Tepp Wealth Management 3rd Quarter 2026 Outlook

The end of the Iran conflict was, in many ways, anti-climactic: a memorandum of understanding, a partially reopened shipping lane, and a great deal of squinting at tanker-tracking data. Our second-quarter outlook was written with oil tankers idling outside the Strait of Hormuz and markets pricing catastrophe. Three months later, the United States and Iran have signed a 14-point framework, the Strait is haltingly reopening and oil prices have collapsed. We said the Strait would be substantially open by late May; the ceasefire came in April and the framework in June.

We said the technology selloff was a valuation problem, not an earnings problem, and an attractive entry point; as of this writing, semiconductor stocks have since risen roughly 80% this year, which is the market’s way of agreeing with unnerving enthusiasm. And we warned of an inflationary impulse which has already occurred.

For the 3rdQ, our advice is simple: take profits where success created concentration and diversify holdings for greater protection against market risk.

SOURCES

• Absolute Strategy Research, “Return to risk-on,” Asset Allocation Quarterly, Zahra Ward-Murphy & ASR Research Team, June 17, 2026
• Absolute Strategy Research, “Resilient Economy Drives Sector Shift,” Nick Nelson, June 25, 2026
• Absolute Strategy Research, “Stick with Japan, Asia ex-Japan & US,” Nick Nelson, July 2, 2026
• Alpine Macro, “Further And Longer,” Global Strategy, Chen Zhao, June 22, 2026
• Alpine Macro, “The Aftermath Playbook,” Global Asset Allocation, Bassam Nawfal, June 16, 2026
• Alpine Macro, “WACC Attack,” Equity Strategy Monthly, Nick Giorgi, July 1, 2026
• BCA Research, “Monthly TAA: Monetization — The Next Frontier Of The AI Bull Market,” Juan Correa et al., June 1, 2026
• BCA Research, “Geopolitical Outlook For Q3, 2026,” Matt Gertken et al., June 29, 2026
• BCA Research, “Is The US Labor Market Tightening Or Easing?” US Bond Strategy, Ryan Swift, July 3, 2026
• Center for Strategic and International Studies, “Why Russia Is Changing Its Nuclear Doctrine Now,” Heather Williams, September 27, 2024
• Oxford Economics, “Good news is bad news for the Fed,” Country Economic Forecast US, Michael Pearce, June 10, 2026
• Oxford Economics, “Job market losing its sheen adds to the case for an extended Fed pause,” Weekly Economic Briefing US, Bernard Yaros, July 2, 2026

