October 16, 2026

In the Loop – October 16, 2026

“In The Loop” is designed to give you a short update reflecting major developments, earnings, and investment trends across some core Equity Income and Growth holdings. All clients should be aware that individual buy/sell recommendations will be conveyed directly to you on an individual basis. Have a great weekend.

The Market’s New Wall of Worry: When the Cost of Capital Meets the AI Revolution

For the past three years, investors have been focused on the enormous opportunities surrounding artificial intelligence, and for good reason. We are witnessing one of the largest infrastructure buildouts in American history, with spending commitments that rival some of the country’s greatest industrial expansions. But lately, the market reminded us of something we have discussed frequently: the cost of capital matters. With long-term interest rates moving higher, Treasury borrowing needs continuing to grow, and investors beginning to question when hundreds of billions of dollars in AI spending will translate into meaningful profits, the market has another wall of worry to climb. I don’t believe the AI investment cycle is coming to an end, but I do believe investors are becoming more selective. The question is shifting from how much companies are spending on AI to which companies will actually generate the cash flow and earnings to justify those investments.

One of my bigger concerns continues to be what is happening in the bond market. We have discussed the Bessent–Warsh framework and the importance of bringing long-term interest rates down, but that is proving easier said than done. Higher yields aren’t necessarily a sign of a weakening economy. In fact, they can reflect stronger economic growth, stubborn inflation, growing Treasury supply, or simply investors demanding a better return for lending money over longer periods. The problem is that higher rates eventually work their way through the entire economy, affecting everything from mortgages and consumer credit to corporate borrowing and stock valuations. This is particularly important as banks begin reporting earnings and we get a better look at credit conditions. The Fed may influence short-term rates, but the bond market ultimately determines the cost of long-term capital. Until investors become more comfortable with inflation, federal borrowing, and the outlook for economic growth, I suspect interest rates will remain one of the biggest obstacles facing the stock market. It also reinforces why we continue to favor companies with strong balance sheets, positive free cash flow, and the ability to grow without constantly returning to the capital markets for financing.

However, before we panic, let’s remember that the 4th Quarter is historically the best quarter of the year. Since 1996, the S&P 500 has finished the fourth quarter lower only five times, posting positive returns 83% of the time, compared with 73% for all quarters. Even more impressive, the fourth quarter has historically delivered an average gain of 5.6%, nearly double the 2.8% average quarterly return over the same period. While seasonality is never a guarantee, history suggests that the final three months of the year have generally been the most rewarding for investors. Let’s also remember what happened in the fourth quarter of 2023, when the 10-year Treasury yield fell from nearly 5% to 3.8%, triggering a powerful rally in both stocks and bonds. Cooling inflation, a moderating labor market, reduced Treasury supply concerns, and expectations for Fed rate cuts drove yields lower, reminding us just how quickly market sentiment can change when interest rates reverse course.

Individual Company Updates

Chevron (CVX) — Expanding Production and Powering America’s AI Infrastructure

Chevron continues to strengthen its position as one of the world’s leading integrated energy companies, benefiting from higher oil prices, expanding production, and disciplined capital allocation. Second-quarter earnings reached $12.1 billion, supported by a 20% increase in worldwide production following its Hess acquisition. More recently, Chevron announced plans to restructure its Hess Midstream interests, potentially reducing Bakken transportation costs by approximately 50%. The company is also expanding into electricity generation through a 20-year agreement to supply 2.67 gigawatts of power to a Microsoft data center in West Texas. We believe Chevron’s combination of low-cost oil production, growing exposure to Guyana, strong cash generation, and emerging AI power opportunities makes it an important holding within our U.S. Resiliency investment theme.

Marathon Petroleum (MPC) — Refining Margins Drive Exceptional Profitability

Marathon Petroleum continues to benefit from strong demand for gasoline, diesel, and jet fuel, combined with favorable refining margins and tight global supplies of refined products. The company reported second-quarter net income of $5.1 billion, or $17.73 per share, while operating its refineries at approximately 94% utilization. Management expects third-quarter throughput near 3 million barrels per day, demonstrating the strength of its refining network. Investments in higher-value fuels, combined with cash flow from its MPLX midstream business, provide additional earnings support. We believe Marathon offers attractive exposure to a critical component of U.S. energy security, particularly as domestic industrial activity and transportation demand remain resilient. However, after the stock’s substantial appreciation, future returns will depend increasingly on the sustainability of refining margins and disciplined capital allocation.

Apple (AAPL) — AI Creates Another Upgrade Opportunity

Apple’s next growth opportunity centers on integrating artificial intelligence more deeply into its enormous installed base of iPhones, computers, and connected devices. Enhanced Siri capabilities, on-device AI processing, and greater personalization could encourage hardware upgrades while strengthening Apple’s highly profitable services ecosystem. Apple’s emphasis on privacy and seamless hardware-software integration remains an important competitive advantage. We believe its substantial free cash flow, recurring services revenue, and customer loyalty support the company’s long-term investment appeal, although meaningful AI monetization will be important to justify its valuation.

nVent Electric (NVT) — Powering the AI Buildout

nVent completed its $1.75 billion acquisition of Maverick Power, expanding its capabilities in electrical distribution and data-center infrastructure. As AI facilities require increasingly sophisticated power and cooling systems, nVent is becoming a more important supplier of the equipment needed to support reliable operations. BMO Capital recently initiated coverage with an Outperform rating and $212 price target. We believe nVent is well positioned to benefit from AI infrastructure investment, grid modernization, and rising electricity demand.

