Smart insight and clear visuals that matter – what we’re watching now and how intention and conviction shape our portfolios.
AI Continues to Drive Earnings Growth
Second-quarter 2Q26 earnings season has been stronger than recent quarters, with nearly 80% of MSCI USA companies having already reported and 85% beating earnings expectations. S&P 500 second-quarter EPS grew 40.6% year-over-year, marking its fastest pace outside of the COVID period since the Global Financial Crisis (GFC).
EPS growth for the S&P 500 AI basket is projected to reach an annualized 48% over 2026–2027, driven primarily by memory and packaging, compute, and AI servers. We believe this underscores the AI capex cycle as the dominant engine of earnings expansion, even as non-AI sectors continue to post respectable gains.
Real yields return to 2.5%
Since the GFC through post-COVID recovery, we have become accustomed to a world where debt was relatively inexpensive and 10-year real yields (TIPS) remained below 1%, and at times even negative. Today, real yields have returned to 2.5%.
While the initial move to 2.5% in 2023 was fueled by improving growth expectations and enthusiasm around the AI boom, we believe today’s environment is different. The current move appears to be driven by an expanding term premium, now around 1%, reflecting mounting fiscal concerns. With a Warsh-led Fed likely to take a more hands-off approach, this term premium probably has little reason to compress without credible fiscal restraint and contained inflation risks.
Unless debt markets experience significant stress from sustained government and AI-related borrowing, triggering a recession, it would seem higher real yields are here to stay.1
Financing Costs Are Reshaping Real Estate
The chart below from Cohen & Steers and Green Street shows general cap rate trends across major real estate sectors. One of the most important takeaways is the relationship between cap rates and borrowing costs, often referred to as positive or negative leverage.
Positive Leverage: Positive leverage occurs when cap rates exceed borrowing costs. Positive leverage allows for accretive equity returns through the use of debt.
Negative Leverage: Negative leverage occurs when cap rates are below borrowing costs. Negative leverage can be dilutive to equity returns and is generally only attractive when strong NOI growth is expected.
Office, Retail, Medical, and Lodging currently show having positive leverage, while others like Multifamily, SFR, Storage, and Industrial, remaining in the negative leverage territory.
We feel it is worth noting the borrowing cost is approximately 6% all-in. With many real estate funds charging a 5-6% preferred rate, it makes sense GPs would typically be highly incentivized to raise capital for retail funds.2
California Shining
1 Jefferies Global , August 13, 2026
2 Cohen & Steers, Q2 2026
3 Wall Street Journal, August 20, 2026
Tues, 8/25 @ 9:00 am: S&P Cotality Case-Shiller Home Price Index
@ 10:00 am: New Home Sales
@ 10:00 am: Consumer Confidence
Wed, 8/26 @ 8:30 am: Durable Goods
@ 8:30 am: GDP, Second Estimate
@ 8:30 am: Personal Income, M/M%
@ 8:30 am: Consumer Spending, M/M%
@ 8:30 am: PCE Price Index and PCE Core Price Index, M/M% and Y/Y%
Thur, 8/27 @ 8:30 am: Weekly Jobless Claims
@ 8:30 am: Advance U.S. Trade Balance in Goods
@ 8:30 am: Wholesale and Retail Inventories
@ 11:00 am: Kansas City Fed Survey
Fri, 8/28 @ 9:45 am: ISM – Chicago Business Survey – Chicago PMI
@ 10:00 am: University of Michigan Final Consumer Survey
Mary Ahn
Investment Research and Portfolio Strategy Manager
Cal Jones, CFA
Managing Director of Fixed Income
Eric Speron, CFA
Managing Director of Equities
Alton Tjahyono, CFA
Sr. Investment Strategist