ClearBridge Appreciation Strategy Q2 2026 Commentary

The ClearBridge Appreciation Strategy underperformed the benchmark S&P 500 Index in the second quarter of 2026.

By Michael Kagan and Stephen Rigo, CFA Market Overview The technology-driven rally in the second quarter was truly unprecedented and marked a sharp reversal from the geopolitical malaise that plagued the first quarter. Although the S&P 500 Index's 15.2% return was "only" the 12th best quarter for the index since 1950, it was the first time since the creation of the Global Industry Classification Standards (GICS) in 1999 that only one sector outperformed the benchmark: information technology.

The second quarter's internal dynamics bore several similarities to the historic run of 1999's fourth quarter. First, it was the only quarter besides 4Q99 that nine of 11 GICS sectors underperformed the index by more than five percentage points. Second, 13 S&P 500 stocks appreciated by more than 100% during the quarter, the most on record.

All but one of these companies (Humana) were technology stocks. This exceeded the prior record of 11 such stocks in 4Q99. AI bubble or not, the historic nature of the second quarter's performance is difficult to ignore.

After pausing during the first quarter, technology shares reasserted market leadership. Technology returned a remarkable 31.8%, more than double the return of the index. Following this blowout quarter, the sector appears poised to outperform the S&P 500 for a fourth consecutive year in 2026.

Industrials was the only other sector to even come close to the S&P 500's return, rising 14.9%, or 0.3 percentage points below the benchmark. Within the sector, businesses linked to construction and energy infrastructure are broadly benefiting from data center and semiconductor foundry capital expenditures. Every other sector lagged meaningfully.

Energy shares were the largest detractor, declining 13.5%, or -28.7 percentage points below the S&P 500, as oil prices fell 30% to below $70 per barrel following the ceasefire agreement between the U.S. and Iran. Traditional defensive areas such as utilities and consumer staples were essentially flat, underperforming the index by roughly 15 percentage points, as investors used these sectors as sources of capital to re-risk portfolios back into the AI thematic. Outlook

We believe the backdrop is nuanced. Fundamentals remain broadly supportive of risk assets, while several risks percolate beneath the surface. Technology-driven capital expenditures are fueling a cyclical expansion in the industrial economy, which appears likely to serve as a tailwind to growth for the remainder of 2026.

Indeed, the ISM Manufacturing Index has now spent six consecutive months in expansion, the first such stretch since the 29-month expansion between January 2020 and October 2022. At the same time, corporate profits have exceeded analyst expectations at a rate rarely seen outside of a post-recession economy (Exhibit 1). Exhibit 1: Corporate Profit Expectations Unusually High As of June 30, 2026.