CIO 2026 Mid-Year Outlook: Selectivity Matters.

Dear Hennessy Funds Shareholder:

As we enter the second half of 2026, investors continue to navigate a market that has surprised even seasoned investors. Despite periods of uncertainty, one thing has remained consistent: Investors who have stayed invested have been rewarded over the long term.

In fact, over the past 17 years from March 6, 2009 through June 2026, the S&P 500® Index has generated an annualized total return of 17%.

Many of the forces that supported the market during the first half of the year remain firmly in place. Two, in particular, stand out.

1. AI spending is fueling a new investment cycle. Large technology companies are deploying enormous amounts of capital toward data centers, computing infrastructure, and next-generation capabilities. Companies that once held substantial cash reserves are now directing those resources toward building the infrastructure needed to support future growth. The result is a significant flow of capital throughout the economy, benefiting not only technology companies but also industries tied to power generation, industrial equipment, construction, and data infrastructure.
2. Companies continue to deliver strong earnings and profit growth. The S&P 500 traded at less than 20x next year’s earnings estimates as of mid-year 2026. Meanwhile consensus forecasts call for earnings per share (EPS) growth of approximately 29% in 2026, followed by an additional 16% growth in 2027. Profitability also remains impressive, with S&P 500 net profit margins reaching nearly 15% in the first quarter of 2026, an increase from 13% in the previous quarter.

The bond market is telling a different story. Fixed income investors continue to grapple with potential risks to the economy, including persistent inflation pressures, evolving Federal Reserve policy expectations, and concerns about the pace of future economic growth.

Markets are currently pricing in a more restrictive monetary policy, with expectations for roughly one hike in 2026 and one in 2027. Those expectations reflect the reality that inflation remains above the Fed’s long-term target. Headline inflation, as measured by the Consumer Price Index (CPI), remains elevated at 4.2% year-over-year as of May 2026.

The fixed income market has responded accordingly. Treasury yields remain elevated, with the 10-year Treasury hovering near 4.5% and the 30-year Treasury remaining above 5%.

At the same time, the bond market may be signaling a moderation in economic growth. Current forecasts call for U.S. GDP growth of approximately 2.1% in 2026 and 2.1% in 2027, below its five-year average of 3.3%.

The divergence between equity and bond markets suggests a potentially more volatile market environment. But it also brings us to what may be the most important question facing investors today: where should capital be allocated?

We believe opportunity extends beyond a handful of companies dominating today’s headlines.

Powering the AI Buildout

Utilities could benefit from the rapid growth in data centers and computing demand that is driving a significant increase in electricity consumption, creating a long-term tailwind for power producers and regulated utilities. Many companies in the sector are also positioned to benefit from the U.S.’s abundant natural gas resources, which remain a critical component of meeting future energy needs. In addition, utilities appear to offer reasonable valuations and potential downside protection during periods of market volatility.

We expect the energy market to remain supported by healthy global demand and expanding natural gas consumption over the next 12 months. While geopolitical risks could create short-term oil price volatility, improving crude supply should help stabilize markets over time. Across the sector, disciplined capital allocation, balance sheet strength, and shareholder returns continue to underpin our positive outlook.

Building the Future

Industrials remain well positioned as manufacturers continue to reshore production and businesses invest heavily in infrastructure. The buildout of data centers, power systems, and related facilities should support demand across a wide range of industrial companies for years to come. We believe the sector offers exposure to both cyclical economic growth and long-term structural investment trends.

Looking Beyond Market Leaders

Financials companies continue to benefit from the wider spread between short- and long-term rates, which can improve profitability for banks and other lenders. Capital markets activity has also remained healthy, supporting earnings across many financial institutions. We believe the sector remains attractively valued: as of the end of June 2026, large and regional banks were trading at about a 40% discount to the price-to-earnings ratio of the S&P 500.

While much of the market’s attention remains focused on the largest technology companies, we believe mid-cap stocks look attractive. Many mid-cap companies stand to benefit from the same economic and AI-related investment trends supporting the broader market but often trade at more reasonable valuations. If market leadership broadens beyond the Magnificent Seven, mid-caps could be well positioned to outperform.

Looking Overseas

In Japan, we see compelling opportunities in areas where structural demand persists regardless of the cycle and where intrinsic value has drifted meaningfully from market pricing. This includes companies benefiting from Japan’s inflationary transition and interest rate normalization, Japan’s world class manufacturing ecosystem, companies that benefit from corporate governance reform and overlooked, undervalued small and mid-cap names. In a market defined by widening dispersion and concentrated enthusiasm, the ability to distinguish genuine value through rigorous, bottom-up research has rarely mattered more.

Markets rarely move in a straight line. There will always be headlines, uncertainty, and volatility, but those periods often create new opportunities. As we look ahead, we believe the question isn’t whether to remain invested—it’s where to invest next. That’s why we’re focused on identifying potential beyond today’s market leaders and positioning portfolios for long-term success.

We value the trust you have placed in the Hennessy Funds by including us as a component of your diversified portfolio. We remain committed to helping you achieve your long-term financial goals. If you have any questions, or would like to speak with us directly, please don’t hesitate to call us at (800) 966-4354.