The Rally Beneath the Surface
The current market rally has continued in a way that looks almost unstoppable, even against a backdrop that would normally give investors pause — a higher inflation picture and higher interest rates. The small-cap Russell index has been left out of the move somewhat, but the broad rally has persisted regardless.
If you look only at the headline indices, you would conclude that the entire year has been nothing but sunshine and rainbows. The reality under the hood is more complicated. The Magnificent 7 names — though they performed well in the most recent morning's session — have actually been laggards for much of the year. What has genuinely powered the market higher is the breadth and depth of participation across the broader market, alongside the AI trade.
This is best captured by the contrast between the equal-weighted and cap-weighted versions of the S&P 500. Coming into 2026, the key anticipated theme was fundamental earnings, and that became the defining story of the first quarter. The equal-weighted S&P (the RSP ticker) has performed very well, outperforming the cap-weighted index by a meaningful margin — RSP up over 2% positive while the cap-weighted side was down about two and a half percent over the trailing 30 days. The takeaway is clear: it is the breadth and depth of the market, rather than a handful of mega-cap names, that is currently driving performance.
Watching the Consumer Into Earnings Season
With earnings serving as such a large contributor to the upside move, the question becomes what to expect from the upcoming season. The market is currently in a bit of a lull, but prime earnings season resumes after the following week.
The single most important variable to watch is the consumer. A great deal has been made of the pressure consumers have supposedly been under. The University of Michigan sentiment report released on a recent Friday came in a little better than had been the case. But sentiment surveys only capture what consumers say. It is far more revealing to watch what they actually do — and on that score, the data has been strong. Retail sales numbers have been robust, and consumer spending, including the PCE figures, has been really quite good.
Because of this, there is no reason to expect a major change in consumer behavior. The quarter may not be the banner result that the first quarter delivered, but strong earnings should still appear in the second and third quarters through the summer. The one caveat is that some choppiness is likely. This is expected to come out of the new Federal Reserve Chairman Walsh's first meeting, as the markets settle down and adjust to the fact that he is not jumping to the dovish conclusion that many investors had been anticipating from that first meeting.
The AI Trade: Suppliers Versus Spenders
A central concern hanging over the market is whether AI represents a bubble. Micron's earnings pushed some of those bubble conversations further down the road. While it is reasonable — and indeed important — for investors to take a cautious approach to any strategy, the AI trade is best understood through one fundamental distinction: suppliers versus spenders.
The spenders — the hyperscalers — have not performed well this year. The market has been punishing them, fundamentally because their earnings are down and there are genuine concerns about how much they are spending and whether they are overspending. The suppliers, by contrast, sit on the other side of the coin, and their gross margins appear to have no limits. Micron came in with gross margins above 85%.
The reason this trade should continue to be a positive one — notwithstanding the normal and healthy cyclical pullbacks that may occur — lies in an aspect of capital expenditure that is perhaps under-reported. The headline capex numbers are staggering: roughly $750 billion this year, over a trillion next year, and a cumulative $11 trillion between now and 2030. But the truly important detail involves a specific bottleneck: DRAM, and more precisely HBM (high bandwidth memory).
Only about three companies in the world can manufacture the kind of memory chips required to build out these data centers — Micron, SK Hynix, and Samsung. Looking specifically at next year, an estimated 30% to 40% of all that capex is expected to be focused on this single bottleneck. This is the other side of the coin that the bubble narrative tends to ignore — there is another story to tell, and it is one of constrained, essential supply.
Where the Opportunity Lies
Given that this part of the narrative is underappreciated, the question of where the greatest benefit can be found depends heavily on time horizon.
For short-term investors, the suppliers carry clear upside. Micron fits squarely into that category. Even Nvidia, trading at what looks like depressed forward earnings, belongs there — its valuation reflects the pressure from the many hedge funds betting against it to execute their hedging, but the underlying supplier story remains attractive.
For long-term investors, however, it is hard to ignore the hyperscaler names that have been beaten down over the past month and a half — the Amazons and Microsofts of the world. Amazon's valuations, measured against historical averages, are genuinely depressed. That creates real opportunity for investors willing to adopt a long-term perspective.
Building a Durable Portfolio
A recurring feature of market commentary right now is hedged, tentative language — words like interesting, unique, uncertain, and cautiously optimistic. This hesitation reflects the discomfort of a long rally: nobody wants to call the top, yet nobody wants to lead people into a dangerous situation either.
The better goal is not to outright beat the S&P, but to build a durable portfolio. In practice, this returns to the theme of market breadth, because breadth carries diversification within it. When earnings are good across many sectors, a portfolio can be built across many sectors. That is the foundation.
The danger for retail investors specifically is getting caught up in FOMO. FOMO is not an investment strategy, and chasing the market is not an investment strategy. The recommended alternative is systematic investing. When there has been a big rally and an investor is worried about being overpriced in any given sector, the suggested approach is a 30–40–30 method: pick a time frame — three months, six months, or a year — and deploy 30% of the intended capital at the start, add another 40% at the halfway point, and commit the final 30% at the end. This spreads entry risk across time rather than betting everything on a single moment.
The Role of International Equities
International equities do have a place in a durable portfolio. There was a significant rotation trade at the turn of 2025 into 2026, during which international stocks actually outperformed many of their U.S. domestic counterparts. Traditionally, the recommended allocation has been no more than 10% to 15% of a portfolio, though this can vary depending on the specific sectors and the approach taken. Given the importance of the memory theme discussed — which spans international names like Samsung and SK Hynix — international exposure certainly has a justified place.
