Five for Friday – August 7, 2026

Capitalism, Earnings, Financials, Records, and Computing

1. Memory

 As ancient Greek texts are all the rage, I’ll open with a quote from a 19^th century translation of Plato’s Republic (which, believe me, I have not read): “the true creator is necessity, who is the mother of our invention.” Said another way, crises and constraints are often the necessary impetus to major innovation (and history has borne this out, from wartime advances in computing to the energy-efficiency gains following oil shocks). Today, memory and power bottlenecks are the same kind of growth constraint that sparked past technological breakthroughs, turbocharged by the breakneck speed at which AI is advancing. This is exciting, and is ultimately why investing in capitalistic societies has created such vast wealth. But it’s also a warning of how quickly things can change. This year has seen dramatic outperformance by memory stocks, a once-sleepier corner of the tech world now reaping outsized profits amid historic shortages. But as Amazon’s Jeff Bezos quipped: “your margin is my opportunity.” The more painful a bottleneck becomes, the more money, talent, and manhours will be spent to solve it. Great news for technological progress writ large, but a warning for any investor extrapolating today's profit margins too far into the future (and a potential market destabilizer if recent winners get repriced quickly). Creative destruction: capitalism’s superpower…and its warning label.  

 2. Earnings

But how about a bit more on that superpower, in this case viewed through the lens of corporate profitability? Here’s one way to think about the current market backdrop: ahead of an earnings season, for a variety of reasons, analysts typically reduce their estimates for the profits that companies will report (e.g., over the last 20 years estimates were revised lower by an average of about 4% ahead of earnings). This quarter, analysts raised their estimates by 3%, the most since 2021, elevating the bar for companies to “beat” estimates (stocks don't really react to good or bad results – they react to results vs. the expectations already in the price). But that high bar was apparently not raised high enough. Over halfway through this earnings season, companies are beating (raised!) profit estimates at their best clip in 20 years. This rate of growth is basically unheard of outside of recession recoveries, and profit margins sit, yet again, at record highs. This won’t continue forever, but we own companies for one reason: over time, they turn earnings into shareholder wealth. And right now, they’re doing that about as well as ever.  

3. Banks

If we were looking for signs of stress, we might look to bank stocks. Banks sit at the center of the financial system by making loans, extending credit, and generally supporting economic activity. Historically, bull markets very rarely end with bank stocks leading the market charge. So we’ll take it as good news that over the last 3 months, Financials is the best-performing sector. Importantly, the group has also been a ballast against AI-related volatility in recent weeks – on days when the semiconductors are down a lot, Financials have averaged a positive return and been up far more often than not. Whether or not this market is in the early stages of a bubble, investors should be on the lookout for outperforming areas that also offer a semblance of diversification against the market’s major concentrations.  

4. Two records

this week worth noting: hourly peak electricity demand in Texas (power generation theme) and box office (consumer resilience theme). Both say a lot about the state of affairs in key areas as we enter the second half of the year.

5. On this day

in 1944, Harvard dedicated the Mark I, a 5-ton calculator that could automatically execute a sequence of orders from a punch card. By proving that a machine could follow a sequence of operations without human “computer” intervention, it helped prove the core concept underlying most modern tech (and also spawned the first computer bug).

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This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

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