Doherty Market Commentary Q2 2026

The second quarter rebounded from a weak start to the year, led by a gold rush in a narrow segment of the market. We are not referring to precious metals, which have fallen significantly this year. This gold rush is in semiconductors, and in particular memory chips that are used for AI. There is also a gold rush in stock issuance (companies selling new shares for capital) as management teams race to take advantage of investor optimism. The valuations are eye watering. This, despite concern about war in the Middle East, inflation, spiraling government debt and potential for higher interest rates. So how can we explain this? Let’s give it a try.

Over a trillion dollars in aggregate spending is fueling much of the global economy at the moment. This race to build data centers for AI has reached new heights, but it is not the first time we have seen something like this. Looking back to the late 1990s, there was a race to build the internet. Companies like Worldcom, Nortel and Alcatel (to name a few) invested unprecedented amounts to build out the communications infrastructure which would become the backbone of the internet. If anything, we underestimated the extent to which the internet would permeate our lives, but most of these names still turned out to be poor investments, as valuations ran way ahead of fundamentals.

Ticking another box in the “frothy markets” checklist – and also reminiscent of 26 years ago –a surge in Initial Public Offerings (IPOs). There was a record IPO from Elon Musk’s SpaceX and announced planned IPO’s from OpenAI and Anthropic. Korean memory chip firm SK Hynix is the latest to join in with a US$28Billion offering. SpaceX was given a valuation of over 100 times sales. For reference, the average company in the S&P 500 Index trades at around 4x times sales and most big technology firms trade between 5 – 10x sales. SpaceX has a viable business with Starlink but hardly warrants this kind of price as they burn through tens of billions of dollars of cash (expect another cash raise).

There is little doubt that AI will be a transformational technology. Its impacts, both positive and negative, will be felt by generations, like previous technological advances. The likelihood, however, of over-build is very high, and it is rare to see this type of spending without a corresponding fall. Semiconductor companies often find themselves in the center of these reversals. Heading into 2000, they grew revenue by 75 -100% per quarter. In the years following, revenues fell by similar amounts and they suffered heavy losses.

In a market environment like the current one, it takes considerable discipline to stay focused. There was no single headline or event that caused the dot-com bubble to burst. It coincided with soaring valuations (ahem) and rising rates. The same scenario played out with the “Nifty Fifty” in the 70s, and the 1929 crash. Eventually, there were not enough incremental buyers to keep the party going. And when the momentum turns, it can be as quick as the rise, if not faster.

Jamie Dimon, chairman of JPMorgan, recently stated he is “cautiously pessimistic”. This captures the market’s resilience in the face of mounting risks. Of course, as we like to remind you, we don’t invest in “markets”. We invest in companies. We aim to manage risk not by hedging with expensive and complicated options strategies, but rather by focusing on companies we believe are resilient with strong balance sheets and consistent cash flows. We have been taking profits where valuations are elevated and exiting positions that no longer warranted owning.

Chasing the gold rush can be temporarily profitable, but sustainably compounding returns over the long run is achieved by investing in companies with durable cash flows and reasonable valuations. Rest assured this is how we continue to invest and remains our core philosophy. Wishing you and your families an enjoyable and restful summer.


This commentary is for general information only, based on information available as of June 30, 2026, and does not constitute investment advice, an offer, or a recommendation. Market conditions may change and Doherty & Associates Ltd. assumes no responsibility for decisions made in reliance on this information; investors should consult their Portfolio Manager before investing. References to specific securities are illustrative only and performance is not guaranteed. This document may contain forward-looking information subject to risks and uncertainties. Information as of June 30, 2026.