“To Infinity and beyond!” was Buzz Lightyear’s iconic catchphrase from the 1995 animated film Toy Story. In many ways, it captured the spirit of the second quarter as capital continued to flow toward technologies pushing the boundaries of innovation – from AI infrastructure and semiconductors to satellites and space exploration. Excitement surrounding satellites and space exploration accelerated following SpaceX’s record-breaking IPO, the largest in history. Beyond launch services, investors are increasingly focused on the broader space economy, including satellite communications and potential for orbital computing over the upcoming decade.
Back here on Earth, financial markets rebounded sharply in the second quarter with the S&P 500 gaining 14.9% following an announcement of a ceasefire with Iran in early April. Semiconductors were particularly strong with the Semiconductor Index up nearly 88% for the quarter, which represented 40% of the S&P 500’s return. WTI declined by 31% in Q2 following a spike of nearly 77% in Q1. Higher oil prices raised concerns around inflation causing interest rates to continue to rise, with the 2-year Treasury gaining 35 basis points (bp) during the quarter. The Federal Reserve is no longer likely to ease interest rates despite the appointment of Kevin Warsh as the incoming Fed chair, who stressed the importance of price stability and the need to get inflation back down to the Fed’s target rate.
While semiconductors should continue to see strong demand from data center buildouts, we expect the market to broaden as inflation subsides due to lower oil prices. Sector performance in Q2 was led by: Technology (+31.6%), Industrials (+14.5%) and Consumer Discretionary (+9.1%). Underperformers included Energy (-14.0%), Utilities (-1.2%) and Consumer Staples (-0.3%). Software showed signs of life during the quarter despite AI concerns, rebounding more than 23% through May before selling off in June to end Q2 up 4.5% as measured by the S&P Software and Services Index.
Despite the first quarter’s oil-supply shock, the economy remains resilient. Corporate earnings grew 28.6%, the strongest pace in over four years, while unemployment remained low despite slower hiring. Inflation accelerated as higher energy prices flowed through the economy, leading the Federal Reserve to take a more cautious stance towards additional rate cuts. Economic growth continues despite the Iranian conflict, though Q2 GDP decelerated to an estimated 1.2% as measured by the Atlanta Fed’s GDPNow. Growth is expected to accelerate in the second half with the end of the conflict. Inflationary impacts could prove transitory if a long-term agreement with Iran can be reached. The Federal Reserve is likely to keep its Fed Funds rate steady until it can determine whether inflation remains elevated or if this is a short-term blip.
Following Q1 weakness and the market rebound in Q2, we believe it is important to highlight the value of staying invested, as long-term returns are driven by the power of compounding. Pullbacks of 5% or greater occur on average 1.6X per year over the past thirty years, and market timing is notoriously difficult. Sharp market rebounds often occur after sell-offs, highlighting the importance of remaining invested for the long-term.
We remain disciplined in managing your portfolios, utilizing diversification to remain invested and help ensure participation in eventual recoveries. The decline in energy prices from Q1 highs could provide tailwinds for consumer spending and drive growth for cyclical sectors like Consumer Discretionary and Financials in the second half. While we remain constructive on AI and the long-term data center buildout, we believe that the strongest opportunities may become increasingly diversified as market leadership broadens.
Our top three contributors to performance for the quarter were as follows:
Palo Alto Networks (PANW) grew total revenue by 31% year-over-year, beating all metrics and demonstrating strength across products and services as it shifts toward a platform-centric model. In addition, RPO (Remaining Performance Obligation) grew 36%, underscoring long-term revenue visibility. The company’s products have become essential as it provides enterprise-grade cybersecurity platforms that defend modern, cloud-centric infrastructures.
Cisco Systems (CSCO) reported revenues up 12% and GAAP EPS up 37%, driven by growth in product revenue that more than offset a slight decline in services. Product strength was most notable in CSCO’s networking portfolio, where AI infrastructure—particularly high-speed Ethernet upgrades from hyperscale cloud providers and enterprise data centers is modernizing for agentic AI workloads.
