Santoli: Stocks return to their winning ways. But was July's brief pain enough to satisfy the market gods?

• Nearly 20 percentage points of the S&P 500's 47% Q2 earnings growth came from $140 billion in unrealized gains by Alphabet and Amazon from investments in Anthropic and SpaceX, representing non-recurring windfalls the market won't extrapolate
• The long-short tech momentum strategy has lost 39% from its June peak, with historical patterns suggesting further declines to a total 59% loss over the next year despite short-term recoveries
• Market veterans including David Snyder and Ned Davis Research's Tim Hayes warn the market shows signs of being 'overbought, overowned and overvalued' with conditions consistent with previous secular market tops

Market Summary: Stocks Break Out Despite Warning Signs

Key Market Developments

The S&P 500 achieved three new all-time highs last week, breaking above 7,750 and emerging from a nearly three-month trading range of just 3%. The index has now posted positive returns in over 70% of calendar years historically, with all-time highs occurring on 7% of trading days since 1952.

Momentum Stock Correction

July saw a significant shakeout in AI and semiconductor stocks, with semiconductors retreating 25% and memory-chip leaders declining even more sharply. The hedge fund Situational Awareness was liquidated after its leveraged AI-hardware positions unwound. Notably, the tech momentum long-short strategy has declined from $100 to $61 since its June peak, with historical patterns suggesting further downside to $41.

Earnings and Economic Context

Corporate earnings for 2026 are tracking to rise an extraordinary 30% over last year, supported by nominal GDP growth exceeding 6% and approximately $750 billion in AI-related capital expenditures. However, 20 percentage points of the S&P 500's 47% second-quarter earnings growth came from unrealized gains totaling $140 billion from Alphabet and Amazon investments in Anthropic and SpaceX.

Market Warnings

Despite the bullish breakout, market veterans including David Snyder and Tim Hayes of Ned Davis Research are flagging potential topping behaviors. Hayes notes the market appears "overbought, overowned and overvalued," while recognizing that a secular bear market hasn't definitively started. Trader sentiment has quickly reheated according to Market Vane and Bank of America metrics, reducing the traditional "wall of worry."

The article suggests investors should anticipate at least one "lost decade" of poor returns during their investing lifetime.