Why We're Taking Profits After a Historic Rally

Market commentary

• The US economy has remained resilient over the past three years, despite challenges such as tariffs, elevated inflation, and the recent conflict involving Iran. Business activity and the labor market both remain robust.

• Market breadth has returned, supported by strong earnings. Equal-weight and small-cap stocks have regained leadership, driven by double-digit median earnings-per-share (EPS) growth across the S&P 500. This indicates that gains are not limited to a few large companies.

• S&P 500 earnings revisions breadth is at its highest since 2021, and the index has recorded six consecutive quarters of double-digit earnings growth. The median S&P 500 company is projected to achieve double-digit EPS growth and 7% sales growth.

• These factors have supported a pro-risk environment for most of 2026. The market rotation we have discussed for some time appears to be underway. The Mag 7, on an equal-weighted basis, are down slightly this year, while equal-weighted strategies, emerging markets, and cyclical or real asset sectors are leading the market.

• Against this backdrop, market leadership has broadened beyond the Mag 7 which now dominate the index at levels rarely seen in modern market history.

• Additionally, hyperscalers in this group are funding significant AI capital expenditures through debt and equity issuance, which pressures free cash flow and reduces capacity for buybacks.

Our latest Dynamic Asset Allocation Rebalance

• In our latest rebalance, we moved from an overweight to a neutral position in equities. This marks a significant change from the past one to two years, when we maintained an overweight stance. Following a strong market advance, future returns may become more dependent on security selection and risk management.

• We remain constructive but prefer mid-cap and equal-weight strategies, financials, industrials, materials, and select international exposures, particularly in emerging markets.

• Concerns are rising about the Mag 7’s concentration in market-cap-weighted indices and their declining free cash flow, which was previously a key reason to own these stocks.

• The AI sector continues to exhibit winner-take-most characteristics, with leading companies aggressively pursuing market leadership by tapping debt markets and raising capital through equity offerings. This trend is a significant concern for us which we continue to monitor closely.

• Combined with the Mag 7’s involvement in funding mega-cap IPOs, the upside for large-cap growth stocks and the index may present a less favorable risk/reward profile.

• We are experiencing an exceptional US earnings season, but this is a possibility that earnings growth is approaching a cyclical peak. Earnings revisions breadth at the index level has likely peaked, in line with seasonal trends. Semiconductor earnings revisions breadth is also approaching historical highs.

• We continue to hold real assets as the cornerstone of our alternative’s allocation. Real assets have remained among the stronger-performing asset classes and have historically offered differentiated sources of return. We have consistently believed that inflation would remain structurally higher for longer, a view that appears to be increasingly reflected in market pricing. We launched our Real Assets SMA over five years ago. For more information, see our factsheet: https://www.astoriaim.com/strategies

• It is often overlooked that real assets, such as gold and commodities, have been among the best-performing asset classes in six of the past eight years. https://x.com/AstoriaAdvisors/status/2060472030709858577?s=20

• In fixed income, we favor a dynamic, active approach. We prefer to keep our duration shorter than the benchmark, partly due to deficit risks and as a hedge against equity risk. Within fixed income, our positioning emphasizes active MBS, where both yield levels and spreads remain attractive, as well as active multi-sector exposures not constrained by the Agg, and active core allocations.

• The Fed’s tone has become more hawkish under new Chair Kevin Warsh. His first FOMC statement was shorter than previous ones, he declined to submit his own dot-plot entry, and the median 2026 projection now points to a rate hike rather than a cut.

Liquidity & Sentiment

• 0DTE (zero-days-to-expiration) options are at all-time highs, 2x levered stock ETFs are experiencing significant inflows, and demand for structured bets via Polymarket, Kalshi, FanDuel, and DraftKings remains strong. Potential risks to this environment include a significant economic downturn or an increase in job losses.

• Bulls argue that front-end rates are high in this cycle compared to the post-GFC period, when rates were near zero, and that the Fed has tools to support growth if needed. While that argument has merit, it is prudent to take profits and position for lower volatility after such a strong year to manage portfolio risk which may support a greater emphasis on risk management.

• Liquidity is tightening. The Fed’s balance sheet support has decreased by roughly 75% from the pace set last December. This is part of a broader liquidity environment that has historically led risk-asset performance by several months and requires ongoing monitoring for liquidity-sensitive exposures.

Sentiment

• Cross-asset correlations are at cycle highs. Nearly every alpha-seeking trade is now linked to the AI cycle. Leverage appears elevated in the system, and any disruption to the AI trade could have widespread market effects.

Interesting Stats

• The Mag 7 stocks, on an equal-weighted basis, are down slightly on the year

• Margin debt is $1.3 trillion, a record.

• Levered ETF assets have reached $200 billion, a record, per Todd Sohn of Strategas Research.

• ETF flows are on pace for their strongest year ever, notable given the rally of the past three to four years.

• The South Korea Equity Index is up 260% since January 2025.

• Technology and telecommunication services stocks now make up 52% of the S&P 500, a record.

• NVIDIA’s $5 trillion market cap now exceeds the GDP of India or Brazil. This highlights the extraordinary concentration in today’s equity market. Can one company truly be worth more than an entire nation?

• Small-caps have just completed their best six-month period in 35 years, according to Barron’s. Notably, a wirehouse removed small-caps from its strategic asset allocation a few years ago, which in hindsight marked the market bottom.

Points to Consider

• Rather than focusing solely on the timing of the Fed’s next policy move, investors may benefit from considering broader portfolio construction and long-term strategic asset allocation.

• Scenario analysis that evaluates a range of potential outcomes and their associated outcomes and their associated probabilities can be a useful framework for portfolio construction.

• Following the strong performance of the S&P 500 over multiple time horizons, investors may wish to evaluate portfolio diversification and overall risk exposures.

Our Q2 factsheets have been updated. You can view them here: https://www.astoriaim.com/strategies

Important Information

There are no warranties implied. Past performance is not indicative of future results. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed.

This information contained herein has been prepared by Astoria Portfolio Advisors LLC on the basis of publicly available information, internally developed data, and other third-party sources believed to be reliable. Astoria Portfolio Advisors LLC has not sought to independently verify information obtained from public and third-party sources and makes no representations or warranties as to the accuracy, completeness, or reliability of such information. Astoria Portfolio Advisors LLC is a registered investment adviser located in New York. Astoria Portfolio Advisors LLC may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.

FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

Past performance is not indicative of future results.