Markets have delivered strong gains in 2026, supported by unusually powerful earnings growth and broad participation across large-, mid-, and small-cap stocks. But beneath the surface, risks are building. CIO Scott Opsal examines the competing forces keeping Leuthold’s Major Trend Index neutral, from strong technicals and earnings momentum to elevated valuations, concentrated AI-driven growth, and potential distortions in corporate profits.

Read this week's Major Trend. 

July tested leadership across the strategies as momentum reversed and the AI trade turned choppy. Core stayed resilient, Select Industries absorbed the rotation with help from newly added groups, and Grizzly held essentially flat despite a difficult backdrop for shorts.

The second quarter of 2026 experienced tremendous returns, ranging from 8% for large value up to 26% for small growth, with the nine style boxes recording an average return of 17%.  The differences in style box returns are of such a scale that they had a meaningful impact on the performance of active portfolios across the styles.

Read this week's MTI.

During July, the strategy added positions in two groups that have been viewed as AI disruption targets: Human Resources & Employment Services and Systems Software.

At the end of June, the 20 firms belonging to Semiconductor and Semiconductor Equipment industries accounted for two-thirds of the S&P 500’s +13% YTD return. But in July, those high-flying names were down an average of 18% and, surprisingly, the S&P 500 was flat for the month. The top-ten largest firms in the index, which are laggards YTD (led by MSFT, +25%), spackled over the momentum reversal.

After a 26% gain in Q2, the momentum-heavy RB Growth segment fell an eye-popping 14% in July. On the other hand, RB Value managed a 5% gain. This was the best monthly return for RB Value relative to RB Growth since February 2001.

This is the narrowest discount we’ve registered in the past year. YTD, Small Cap stocks have generally outperformed Large Caps for the first time since 2020. EPS growth, which has been excellent for both size tiers, is slightly better in the Large Cap space, keeping a lid on that P/E estimate.

The Up/Down ratio for the first month of Q2 reads 2.79—which is notably well above the long-term average, but in the same ballpark as the previous two “one-month” readings. In the current boom, the story of YOY earnings growth has been pervasive across market caps—something that was sorely missed the previous two years.

The balance of risk still tilts toward overheating and higher inflation for the next few months.

The renewed backup in bond yields has been driven by higher real yields and lower breakeven rates. This dynamic typically emerges when the market is expecting a hawkish Fed.

The KOSPI Index crash from its June all-time high has been as breathtaking as its meteoric upsurge beginning in 2025. Korean retail investors are the biggest contributors and victims of the volatility. In fact, they have a long history of spectacular speculative misfortunes.

In contrast to most factor ETFs, Momentum is a chameleon with the potential for drastic allocation shifts. Since 2013, every sector has experienced a dip to a near zero weight in the SPX Mo index, while at some point, six of 11 made up 25-67% of the weight.

The Russell 2000’s July collapse (-3%) was the first time since its ’25 low that it trailed SPX by more than a percentage point. A single month settles nothing. But it was enough to send us under the hood, where a couple of things caught the eye: breadth and lack of staying power.

Trading rather cheaply on some metrics, small caps have space for improvement even if the S&P 500 holds up. Still, given the index’s vast earning power amassed from the AI data-center boom, we are not ready to call a major turn in the large-cap/small-cap horse-race just yet.

The economy feels like it is doing fine, but AI capex is carrying the load and, sans that, GDP has muddled along for three straight quarters.

S&P 500 >30% earnings growth occurred only two other times since 1990—both were rebounds out of severe downturns. Today’s expansion is propelled by a narrow list of firms exposed to the AI data-center theme; an eventual loss of confidence in such AI outlays could prove disastrous for earnings and stock prices.

In an unusual twist, one of the cheapest industries today is part of the hottest theme piloting the bull market higher: The world’s leading memory chip companies can be purchased at P/E multiples less than 7x earnings.

Read this week's Major Trend.