Here in NYC the weather is finally looking up. Just like investing in the market has felt since the end of March, it feels good to walk the streets in a t-shirt and let the sun warm you up. Of course, we haven’t yet gotten to the dog days of summer. These are days when the humidity smacks you in the face as you walk outside, and the only relief is when a late afternoon thunderstorm clears it away.

And because of that humidity, it's often a good idea to carry an umbrella with you in the summer. But these are easily forgotten. And then you find yourself buying one from the guy who came out of nowhere standing by the subway stairs as you see the rain pouring down, conveniently charging you $20 for one. 

Should have bought that umbrella when it was sunny. 

Lately, the cost of caution has been visible. In our own proprietary factors, we’ve seen a great disparity in the types of US stocks. 

The gap between stocks exhibiting strong momentum and nearly everything else, particularly stocks that exhibit low volatility, as defined by MSCI’s indices, has been extremely wide over the last three months.

While for the previous 3 months (Dec 2025 to Feb 2026), for example, the difference in return between quality and momentum factors was 2.4%, not 24%. We believe that gap is worth considering, not as a trade, but as a market-behavior observation. The discipline lesson for long-term portfolios may not be to abandon balance. It's to recognize that diversification has a cost in (narrow-ish) rallies, and that cost is the price of being there, if and when leadership eventually rotates.

And narrow is the operative word. Of the AI-oriented companies we track, not including the materials and industrial names that benefit from the build out of AI, they are up on an average weighted basis, 28% in the last month, versus the 5.5% or so from the S&P 500 (both through June 4th).

The dominant question among investors has been FOMO, instead of fear—from "how do I protect against losing money?" to "how do I avoid missing more upside?"

Until today, the VIX has stayed near the lower end of its recent range through May, even as the S&P 500 has hit new highs. So it’s no wonder the cost of protection against a sudden crash dropped to its lowest level this year. 

The CBOE Skew Index measures the perceived tail risk of the S&P 500. It focuses on "out-of-the-money" (OTM) put options that investors tend to buy to insure their portfolios against a severe crash. Current levels are the lowest in 3 months and similar to February, prior to the conflict in the Middle East. On the other hand, demand for bullish calls has proved relentless, as the market’s optimism remains.

It's understandable. Fundamentals look strong: forward S&P 500 EPS estimates are up roughly 15% YTD through May, a revision pace more typical of a post-recession rebound than a mature expansion. Per Factset, Q1 earnings grew 29% year-over-year—more than double the 13% expected at the end of March. Net profit margins hit 14.8%, the highest the S&P 500 has reported since FactSet began tracking the metric in 2009. But there are real headwinds: inflation worries are resurfacing, “Middle East” mentions on Q1 earnings calls hit a decade high, and 30-year mortgage rates just made a fresh nine-month high.

It’s not a terrible time to consider buying that umbrella.

For portfolios, the 3 Rs still frame how we're thinking. We are still focused on the Receivers of AI capex; semis, networking, electrification, and Resources. Recoveries, such as in select software and healthcare, are the umbrellas for us. 

Make sure the FOMO doesn’t catch you in the rain without $20 cash.