Key Highlights
Market Updates & News
  • Kevin Warsh’s first meeting as Fed Chair marked a clear regime change. The Fed’s price stability mandate now takes center stage.
  • Beneath last week’s headline gains, market breadth flashed a warning as the S&P 500 produced its worst single-day advance/decline reading for the year.
  • The AI trade has effectively taken over the market, hollowing out the diversification investors assume they own across passive index funds.
Tandem Strategy Update
  • Indiscriminate selling of high-quality compounders presented Tandem with the opportunity to add to four existing positions across its strategies earlier this month.
  • Each of the businesses have track records of consistent growth in sales, earnings, cash flow, and dividends over time and stand to benefit from advancements in AI over time.

Market Updates & News

U.S. equities clawed back ground last week in a holiday-shortened trading week (markets were closed Friday for Juneteenth). The S&P 500 added 0.93% for the week to close at 7,500, while the Nasdaq 100 rose 2.60% and the small-cap Russell 2000 gained 1.22%. Index level volatility declined as the VIX drifted back below 17. Despite the headline gains, last week’s market rally was actually quite narrow. Wednesday’s trading session produced the worst single-day advance/decline reading for the entire year, with decliners outpacing advancers by 355 names even as the cap-weighted index finished higher on the day.



Source: Bloomberg Finance L.P.

Away from stocks, crude oil dominated last week’s action. WTI sank below $75 a barrel for the first time since early March, capping a 30% monthly decline after a signed U.S.–Iran memorandum of understanding effectively erased the geopolitical risk premium that had built up over the course of the conflict. Economic data leaned positive last week. May retail sales jumped 0.9% month-over-month against the consensus estimate of 0.5%, with 11 of 13 categories higher and the GDP-relevant control group up 0.7%. While the top-line number was strong, economists noted two important caveats in the report. First, a portion of the 0.9% jump was driven by a 3.4% rise in gasoline station sales, reflecting higher prices at the pump rather than increased volume. Second, the retail category that represents services (restaurants and bars) stalled with a 0.1% decline, a minor pullback that is worth watching closely to see if booming discretionary spending is simply taking a breather or beginning to show real pressure of slowing. On the jobs front, initial U.S. jobless claims fell to a seasonally adjusted 226,000 for the week ending June 13. This marked a decrease of 4,000 from the previous week’s revised level of 230,000.

Last week’s marquee event was Wednesday’s FOMC meeting. Kevin Warsh’s first meeting as Fed chair left no doubt that regime change is underway at the Federal Reserve. The committee voted unanimously to hold the policy rate at 3.50%–3.75% for the fourth straight meeting. This marked the first meeting without a dissent in eight, a shift due in part to Stephen Miran no longer serving as a Fed governor. Contrast with the Powell-era Fed was unmistakable. The accompanying statement was slashed to just 130 words from 341 in April. Warsh declined to submit his own dot in the Summary of Economic Projections, delivered a press conference shorter than any of Jerome Powell’s, and unveiled the formation of five independent policy task forces spanning communications, the balance sheet, data sources, productivity and jobs, and the inflation framework. Staffed by a mix of internal personnel and outside experts, these groups are charged with conducting a first-principles review of how the central bank operates, interprets data, and communicates with the public. The surprise for markets came in the dot plot, where nine of eighteen participants now pencil in at least one rate hike this year. Bond markets reacted accordingly. The 2-Year U.S. Treasury yield leapt more than 14 basis points for its largest move on a Fed day since January 2022. The yield curve flattened to its tightest since April 2025 and pricing swung from roughly one hike by year-end to nearly two by the first quarter of 2027. Warsh announced the committee had dropped forward guidance entirely and made plain his view that inflation “is a choice” and that the committee unanimously intends to deliver price stability. This statement, paired with Warsh’s pointed observation that monetary policy looks “somewhat restrictive” in housing but nowhere else (i.e. financial markets), calls into question what the “Fed put” might look like under Warsh’s regime.



Source: Apollo



Source: WisdomTree, FactSet, S&P

All of which returns us to a theme we have discussed across recent editions of Notes from the Trading Desk: the extent to which one trade has become the market. Last Wednesday’s narrow tape put on full display an index hollowed out around the artificial intelligence trade. The charts above illustrate the sheer scale of this concentration. Per Apollo’s Torsten Slok, essentially all of the S&P 500’s market-cap gain in 2026 has come from AI and energy. Strip those two out, and the rest of the index has actually lost value on the year. Furthermore, WisdomTree highlights that expanded technology now accounts for roughly 50% of the S&P 500’s weight, up from 29% at the dot-com peak in 2000. Technology has, without question, woven itself ever deeper into the economy and into our daily lives over the past two and a half decades. But when a single sector swells to half the index, it is fair to ask what are passive investors really buying: a diversified basket of businesses representing the U.S. economy, or something far closer to a technology fund?



