The Cost of Great Expectations
By Crest Capital Advisors on June 29, 2026
Dow: 0.60% to 51,876.11
S&P 500: (1.95%) to 7,353.37
Nasdaq: (4.60%) to 25,297.62
Russell 2000: 1.02% to 3,009.85
Bitcoin: 60,000
10 Year Yield: 4.37%
Outperformers: Healthcare 7.89%, Real Estate 3.95%, Utilities 3.91%
Underperformers: Communication Services (6.22%), Technology (5.40%)
Major US equity indices were mixed this week following last week’s higher performance. However, breadth was very positive as the more defensive Dow Jones Industrial Average was higher for the week, and the broadening into small caps continued with a 1.02% positive week for the Russell 2000 index (more on this in the pages below).
If there was a defining theme this week, it was not inflation, interest rates, or geopolitics. It was expectations. Markets are no longer asking whether artificial intelligence will reshape the economy. They are debating how quickly, how completely, and which companies will capture the spoils. When expectations become this elevated, good news is no longer enough. Companies must deliver exceptional results simply to justify where their stocks are already trading.
Micron provided a perfect example. Heading into earnings, the company had become the latest litmus test for the AI infrastructure trade after its shares quadrupled this year on surging demand for high-bandwidth memory. The company reported outstanding results and reinforced the narrative that AI-related demand remains exceptionally strong. Yet the market’s reaction was anything but straightforward. The initial rally quickly faded as investors shifted their attention from what Micron accomplished to whether expectations had simply become too ambitious. The stock ended the week almost dead flat from last Friday’s close.
SpaceX tells a similar story. The company remains one of the most extraordinary businesses ever brought to public markets, but after an explosive debut, its shares slid sharply this week despite little change in the long-term investment thesis. Investors suddenly found themselves asking a different question. Not “Is SpaceX an incredible company?” but “How much of that future is already reflected in today’s price?”
This is often how mature bull markets behave. Fundamentals continue improving, earnings remain strong, and secular trends stay intact. The challenge shifts from finding great businesses to finding great businesses whose future has not already been fully discounted by today’s valuation.
None of this argues against AI or the companies building it. The AI infrastructure cycle continues to gather momentum, and the long-term opportunity remains substantial. It simply means the bar has moved higher. When expectations reach escape velocity, even outstanding execution may only be enough to keep pace rather than move prices materially higher.
In markets, there is a meaningful difference between buying a great company and buying great expectations. This week served as a reminder that the latter can be considerably more expensive. Please enjoy our corporate expectations meme in the meantime.
Index Shenanigans Re-shuffling
One of the quirks of index investing is that success eventually comes with a penalty. As part of this week’s annual Russell reconstitution, many of the companies responsible for driving the Russell 2000 index higher during the first half of the year will no longer qualify as small caps. Having appreciated so dramatically, their market capitalizations now exceed the index’s eligibility threshold, earning them a promotion to the Russell 1000 index.
Take a look at the chart below. The ten largest contributors to the Russell 2000’s performance have generated more than 25% of the index’s year-to-date return. Expand that universe to include all companies whose market capitalizations have grown beyond roughly $10 billion, and those soon-to-be graduates account for nearly 46% of the Russell 2000’s gains this year.
In other words, almost half of the index’s performance is about to leave the index. That creates an interesting challenge for investors evaluating the recent “broadening” narrative. On the surface, small caps have finally begun to outperform. Underneath the surface, much of that performance has been driven by a relatively small group of technology, electronics, and industrial companies that are no longer particularly small.
By next week, the Russell 2000 will be a meaningfully different index than the one that generated this year’s returns. The irony is hard to miss. The companies that proved themselves worthy of being called winners have become too large to remain small caps. Perhaps that’s exactly how the system is supposed to work.
It also serves as a useful reminder that index returns and index composition are constantly evolving. Sometimes the strongest performers don’t simply move to the top of the leaderboard. They graduate from the league altogether.
About that Emerging Markets Outperformance
One of the more popular trades this year has been rotating into international and emerging market equities. On the surface, it makes sense. Valuations are lower, the US dollar has weakened (though showing strength in the past few weeks), and international markets have finally started to outperform after years of lagging. There is just one catch.
Many investors believe they are diversifying away from technology when, in reality, they are simply buying a different part of the same AI ecosystem.
Take the iShares MSCI Emerging Markets ETF (EEM). Nearly half of the portfolio is allocated to the technology sector, with semiconductor companies representing the single largest industry exposure. Taiwan Semiconductor alone accounts for roughly 13% to 14% of the entire index, while Samsung Electronics and SK Hynix add another meaningful allocation. Together, those three companies account for nearly one-fifth of the portfolio.
