Patient Capital Management Q2 2026 Commentary

Samantha McLemore discusses the market's optimistic mood and the Opportunity Equity Strategy's Q2 outperformance. Read the full analysis for more details.

By Samantha McLemore Finding Patience in... an Early 2000s Hip-Hop Song? My original version of this letter led with the intro and first verse of Nelly’s Hot in Herre. Apparently, copyright laws don’t allow that.

With Baltimore’s recent extreme heat warning (heat index at 114°) following record-breaking European temperatures, and markets freshly off new highs with semiconductors on fire, it indeed seems hot and his lyrics about trying to stay patient are appropriate. The investor’s behavioral barometer reads optimistic. Though we believe the path of least resistance for the market continues to be higher, this quarter I was struck by advancing enthusiasm.

Market prospects are best when moods are sour, though some of the best returns occur during the latest stages of a bull market. We think that’s where we sit today. The S&P 500 gained 15.2% in the quarter as markets recovered their first quarter losses and semiconductors surged on the back of AI-driven shortages.

The Opportunity Equity Strategy 17.3% net, outperforming the index. For the first half, the strategy gained 10.4% outpacing the benchmark. This year, it’s been difficult to outperform without exposure to beneficiaries of AI spend, particularly semiconductors -- the Philadelphia Semiconductor Index exploded a whopping 101.7% in the first half.

Our only exposure, Nvidia (NVDA $202.78), didn’t help much, as it lagged the market. Technology overall accounted for 82% of the market’s first half gains whereas our modest tech exposure was a net drag. We find ourselves in familiar territory.

We’ve managed to outperform despite being underweight technology, the market’s main driver for the past decade-plus ((a bad call! )). In the quarter, our healthcare exposure drove most of our performance despite the sector lagging the market overall. Six of our seven healthcare companies gained more than 20% in the first half, contributing 935 basis points to strategy performance.

These investments are emblematic of our process. A few years ago, healthcare hit a 50-year relative valuation low. The sector was ripe for contrarian, value investors.

We initiated positions during weakness when the market didn’t reflect the long-term fundamentals of the businesses. It took the market some time to come around to our view, but our patience was rewarded. We think elevated single stock volatility, and the market’s myopic focus on the next quarter or 6 months, continues to create significant opportunities for contrarian, patient investors like us.

At a macro conference I attended in June, during a hedging discussion, one moderator from a big bank mentioned the challenge of monetizing hedges effectively. She said her hedge fund clients failed to profit from hedges in March’s selloff because the market rebounded before they cashed in. She recounted their conclusion: “the best hedge is being ready to buy the dip.”

The audience nodded in support. At lunch someone cited the insight as a top takeaway. A bull market insight born of optimism if I’ve ever seen one.

When I mentioned to my partner Bill Miller that I was troubled by this bubbly sentiment, he astutely reminded me that few consistently practice what they are preaching. It’s not surprising to see elevated complacency after 17 years of 15% annualized returns for the S&P 500. Dip buying has been rewarded for decades.

Investors now see opportunity. This wasn’t always the case. In the early days of this secular bull market, every rally was met with fear of an imminent reversal.

Risk management was the top consideration. Demand for hedges surged. In 2010, after hedge funds lagged the market significantly, one article included the following quote: "Hedge fund managers are significantly more conservative than they were at the beginning of 2008, and I don't think there are really the mega opportunities, like there were in subprime in '07 and '08, " said Virginia Parker, chief investment officer at Parker Global Strategies, a firm that advises institutional investors on hedge funds.

"iNow the market is nearly 6x higher and valuations 55% greater and investors see abundant opportunities! There’s finally confidence that every selloff should be bought.

The irony is that the best opportunities are born from low prices and moribund sentiment. But the perception of opportunities follows trailing returns. Other speculative indicators grew too.

SpaceX (SPACE) (SPCX $152.16) completed the largest IPO (initial public offering) in history, raising $86B -- more than double the previous record (Saudi Aramco (ARMCO)). Retail demand, a driving market force, was astronomical, with retail buying hitting a single day record that day. Margin debt is at record levels and levered ETFs have exploded.

M&A also set a record in the first half. Today’s retail trading environment echoes the late 90’s. Shortly after I started in the business in the early 2000’s, I attended a Harvard Behavioral Finance seminar where we learned about irrational exuberance where a hilarious video, a commercial from Ameritrade from 1999, was shown.

Today, the vibe would resonate with many. That’s not to say the bull market is doomed. Frothiness still falls short of what we observed at the peak of the Innovative Disruption bubble in the second quarter of 2021, and pales in comparison to the late 90’s.

By the middle of 2021, the S&P 500 had gained 41% over the prior twelve months (vs. 22% today) with the hottest stocks, exemplified by Cathy Wood’s ARK Innovation ETF (ARKK) up 86%. While today’s biggest winners, the semiconductors, are up far more (+159% 12-month gain for Philadelphia semiconductor index), other indicators look better. Both periods register as euphoric on Citigroup (C)’s panic-greed index, but 2021 was more extreme.

Today, S&P 500 valuations are lower while earnings growth is higher. Elevated inflation plagues both periods, but today’s interest rate levels better reflect the situation (see details in Exhibit A below). Exhibit A Market losses in 2022 resulted from sharp interest rate increases (SPX down 18.2% and ARKK down 67.1% in 2022).

We won’t see similar increases from here with the Fed funds rate sitting above the core inflation rate. The late 90s reached euphoric extremes. Outside of semiconductors, the Tech Bubble gains dwarfed current ones.

From Netscape’s IPO in August 1995, the S&P 500 gained 195% through the peak in March 2000, with the tech sector up 564%. Since Chat GPT’s launch in November 2022, the S&P 500 has gained 93% with tech up 187% (note: we need another year to match the duration of that 90’s run). Back then, semiconductors gained 589% vs. the current 535%.At the stock market peak in 2000, the S&P 500 traded at 24.6x forward 12-months earnings vs. 20.0x today.

Today’s tech sector valuation of 24.8x pales in comparison to the prior period’s 61.0x. Fortunately, unlike the late 90’s, stock prices have moved in lockstep with earnings and multiples haven’t expanded, creating a more stable base. Citigroup’s bear market checklist has 11.5 of 18 indicators flashing caution vs. 17.5 at the March 2000 peak.

The chief determinant of market prospects likely remains the AI revolution, where some concerning signs have emerged. AI has accounted for a significant chunk of economic growth. Surging demand and supply constraints have boosted prices and earnings.

A period of “tokenmaxxing” (eg – maxing out your AI/token usage) has evolved into more rationality. Companies like Uber (UBER) and Microsoft have gated usage to manage exploding costs. Companies are saving money by swapping to cheaper open-