Source: Creative Planning, Charlie Bilello

Leadership at the very top of the index is almost comically narrow when you view it by industry groups. The table above from Charlie Bilello at Creative Planning lists the top performing stocks in the S&P 500 this year. Of the twenty S&P 500 constituents that have doubled year-to-date, nineteen are AI-related – the lone holdout being Moderna. Memory and storage names top the list. Sandisk is up 820% so far this year. Western Digital has returned north of 330%, while Micron has gained nearly 300%. The memory melt-up is global in nature. South Korea’s Kospi index has more than doubled in 2026, powered by the Samsung/SK Hynix memory duopoly that sits at the top of their stock market.

The more unsettling implication is what this hyper concentration on a single trade does to portfolios that were never meant to be AI bets in the first place. Passive allocations are, in theory, supposed to provide investors diversification. Mix a few low-cost passive index funds together and – voila! – you have a diversified investment portfolio, right? Not anymore. Let’s take the iShares Russell 1000 Value ETF (IWD) as our first example. The largest holding in the Value ETF is not a large money center bank or a consumer staple giant, no, it’s Micron. Look further at the top holdings in the table below. Intel, AMD, Applied Materials, and Sandisk all crack the top 20 positions. This “Value” index looks more and more like a momentum trade full of AI cyclicals. We discussed above how the S&P 500 is essentially half tech stocks – top holdings in Nvidia, Apple, Microsoft, Amazon, Alphabet, Broadcom, Meta, Tesla, and Micron – so not much of a diversifier when paired with the Value ETF these days. But what about emerging markets or small caps, we should certainly achieve some diversification pairing those, right? Cross into emerging markets and the AI concentration picture is starker. The top three holdings of the iShares MSCI Emerging Markets ETF (EEM), Taiwan Semiconductor, Samsung, and SK Hynix, together make up roughly 30% of the fund. All three companies are levered to the very same AI trade. The Russell 2000 is supposed to be the bastion of domestic diversification. The IWM today is led by Bloom Energy (data-center power), Credo (data-center chips), IonQ (quantum computing), and Fabrinet (data-center connectivity). The Russell 2000’s top holdings are a roster heavy on cash-burning, AI-adjacent speculation.



Source: Apollo

Across the small-cap index, companies with negative earnings have comfortably outperformed their profitable counterparts since the spring of 2025, the hallmark of a market rewarding narrative over fundamentals. The uncomfortable takeaway is that the diversification investors believe they own across their value, international, and small-cap sleeves has quietly collapsed into one concentrated factor bet on AI capex. That is fine on the way up. The trouble is what happens on the way down. There has rarely been a moment in market history when so many “diversified” investors were quietly all holding the same thing.



Source: FactSet

Tandem Strategy Update*

The market’s hyper-focus on AI has opened up pockets of weakness in shares of high-quality, durable businesses, as investors chase the hot dots and leave steadier compounders behind. At Tandem, we tend to view that sort of indiscriminate selling as opportunity. Earlier this month, we added to four existing positions across our strategies: McDonald’s (MCD), PepsiCo (PEP), Republic Services (RSG), and Rollins (ROL). While these may be “boring” businesses in a market where the tape is dominated by news of the next multi-billion-dollar AI compute agreement, each of these companies stand to benefit from advancements in AI. Whether it be route optimization and smarter fleet telematics that trim fuel and maintenance costs for Republic Services, AI-enabled pest detection and predictive technician scheduling for Rollins, higher-converting personalized marketing for Pepsi, or AI-powered drive-thru automation and dynamic menu pricing for McDonald’s – the same wave of innovation captivating the market stands to make these already-durable businesses leaner and more profitable over time.

Source: Source of all data is FactSet, unless otherwise noted.

*The transition level activity taken by Tandem is applicable to new manager-traded accounts and new money in manager-traded accounts, not the composite or firm-wide level. New manager-traded accounts and new money in manager-traded accounts are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions, this process differs from Tandem’s model-provided strategies, where money is invested on the day the account opens. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

Print
Back to Archives

Disclaimer: Tandem Investment Advisors, Inc. is an SEC registered investment advisor.

This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

All performance figures, data points, charts and graphs contained in this report are derived from publicly available sources believed to be reliable. Tandem makes no representation as to the accuracy of these numbers, nor should they be construed as any representation of past or future performance.

This document was originally written/recorded in English. Tandem does not guarantee the accuracy, completeness, or reliability of any translated materials, and shall not be held responsible for any discrepancies, errors, or misinterpretations arising from the translation process.