The chart above illustrates how dramatically that semiconductor exposure has grown. A decade ago, chips represented roughly 5% of the index. Today, they account for approximately 27%. Even Vanguard’s FTSE Emerging Markets ETF (VWO), which classifies South Korea as a developed market and therefore excludes Samsung and SK Hynix, has seen semiconductor exposure climb to roughly 22%. The implication is straightforward.
Much of this year’s emerging market outperformance may not be a broad vote of confidence in developing economies. It may simply be another expression of the same AI trade that has dominated US markets. In other words, investors rotating out of Nvidia and into emerging markets may discover they never really left the semiconductor trade at all.
That is not necessarily a bad thing. The AI supply chain is global, and many of its biggest beneficiaries are headquartered outside the United States. It is, however, a useful reminder that diversification is not always what it appears to be. Sometimes a different geography simply gives the same investment theme a new passport.
Peak Margins? Or a New Paradigm
One of the quieter stories unfolding beneath the surface of this bull market has been the relentless expansion in corporate profit margins.
Consensus expectations now call for the S&P 500 to generate operating margins of roughly 20.5% over the next twelve months, the highest level on record. As the chart illustrates, previous cycles have typically found resistance once margins approached the mid-to-high teens. Each prior peak was followed by a period of normalization as competition increased, costs caught up, or economic growth slowed. This cycle appears different.
The composition of the S&P 500 has changed dramatically over the past decade. Technology companies, many of which enjoy software-like economics, high recurring revenue, and minimal incremental production costs, now account for roughly 40% of the index. Unlike manufacturers or retailers, these businesses can often grow revenues much faster than expenses, allowing margins to expand for longer than traditional industries ever could. Artificial intelligence may be accelerating that process.
Many companies are only beginning to realize productivity gains from AI through software development, customer service, automation, and internal workflow improvements. If those efficiency gains continue to compound over the next several years, today’s record margins may prove less of a ceiling and more of a new baseline. Of course, history argues for caution.
Markets have a habit of extrapolating favorable trends further than they ultimately persist. Every previous margin peak has eventually given way to some degree of mean reversion, even if only temporarily. Investors should therefore ask whether they are witnessing the start of a structurally more profitable corporate America, or simply another point where expectations have gotten a bit ahead of reality.
The answer may determine whether today’s premium market valuations prove justified.
Economic Funnies
Crazy Stat(s) of the Week
- As of June 22nd, 2026, semiconductor ETFs are averaging $42 billion traded per day. See the chart below.
- According to KFF, an independent non-profit organization focused on national health policy, the average US family health insurance premium has increased 365% since 1999, that’s a 6.1% annualized rate of increase. US CPI inflation over the same period has increased by 2.6%.
Quote of the Week
“We currently do not have line of sight as to when memory supply will be able to catch up with increasing demand.”
– Micron Management, Q3 FY 2026 Earnings Call
Calendar of Events to Watch for the Week of June 29th
We have a holiday-shortened week ahead with US markets closed on Friday to observe the Independence Day holiday and a bit of a busy week leading up to that with a handful of earnings prints and economic data focused on the employment picture. The highlight of the week will be Thursday with the arrival of the Nonfarm Payrolls report. Other than that, we welcome the turn of a new month and quarter and note that we’re just a few short weeks away from the kickoff of Q2 earnings!
Stay safe, enjoy the festivities/barbecues/fireworks, and the celebration of sport and the world coming together as the World Cup advances to the knockout rounds. It’s been an incredible event/tournament so far, and the stakes ratchet up significantly next week! Happy 4th of July, all!
Monday 6/29 – The Dallas Fed Index is expected to come in at 3.0, up slightly from 0.40. Both readings are barely above the 0.0 contraction line.
Tuesday 6/30 – The May JOLTS Job Openings data is expected to show 6.975 million job openings, down quite a bit from 7.62 million last month. The prior Fed used to believe elevated job openings are a potential precursor to higher wages and, therefore, higher inflation. Lower openings were always considered market bullish in the sense that the Fed was less likely to raise rates. The S&P/Case-Shiller Home Price Composite for April is expected to show a 0.9% increase.
Wednesday 7/1 – The ADP Employment Survey is expected to show 92.5k net new private sector jobs created last month. June ISM Manufacturing is expected to come in at 53.9, down a tick from 54.0 last month.
Thursday 7/2 – The June Nonfarm Payrolls report will be out a day early this week due to Friday’s holiday. Economists are looking for 87.5k net new jobs, down quite a bit from 172k last month but still within a balance range. The unemployment rate is expected to remain unchanged at 4.3%. Hourly earnings are expected to post a 0.3% increase.
Friday 7/3 – US Markets will be closed in observance of the July 4th Independence Day Holiday. Happy 250th birthday to the USA!
Source: MarketWatch / FactSet (June 2026)