Willams Companies (WMB) delivered record quarter results with EPS up 22%, driven by broad-based strength, particularly in the Transmission & Gulf segment. The segment increased EBITDA by 17% year over year, underscoring a shift toward more regulated, long-haul infrastructure. Management expects full-year EBITDA toward the upper half of company guidance and highlighted a robust growth pipeline, including major transmission expansions.
Holdings within the portfolio that were negative contributors to performance were as follows:
Verizon Communications (VZ) reported positive postpaid phone net adds for the 1st time in 13 years while meaningfully improving consumer churn, supporting a healthier growth trajectory. Also, broadband remained a key growth driver with over 300,000 net adds across FWA (Fixed Wireless Access) and fiber build-out, reinforcing the converged mobility-plus-broadband strategy. Weakness in the stock price occurred primarily in the last week of the quarter as multiple catalysts converged to drive multi-day declines, which included removal from the Dow Jones Index (replaced by GOOGL), resulting in passive index funds, ETFs, and institutional managers to liquidate their holdings.
In addition, heavy restructuring charges, including severance and asset rationalization to exit real estate leases, and competitive threats related to SpaceX talks with Charter Communications to potentially build out a consumer satellite-to-cellular mobile phone service. We intend to hold the position in the near-term and reassess positioning after the mechanical selling is complete and fundamentals can be re-evaluated.
Salesforce, Inc (CRM) once again makes the top negative contributors list even though it reported a 13% year-over-year revenue increase and a 50.4% surge in adjusted EPS with strong momentum in the latest quarter. The stock was subsequently sold during the quarter. Salesforce’s AI and data integration solutions software-based products, including Agentforce and Data 360, are seeing increasing adoption among enterprise customers.
Conversely, a large part of the bottom-line EPS spike was bolstered by a $25 billion accelerated share repurchase program. As it continues to be the case, the company has traded lower along with a host of software-based (SaaS) companies as the market wrestles with terminal values for seat-based licensing models. The transition to consumption-based pricing, however, should help to alleviate some concerns for those companies able to successfully navigate and evolve their pricing models. The key concern for investors is how quickly the transition can occur relative to the potential erosion of existing seat-based revenue.
TJX Companies (TJX) reported a very strong quarter with 6% revenue growth and 29% EPS growth, all materially ahead of plan. HomeGoods was particularly strong in the quarter with 9% comps and 270 basis points of margin expansion. Internationally, TJX saw healthy comps and improved margins, with notable strength in Australia and a positive early read on its first stores in Spain. The company intends to expand its presence by 1,700 stores as it continues to expand globally. Weakness in the stock was essentially due to macroeconomic pressures and a sell-off in the consumer discretionary sector. Investor concerns rose related to inflation and rate hikes and subsequent impact on consumer spending. No idiosyncratic issues are notable for TJX at this juncture.
Given the improving geopolitical picture and signs of tensions cooling down, we focused on maintaining exposures in interest rate-sensitive sectors as well as beneficiaries of the massive AI capex spending cycle. New purchases included American Express (AXP), Taiwan Semiconductor Manufacturing Company (TSM), Arista Networks (ANET), and Johnson & Johnson (JNJ).
American Express (AXP) reported solid revenue and eps growth of 11% and 18%, respectively, in a nod toward positive payroll numbers supporting consumer resilience. Card member spending rose 10%, the strongest in three years, with broad-based growth across travel, retail, and restaurants.
Taiwan Semiconductor Manufacturing Company (TSM) continues to benefit from strong leading-edge process demand. Revenues easily beat guidance while management is confident that demand will continue to remain strong into 2027.
Arista Networks (ANET) is also benefiting from surging demand for AI infrastructure as companies upgrade their data centers to handle massive AI workloads. Revenue growth and exceptional operating margins drove bottom-line profitability as the company’s high-speed ethernet switching products and software subscriptions continue to grow in demand.
Johnson & Johnson (JNJ) is benefiting from its focus on profitability within its Innovative Medicine and MedTech divisions. Drivers of growth seen in oncology include blockbuster drugs like Darzalex and Carvykti and Icotyde for plaque psoriasis.
