that Wall Street has always been a place where hope and fear compete for investors' attention. Sometimes that roar is louder and results in sentiment re-rating to the upside as we see today. Other times, sentiment pushes valuations lower than a normative range. One consistent element is that the headlines will continue to change. Predictions will come and go. Crises will emerge and eventually fade. What does not change is that patient ownership of outstanding businesses remains one of the most reliable ways to build long-term wealth.
We continue to appreciate the opportunity to serve as your investment manager and look forward to navigating these dynamic times together.
Sincerely,
Peter Wernau
CEO
Wernau Asset Management
30 Western Ave, Suite 206
Gloucester, MA 01930
Direct: 978-325-6049
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