Transcript

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TEP Wealth Management, third quarter, twenty twenty six. Outlook. Executive summary. A June. US slash Iran ceasefire has the Strait of Hormuz partially reopening, and oil prices have rapidly fallen back to pre-war levels. The economy bent during the conflict but did not break. Growth is improving, corporate profits are accelerating, and the labor market is roughly balanced. Though the falling unemployment rate flatters the picture, it reflects fewer people looking for work rather than a hiring boom. Inflation reached nearly 4% this quarter but should grind lower through year end, with a growing oil glut doing most of the heavy lifting. We expect it to stay above the Fed's comfort zone, but not by enough to force a series of rate hikes. Over time, we expect the yield curve to re-steepen. Short rates anchored by a patient Fed, long rates drifting higher on deficits and heavy treasury issuance. The AI boom is entering its second act. The market's attention is shifting from the companies building computing power to the companies turning that power into revenue. Is this a bubble? Read on. The signature of our positioning this quarter is enhanced diversification. The concentrated technology trade served portfolios extremely well in the second quarter. This is precisely why we are deliberately broadening. Smaller companies, communication services, Japanese equities, and selected emerging markets. Geopolitical risks remain. The Middle East is calmer but fragile. Washington enters a noisy midterm season, and a Russia-Ukraine escalation is a noteworthy risk. Introduction The Aftermath The end of the Iran conflict was in many ways anticlimactic, a memorandum of understanding, a partially reopened shipping lane, and a great deal of squinting at tanker tracking data. Our second quarter outlook was written with oil tankers idling outside the Strait of Hormuz and markets pricing catastrophe. Three months later, the United States and Iran have signed a fourteen-point framework, the strait is haltingly reopening, and oil prices have collapsed. We said the strait would be substantially open by late May. The ceasefire came in April and the framework in June. We said the technology sell-off was a valuation problem, not an earnings problem, and an attractive entry point. As of this writing, semiconductor stocks have since risen roughly 80% this year, which is the market's way of agreeing with unnerving enthusiasm, and we warned of an inflationary impulse which has already occurred. For the third quarter, our advice is simple. Take profits where success created concentration and diversify holdings for greater protection against market risk. Theme 1. The economy after the fire drill. Employment, less work, fewer workers. The unemployment rate fell in June and it was not good news. Payroll growth came in at a tepid 57,000 jobs, and the prior two months were revised downward. However, the unemployment rate declined because the labor force shrank. Slower immigration has cut the supply of new workers to a trickle, and a meaningful number of frustrated job seekers have simply stopped looking. Oxford Economics expects the rate to drift toward 4.15% by year end, largely for these reasons. Beneath the noise, the labor market is balanced, layoffs are low, the quits rate is subdued, and wage growth is running a very modest 3.5%. Meanwhile, productivity is growing near 3%, but almost the entire productivity windfall is flowing to corporate profits rather than paychecks. This means workers' share of income is stagnant while margins expand. We imagine this fact will be raised more than once during the upcoming election season. While this is uncomfortable social commentary, it is excellent news for equity earnings and stock prices. Inflation. Headline inflation peaked near 3.9% in the second quarter and has begun to decelerate. Gulf oil producers throttled output during the conflict and are now racing to restart it. U.S. shale never stopped. And Chinese crude demand remains a third below pre-war levels. Having spent the spring demonstrating what scarcity looks like, the world's producers will likely spend the autumn demonstrating what a glut looks like. Alpine macros Chen Zhao thinks crude could reach the fifty to sixty dollar range. Not everything points down. Metals and materials, prices are still firming. Industrial metals are up 16% this year. In a twist few saw coming, the AI buildout is itself inflationary before it becomes disinflationary. A global memory chip shortage is raising computer prices and data center construction is pushing up household electricity bills. Set against that, wage growth is contained and housing costs, the heaviest single item in the index, should continue easing. Our conclusion, inflation stays elevated through the second half but may grind lower into 2027. The Fed, doing nothing. New chair. At the June meeting, half the voters penciled in a rate hike, and markets priced in one or two. Our view is that the Fed will likely take no action for possibly a good while. Inflation is too high to cut, the labor market is too soft to hike, and a committee this divided defaults to doing rather little, a policy stance for which, in fairness, there is considerable historical support. As an additional point, while the Fed remains an independent agency, the newly appointed chair Warsh may be quite reluctant to sign off on rate hikes heading into a critical election. With that, here is what could change our mind. Core inflation reaccelerating, wage growth pushing back above roughly 3.8%, or market-based inflation expectations becoming unanchored. If those tripwires stay quiet, so should the Fed. Meanwhile, we expect the yield curve to re-steepen over time. Short-term rates should remain level if the central bank is patient, while long rates could drift higher on overwhelming budget deficits. More on why that matters below. Theme two, AI, the second act. In April, we argued that the technology sell-off was a price problem, not a profit problem, and potentially an attractive entry point. Pausing here for a quick victory lap. What matters is that the gains have been earned the old-fashioned way. SP 500 earnings estimates for 2026 have risen 11% since January, and the market's price to earnings multiple has actually fallen since November, even as the index hit new highs. While the stock market may appear out of control, profits are growing faster than prices. But now the story is shifting. Act one of the AI boom was about building computing power, and nearly all the money flowed to the companies selling the picks and shovels, and above all, the chipmakers. Act two is about turning that computing power into revenue. The industry's free lunch era is ending. AI providers are moving from flat subscriptions to usage-based pricing. Having discovered the size of the check, they would now like customers to pick it up. BCA research calls monetization the next frontier of this bull market, and the early evidence is striking. Alphabet and Meta are using AI to accelerate the growth of their core businesses at a pace that should be impossible for companies their size. The rally is also broadening, which is healthy. Earnings upgrades now span most U.S. sectors, not just technology, and smaller companies are stirring. Alpine Macro's asset allocation team argues small caps are entering one of their rare windows of outperformance. The domestic economy is accelerating, energy input costs are falling, and financing conditions have eased. Which brings us to the signature of this quarter's positioning, diversification. While the concentrated technology trade worked well, it is now prudent to broaden portfolio holdings. We are trimming our biggest technology winners back to their intended weights and redeploying toward the next phase, the monetizers, the