Purchases were funded by sales of several securities, including Tyler Technologies (TYL), Accenture (ACN), Salesforce (CRM), Medtronic (MDT), Abbott Labs (ABT), and Charles Schwab (SCHW).
Tyler Technologies (TYL), Accenture (ACN), and Salesforce (CRM) were sold given the massive headwinds to the SAAS seat-based licensing model as investors worry that enterprise customers will bypass legacy software and build applications in-house. With this line of thinking, valuations were considered to be too high given the uncertainty of forward projections.
Medtronic (MDT) and Abbott Labs (ABT) were both sold given downward adjustments to full-year profit guidance due to product recalls and settlement charges for MDT related to the Flex insulin pump and continued segment shortfalls in Nutrition for ABT.
Charles Schwab (SCHW) was sold as we shifted exposure towards companies with greater leverage to affluent consumers. We purchased AXP, whose customer base continues to demonstrate resilient spending on travel, dining, and other discretionary spending.
Volatility was elevated at the beginning of the quarter because equity investors were pricing geopolitical and inflation-tail risks rather than a normal earnings-cycle slowdown. The VIX Index had reached 28 in early April, then declined through April and May as the immediate crisis risk faded. It reached the mid-teens in June before moving higher again around renewed Iran tensions, higher yields, and technology weakness.
Regardless of investor uncertainty relative to these issues, the S&P500 Index climbed the wall of worry in a powerful move higher throughout the quarter as earnings growth dominated the narrative while geopolitical tensions and inflation fears eased. With that backdrop, option activity was elevated as positions were moved out and up in strike to continue to participate in the powerful upside move in the market.
For the model portfolio, premium generation was solid at 1% simple and 4.0% annualized gross returns. Positions were generally rewritten with a slightly shorter maturity than past quarters, with average days to maturity at roughly 84. Given the spikes in general market volatility, premiums were able to be generated with significantly more potential built-in upside return to strike prices averaging 13.1%. The model portfolio was roughly 49% written overall.
The market rebounded strongly in the second quarter following a 1970’s-style oil supply shock in the first quarter. Leadership, however, was concentrated with semiconductor stocks surging nearly 88% during the quarter, underscoring the importance of maintaining exposure to long-term secular growth themes while remaining diversified. Encouragingly, there are signs that participation is beginning to broaden with the S&P 500® Equal-Weight Index outperforming the market-cap-weighted S&P 500® index by approximately 300 bp during the month of June. We believe a durable resolution to the Iranian conflict could benefit cyclical sectors such as Consumer Discretionary and Financials in the second half, driven by potentially lower energy prices, easing inflation, and lower interest rates. The economy remains on solid footing and earnings growth continues to surprise to the upside.
While there are some pockets of what former Fed Chair Alan Greenspan famously described as “irrational exuberance”, the broader market appears reasonably valued at 19X 2027 consensus earnings estimates, supported by robust earnings growth. We continue to balance our exposure to structural growth opportunities with a disciplined commitment to diversification, which we believe remains one of the most effective ways to participate in long-term market appreciation without taking on undue portfolio volatility. We remain opportunistic in stock selection by trimming positions that appear extended and adding to new or existing positions with strong underlying fundamentals and attractive risk/reward profiles.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Connors Investor Services, Inc. “Connors”) or any non-investment related content referred to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer reflect current opinions or positions. Moreover, you should not assume that any discussion or information in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Connors. Please remember to contact Connors in writing if there are any changes in your personal/financial situation or investment objectives to review/evaluate/revise our previous recommendations and/or services or if you would like to impose, add, or modify any reasonable restrictions to our investment advisory services. Unless and until you notify us in writing to the contrary, we shall continue to provide services as we do currently. Connors is neither a law firm nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Connors’ current written disclosure Brochure discussing our advisory services and fees remains available upon request. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Connors account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Connors accounts; and (3) a description of each comparative benchmark/index is available upon request.