Eli Lilly (LLY) — Advancing the Next Generation of Obesity Treatments

Eli Lilly reported encouraging Phase 2 results for an experimental combination of tirzepatide and eloralintide, achieving average weight loss of 23.3% among patients who remained on the highest-dose treatment, compared with 14.8% for tirzepatide alone. Higher treatment discontinuation rates remain an important consideration. Lilly also received expanded FDA approval for its cancer treatment Jaypirca. We believe the company’s growing pharmaceutical pipeline, manufacturing capabilities, and leadership in obesity treatments provide multiple opportunities for long-term earnings growth.

BNY (BK) — Modernizing Financial Infrastructure

BNY is reportedly exploring a partnership with Kraken’s parent company, Payward, to expand institutional services involving digital assets, custody, payments, and tokenized securities. Although discussions remain preliminary, the opportunity could strengthen BNY’s position as traditional financial markets increasingly adopt blockchain technology. We believe the company’s established custody business, recurring fee revenue, and growing technology capabilities position it to benefit from the modernization of global financial markets.

Jabil (JBL) — AI Infrastructure Accelerates Earnings Growth

Jabil delivered an exceptional fiscal fourth quarter, with revenue increasing 29% to $10.62 billion and adjusted earnings rising 34% to $4.40 per share. Management expects fiscal 2027 revenue of $44.5 billion, including $22.1 billion from AI-related business, representing 54% growth. Jabil is increasingly involved in designing and manufacturing the networking, power, cooling, and computing systems supporting AI data centers. With more than $1.5 billion in annual adjusted free cash flow and strong capital efficiency, we believe Jabil offers attractive exposure to the expanding AI infrastructure investment cycle.

Berkshire Hathaway (BRK.B) — Financial Strength and Investment Flexibility

Berkshire Hathaway remains particularly attractive in an environment of elevated interest rates and economic uncertainty. Under CEO Greg Abel, the company’s diversified insurance, railroad, utility, and industrial operations generate substantial cash flow, while its significant Treasury holdings benefit from higher short-term yields. Berkshire’s financial flexibility allows it to pursue acquisitions and investments when competitors face capital constraints. We believe its strong balance sheet, disciplined capital allocation, and limited dependence on external financing provide a valuable counterbalance to technology-heavy portfolios.

JPMorgan Chase (JPM) — Core Banking Strength Outweighs Earnings Miss

JPMorgan reported third-quarter earnings of $5.57 per share, below expectations, despite net income increasing 6% to $15.3 billion. Revenue grew 8%, net interest income advanced 13% to $27 billion, and average loans expanded 10%. Importantly, management increased its 2026 net interest income forecast to $106.2 billion and anticipates further growth in 2027. We believe JPMorgan’s strong deposit franchise, diversified earnings, and disciplined credit management position it to outperform competitors as higher interest rates place greater pressure on the banking industry.

Amazon (AMZN) — Improving AI Economics Through Custom Technology

Amazon is reportedly considering a roughly $7 billion acquisition of AI startup Decart, whose technology could improve the performance and flexibility of AWS computing systems. The potential transaction would complement Amazon’s proprietary Trainium processors, helping customers reduce reliance on more expensive third-party AI hardware. Combined with continued growth in cloud services, advertising, and retail profitability, these investments could support stronger earnings and operating margins. We believe Amazon’s ability to lower the cost of AI computing while expanding AWS adoption remains an important long-term growth opportunity.

ServiceNow (NOW) — Enterprise AI Drives Growth Expectations

ServiceNow continues to attract analyst upgrades as businesses increasingly adopt AI-powered automation to improve productivity and reduce operating costs. TD Cowen recently raised its price target to $165 from $140, joining several firms increasing expectations ahead of the company’s November 4 earnings report. ServiceNow’s ability to integrate AI agents into existing enterprise workflows creates opportunities for additional subscription revenue and margin expansion. We believe its established customer relationships and expanding automation capabilities position it to benefit as corporations move from experimenting with AI to deploying it across everyday business operations.

Meta Platforms (META) — Muse Expands Its AI Ambitions

Meta Platforms is gaining momentum in consumer artificial intelligence with Muse, its new AI-powered application that has reportedly surged to the top of free-app download rankings. The rapid adoption highlights Meta’s ability to reach consumers at scale and its ambition to make AI an everyday digital companion. More importantly, Muse could create another opportunity to deepen user engagement, expand personalized advertising, and eventually develop new revenue streams across Meta’s ecosystem of Facebook, Instagram, and WhatsApp. We believe Meta’s enormous distribution network, AI infrastructure investments, and advertising expertise provide significant advantages as competition shifts from developing powerful AI models to attracting and retaining users.

Since its September 8 launch, Muse has reached No. 1 on the U.S. free-app charts and surpassed five million downloads in September, according to Sensor Tower estimates.

We remain focused on navigating market trends and positioning portfolios for long-term growth and resilience.
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