smaller companies, and markets abroad where earnings are inflecting. DT note. We have received several client inquiries regarding stock price levels and whether we anticipate a significant correction. In our view, stock prices are a bit high, but depending on the sector, not astronomical. From a perspective of valuation, stock prices have been higher several times over the past ten years. Remembering that prices are driven by earnings, the U.S. technology sector earnings are historically high and still climbing. With that, while it makes sense to lock in gains and diversify portfolios, we do not yet see evidence of an impending, across the board pullback. We remain vigilant in watching for what typically ends stock booms, a monetary tightening cycle. Rising rates increase the cost of the capital that funds the buildout, and the build out is the boom. That is why Fed policy tops our watch list. We should also add a second homegrown risk. Fiscal policy can accomplish the same damage without the Fed lifting a finger. A large unfunded tax cut, always a temptation in an election season, could send long-term rates soaring on deficit fears alone. Never underestimate the bond market's ability to do the Fed's job with none of the Fed's manners. Either path leads to the same place. A higher cost of capital for the companies funding the AI buildout, which is the one thing this market cannot absorb. For now, however, neither of these events are anticipated in the near term. Theme three, geopolitics, a fragile peace and a noisy autumn. Iran, a momentary pause. The 14-point framework calls for shipping through the Strait of Hormuz to reach pre-war levels by mid-July, it is behind schedule, stage nuclear negotiations by mid-August, and my personal favorite detail, Iranian insurance fees on transiting vessels, which would make Hormuz history's most heavily armed toll plaza. BCA research's geopolitical team puts roughly 40% odds on the ceasefire failing this quarter and higher odds that tensions revive after the U.S. midterms when Washington's incentive for calm expires. Both sides needed a pause, but this story probably isn't over just yet. Russia and Ukraine, the nuclear option. While the world watched the Gulf, the war in Ukraine deteriorated on two fronts, the battlefield and the Russian economy. Energy revenues are falling with the oil price, casualties are staggering, and Russia's own financial officials have reportedly told the Kremlin the war spending is unaffordable. Accordingly, investors should not assume that the comfortable stalemate of the past three years persists. Moscow has a habit of manufacturing a crisis with NATO before negotiating, and, more soberingly, Russia has formally lowered and deliberately blurred the threshold in its nuclear doctrine. While prominent voices within the Russian establishment have openly floated nuclear use in Ukraine. We do not forecast such an event. We note that its probability is not zero, and its market impact would likely generate sharp volatility. We will continue to monitor this closely. Washington Gridlock with fireworks. The midterms arrive november third. Current polling and history suggests the House likely changes hands, while the Senate is a genuine coin toss. Whatever your politics, markets have generally been comfortable with a Washington that requires compromise. Three consequences matter for portfolios. First, expect the administration to avoid disruptive foreign policy and trade moves before November and to regain its appetite afterward. Second, if either chamber flips, the odds of stimulative tax legislation in 2027 rise from roughly zero to meaningful, the fiscal concern we flagged above. Third, artificial intelligence is becoming a political issue. Rising household power bills sit right next to data center construction in voters' minds, and candidates of both parties have noticed. China, constrained and therefore quiet. The US-China trade truce should hold this quarter, less out of goodwill than because Beijing is preoccupied at home. Deflation persists, retail sales have contracted for the first time since the pandemic reopening, and stimulus has been slow off the shelf. A constrained China is context for our selective approach to Chinese assets such as technology. Investment strategy expressing these views. Core. Internationally, we are increasing allocation to Japan, which has the strongest earnings momentum of any developed market, record share buybacks, and the most persistent foreign buying in a decade. We are also replacing India equities with Chinese technology shares, which trade at roughly half the valuation of their U.S. counterparts. Tactical. Semiconductors, our best performer, are being trimmed back to their intended 5% weight after this year's approximately 80% run. The thesis is intact, and we simply refuse to let winning become a risk concentration. The proceeds fund a new position in communications services, the primary vehicle for the AI monetization theme. We are restructuring our utility exposure to concentrate on electric utilities, the segment most directly levered to grid expansion and data center power demand, while acknowledging the political headline risk around power prices heading into the election. Gold remains a long-term conviction, but for more risk-tolerant portfolios, we are shifting the near-term emphasis from the metal toward gold mining companies that trade at attractive multiples. Industrial metals and nuclear slash uranium positions are maintained. The demand story, AI infrastructure, electrification, rearmament, has outlived the war that spotlighted it. Thematic. Clean energy, robotics, and water are unchanged. Long horizon positions designed to compound quietly, independent of the quarterly news cycle. Fixed income. Apart from slight increases in allocation, there are no major changes. Our multi-sector income core and short duration reserve remain in place. The short duration position doubles as near liquid dry powder we can deploy quickly into equity weakness. The rate curve has flattened so far this year, but our position remains that we will see it re-steepen. A. Markets have priced in two Fed rate cuts this year, and we are not convinced this will occur. B. Global debt levels remain elevated, which should put upward pressure on long-term yields. Risks in what we are monitoring. In rough order, of how much sleep they cost us. A ceasefire collapse and second oil spike, the scenario that would invalidate our inflation view. The tripwires in theme one are the early warning system. Fed that elects to tighten into the aftermath of a supply shock or a fiscal package that sends long rates soaring without the Fed's help. A hyperscaler stepping back from AI investment on funding cost concerns. A significant point of failure for the market's dominant theme. The coming wave of mega IPOs, and more importantly, their lockup expirations in 2027, in 2000, it was the flood of newly unlocked shares, not the IPOs themselves, that marked the top, a significant Russian escalation aimed at dividing NATO and weakening Ukraine. The wealth effect in reverse, the top fifth of households by income, now drives over half of discretionary spending, so an equity correction would hit consumption harder than in past cycles. Conclusion. The structural forces we identified entering 2026, including the AI productivity cycle, the capital investment supercycle, energy security, American economic resilience, remain intact. What has changed is the expression. We are harvesting concentration, broadening the base, and keeping our hedges through a piece we consider rentable rather than ownable. If this letter has a signature, it is discipline, trimming winners back to their intended weights, retiring a forecast the facts overtook, and publishing exactly what would change our mind. As always, we welcome your questions.