Weitz Investment Management Q2 2026 Shareholder Letter
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Beyond the AI Boom
In the second quarter, the stock market resumed its uptrend after a sharp 1Q decline triggered by the war in Iran. Market returns continued to be dominated by AI-related technology stocks as the S&P 500 gained 15.2%. Our equity funds delivered positive returns but trailed the index, not fully participating in the narrow, AI-driven market leadership (see our Quarterly Commentaries for fund-specific information).
The brightest stars of the “AI trade” were computer chips, both processing and memory. The SOX Semiconductor Index rose 88% in the quarter and 101% in the first half. These gains inflated the semiconductor group to 19% of the capitalization of the S&P 500. Depending on the definition, the broader technology sector now accounts for roughly 40–50% of the S&P 500.
This concentration of investment capital in a narrow group of stocks is reminiscent of the “Tech Bubble” of the late 1990s. This period saw the ascendance of the Internet, and all things “tech-media-telecom” (TMT) were must-owns. The vast majority of other stocks languished even though many were enjoying strong growth and were bargain-priced. Nobody cared.
The good news from our point of view is that when the feeding frenzy ended, the (formerly) hot stocks came back to Earth, and the wallflower stocks came to life. This is a typical pattern when one sector becomes over-hyped and over-owned. We may be seeing the beginnings of a similar transition in market leadership, as the chip stocks began to come under selling pressure towards the end of the quarter. We own some terrific businesses that are ready to receive the investor attention they deserve.
Investing in an Invisible Future
With the emergence of AI “chatbots” and “agents, ” our crystal ball has become unusually opaque. Companies are spending unprecedented hundreds of billions on computing power and infrastructure. AI models are getting “smarter” at an exciting/alarming rate. Early adopters of AI are having astonishing results, but they are finding that the costs of using the models can be much higher than expected. Given the uncertainties as to profitability, return on capital investments and disruption of both business models and job security, anecdotal evidence can support both fondest hopes and greatest fears. This is such an unusual time, it might actually be appropriate to utter the phrase, “This time is different.”
Our investment philosophy calls for appraising companies’ business values and buying shares only when they are available at an attractive price. This process gets much more difficult when the world is changing so fast. Fortunately, human nature does not change and inertia is powerful in most businesses and institutions. Nevertheless, we are trying to be both imaginative and humble as we update our valuation models.
All of our companies will be affected by AI, even the aggregates (“rocks and gravel”) companies, but most are at some distance from the epicenter of the AI revolution. We do have significant exposure to four of the major players—Alphabet (Google) (GOOGL), (GOOG), Microsoft (MSFT), Amazon (AMZN) and Meta (Facebook) (META). Each is involved in multiple ways. Three are “hyperscalers, ” offering cloud computing services. They all design some of their own processing chips for their own use, and in some cases, for sale to others. They are significant users of AI in their own businesses. Investors have high expectations for these companies but also harbor fears that future profitability will disappoint.
Beyond the AI Boom
These mixed feelings are evident as “risk on” and “risk off” days make for extreme volatility. We feel good about their long-term futures because they had great businesses before ChatGPT arrived in 2022 and those businesses continue to provide strong cash flows. They have armies of the smartest engineers and scientists, and massive amounts of valuable intellectual property.
Their managements have histories of intelligent capital allocation, and their optimism is not necessarily misplaced. But if the capital spending turns out to be premature, if delays in deploying data centers postpone profits, or if early enthusiasm for AI is not shared by the broader population, investors may be disappointed. We believe that the stocks are reasonably priced but may take longer to “work” from here than we would like. Nevertheless, they have major advantages over competitors and the financial strength to withstand almost any temporary disappointments.
Aside from AI uncertainties, everything else is fine ((? ))
Well, the aggregate ((U.S.)) economic numbers are pretty good. Earnings and GDP are growing. Looking at individual sectors, the picture is more mixed, but still positive. The lower-income consumers in the descending leg of the K-shaped economy are struggling a bit, while those in the upper-income brackets are doing very well. Businesses seem to be coping with tariff confusion and supply chain kinks. The war in Iran seems to be in a relatively benign stalemate and global energy markets are returning to normal.
Public policy and its implementation still leave much to be desired. The polarized population and their representatives in Washington continue to struggle with the major issues of the day. We still believe that budget deficits and the national debt will eventually cause funding problems and lead to higher long-term interest rates. This issue has been looming for a long time and may be kept at bay for years, but we think it is important to be positioned so that we can survive some interest rate and credit volatility.
Last quarter we described the ebbs and flows of the global economy as a movie. That movie continues with all sorts of twists and turns. It is very interesting, and although AI is the most visible character right now, there are lots of other plots and subplots. We are optimistic about the prospects for renewed interest in the broader stock market and that should be very good for our portfolios.
As we celebrate the country’s 250th Fourth of July, we are grateful for our loyal shareholders and look forward to the second half of the year.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
