Friday Focus – July 17, 2026

5 minute read

Smart insight and clear visuals that matter – what we’re watching now and how intention and conviction shape our portfolios.

Markets

The market is sitting within 2% of its all-time high, and part of what makes this recent pullback notable is how little disruption investors have experienced over the past four years. The Goldman Sachs chart below puts the current rally into a historical perspective, comparing four years as the timeframe going back to 1928.

Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research, and Goldman Sachs Asset Management. As of July 6, 2026. Chart shows the historical distribution of returns for the S&P 500 index over a four-year cycle dating back to 1928. 'We' refers to Goldman Sachs Asset Management. For Illustrative Purposes Only. 

The market strength has been supported by what we believe to be a significant earnings growth, as highlighted in another Goldman Sach’s chart below. One observer who contradicts this opinion, Longleaf Partners, has said that today’s environment reflects both an earnings and multiple expansion bubble, noting that “big cap tech” companies are amortizing their AI investments, while the companies selling into the AI buildout are recognizing revenue without the mitigation or smoothing of a depreciation schedule.

This is our case for diversification. We do not believe we need to bet that this rally will continue indefinitely, or that we need to assume a major accounting adjustment to S&P 500 earnings, because our portfolios are not soley invested in the S&P 500. Over the past 3-5 quarters, we have striven to make a significant effort to increase exposure toward real estate, and this year we feel that positioning has served us well. Additionally, we’ve invested in commodities, the energy sector represented just 3.7% of the S&P 500 Index but generated 14.7% of the index’s total earnings last quarter.

State Economies

California’s economy grew at a 3.7% annualized rate in the most recent quarter, making it the second-fastest growing state economy in the nation, behind only Washington, which may offer some insight into where much of the recent growth is coming from. If you’re focused on national headlines, you may miss some important context. Here are a few facts worth keeping in mind:

• Following the 2020 U.S. Census, California lost one seat in the House of Representatives, reducing its delegation from 53 to 52 seats. While historic, it marked the first time in the state's 170-year history that it lost a House seat. California still maintains the largest House delegation in the nation, in addition to its two U.S. Senators.

• As far as the California economy goes, UCLA’s Anderson Forecast notes that California still hosts more S&P 500 headquarters than any other state, with 69 in 2026, up from 67 a decade earlier (Source: UCLA Anderson Forecast, 2026). While some of our businesses have left the state, many continue to start and grow in California, gaining share

• California experienced a net migration loss of roughly 89,000 residents between 2020 and 2025, according to official California Department of Finance. On a population base of 40 million people, that represents less than 1% of the population, or about 5.5 basis points per year. While Los Angeles did lose residents, many stayed in the state and relocated to other parts of the state.

Tech

Charts from A16Z below show that over the last 30 trading days, both the top quartile and median iShares Software ETF (IGV) stock have outperformed the ETF as a whole.

• The past year, the median tracks the overall ETF much more closely. It was only around the turn of the calendar year that performance quartiles began to disperse. (Chart 1)

• From a revenue growth perspective, there is basically no correlation between growth and recent performance. (Chart 2 and 3)

• The top and second quartile performers tend to be dominated by (1) cyber/observability; and (2) vertical SaaS. (software purpose built for single specific industry)  (Chart 2 and 3)
  
• The bottom two quartiles, by contrast, are some combination of horizontal SaaS (Software that serves all businesses) cloud/infrastructure, and the “other” category, which includes marketplaces, ad tech, and point solutions. (Chart 1)

Chart 1

Chart 2

Chart 3

A16Z points out the shift from token-maxxing to token-optimizing. (Chart 4)

•  While frontier models are increasingly expensive to train, the marginal benefits of those frontier improvements may not be enough to persuade customers to absorb the additional cost. Rather than maxxing out on the latest and greatest tokens, customers may instead downshift where they can to cheaper, less-powerful models (including open-weight models).

• The cost of intelligence is falling rapidly, and that it appears to have positive implications for AI demand. The Jevons Paradox continues to hold: the cheaper AI gets, the more people/firms want to use it.

Chart 4

Real Estate

The National Association of Real Estate Investment Trusts case study on REITs historical total return performance relative to 10 yr show that elevated or rising interest rates do not necessarily equate to weak, or poor, real estate performance.

• Historical data shows that REITs have generally enjoyed positive total returns in both rising and falling interest rate environments with the economic backdrop playing a critically important role.
• As shown in the chart below, over a rolling four quarters since 1992, REITs posted positive total returns in 77.4% and 78.7% of rising and declining interest rate periods, respectively.
• Strong GDP growth and significant reduction in new supply continues to drive real estate demand, occupancy, and rent growth, which could override the headwinds of higher borrowing costs. An example could be drawn from Prologis’ recent earnings report. The largest industrial REIT, upgraded its outlook for industrial market fundamentals.
  • Core FFO grew 12% YoY and have raised its guidance by 2% at midpoint.
  • Signed over 67 million square feet of leases, a record level. They point out that absorption expected to outpace new completions, a favorable suppy-demad balance.
  • Increased owned & managed period end occupancy to 95.5%, a 20-basis point increase compared to March 31, 2026.

Economic Calendar: Week Ahead (Eastern Time)

Mon, 7/20 @ 10:00 am: Leading Indicators

Thur, 7/23 @ 8:30 am: Weekly Jobless Claims

                     @ 11:00 am: Kansas City Fed Survey

Fri, 7/24 @ 9:45 am: U.S. Flash Manufacturing PMI

                  @ 9:45 am: U.S. Flash Services PMI

                  @ 10:00 am: New Home Sales

The Team Behind Friday Focus

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