Steven Cress' Top 2 Stocks H2 2026

0:09Hey, everyone. Welcome to Top Stocks for H2 of 2026. I'm Daniel Snyder from Seeking Alpha, and you're in for a treat today. Now, if you joined us last week for last week's webinar about the review of the top 10 from January, we know that we had one word, and that was outperformance. Well, hopefully the word from today on is continuation, and we're going to dive into conversation and get those picks from Stephen Kress here in just a moment. But before we do, let's get a quick legal disclaimer out of the way. Past performance is no guarantee for future results. Any views or opinions expressed may not reflect those of Seeking Alpha as a whole.

0:41The accuracy and completeness of content shared during the event cannot be guaranteed. Content is offered for information purposes only. Analysts, investing group leaders, and other third parties participating in the event include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body. Seeking Alpha does not take account of your objectives or financial situation and does not offer any personalized investment advice. Seeking Alpha is not a licensed security dealer, broker, US investment advisor, or investment bank. With that out of the way, this is the best part.

1:11I get to introduce you to Stephen Kress. For all of you that know who he is, well, he is back. He is the quant titan here at Seeking Alpha. So obviously, we love to pick your brain on the knowledge and see what your thoughts are on the macroeconomic things that are unfolding in the market, how that's affecting the market, what you're seeing within the quant system, because you designed and built it, you know it best. But I'd love to start off. Can you walk us through what do you see in the macroeconomic world right now? Yeah, well, first and foremost, Daniel, thank you for organizing this event.

1:36It's one of my favorite of the year. This event and top stocks in January. And we've got a great track record and I appreciate you organizing it. I think that's a great idea. We'll cover a little bit what we see in the market, the macroeconomic world, what we see with the equity market, and what we have seen, and I'm sure many people have witnessed it and felt it in their own portfolios, is a lot of volatility during the first half of 2026. It is amazing that the market hit near all-time highs in June. Both the S &P 500 and the Dow Jones are near record highs. The NASDAQ hit their record highs in early June.

2:13And then technology really did come off sharply. And this is amidst just a lot of uncertainty. we have a war that's going on with Iran. We have inflation that's been very sticky. And that was a result post-pandemic. And then tariffs. And then obviously with a war, oil surging from$70 to$120. And we, at the same time, have had this AI revolution, which has led to huge capex spending by hyperscalers. And of course, additional uncertainty coming up as it is seasonal with midterm elections. And during the last 25 midterm elections, the market typical is very volatile during that period. So it has been a period of risk on, risk off, risk on, risk off during January.

3:03But I will say our earnings have really helped keep the market near all-time highs. Even with the market close to highs, investor sentiment is very, very skittish. This is taken from the CNN Fear and Greed Index, which I commonly use, I think it's a good index, has a lot of underlying indicators that show what sentiment arc. So these market indicators and economic indicators feed into this overall index. And you can see it is now approaching extreme fear. And this is during a period where the market is close to all-time highs. And as you look at the fear and greed index for the previous close, it was 24.

3:44A week ago, it was 31. A month ago, it was actually greed at 59. And a year ago, it was even closer to extreme greed at 64. So investor sentiment has been all over the place. If you look at the year-to-date column, you can see easily technology has led this year. But it's a very deceptive picture. If you take a look at the five-day performance for technology, and yesterday's performance, you can see technology was down 2.7%. For the five days, it was down 1.2 % when most other sectors were up. And it's just like switching on and off every couple of weeks between technology taking the market to highs to technology falling off.

4:28Energy, you could see, is up 18 % year to date. At one point, energy was the best performing sector. It was up close to 30%. Honestly, that fell when it looked like we were going to have a treaty with Iran, but that has since reversed. So there's just a lot of volatility, which has led the VIX to rally during various periods and the CNN fear and greed index to fall to the fear, to extreme fear territory. And then at other times, earnings are just crushing it, both top line and bottom line. But we have our results and that helps bring the market to new highs. So lots of mixed uncertainty. And Daniel, we were just talking about this, you and I earlier today, with the current CPI numbers.

5:10Why don't you tell the audience a little bit about the economic data that just came out and had a positive impact on the market today? Yes, does have a positive impact. Obviously, we've been watching the inflation numbers every month, watching also producer price index numbers. But the CPI, you get a little bit of hope this morning with the release of it actually falling, which was a surprise, but probably not a surprise to some that are watching those oil prices. You know, watching the oil futures, obviously, as we were doing our webinar last week, we were, I think, around$75. Today, we're up closer to$80.

5:39The market's going to be watching that as well going forward because higher energy prices, obviously, can trickle down to that inflation number. But it is a little bit of a hope here. The cause being that the falling energy prices probably helped us here. But you think about the Federal Reserve, right? So what comes next? We obviously have a new Fed chair, Warsh, who stepped in. And the market is probably going to test him at some point and see if maybe you can talk about this a little bit further into the presentation today. But thinking about the dual mandate, right? Employment and inflation.

6:07And with this inflation number, obviously, they're not going to react to just one inflation print. They usually look at three or more to see what the trend is. So we need to see how it pans out over the rest of the summer. But also keeping an eye on those employment numbers at the beginning of every month. Employment's been strong is what we've seen, even with everybody talking about AI, maybe having job displacement, job destruction. The numbers aren't showing it. So as you're talking about with the trade that's been going on with the AI trade, there's a lot of focus on it. But this inflation print today is definitely going to be welcomed by all.

6:37And we'll see what happens over the next two or three months, especially as you mentioned with Iran, the closure with the Strait of Hormuz, everything that's going on over there. Just as we thought we were getting a glimmer of hope, obviously things have escalated again. So all eyes are obviously on that. But I do want to mention as well, if you were watching the bank earnings this morning, Goldman Sachs, JP Morgan, earnings are strong. To your point, earnings are coming in strong so far. However, I believe Diamond even said one of the big key risks right now is still that geopolitical risk. So, Steve, do you want to talk about what you're seeing with the interest rate traders and what they're looking forward?

7:09Yeah, absolutely. So much uncertainty. And you can see before this big drop, there's a big increase. So, like last month, you know, the NASDAQ really started to come off. That's when we saw this like CPI print surge. So if you go back to that period, people were really fearful. Will it continue to surge? Now, we knew we had the treaty take place, and that helped alleviate a lot of the pressure, and oil did come down. But as we're getting into more geopolitical events that could indicate further hostility, there's still a lot of uncertainty in there. Interest rate target probability going out to December.

7:44So for the FOMC December meeting, this is showing you what basically the sentiment is of interest rate traders. And this is completely different than what we were seeing really just six months ago. Six months ago, we were looking for cuts in interest rates. Now, interest rate traders are actually betting rates are going to go higher. And that's due to persistent inflation. That's due to higher treasury yields. currently for the Fed December meeting, about 21 % of interest rate traders are expecting rates to stay unchanged. However, you have 41 % expecting a 25 basis point hike. You have 28 % expecting a 50 basis point hike.

8:25And you even have 8 % of interest rate traders expecting a 75 basis point hike going into that December meeting by that period. So this is clearly a different picture than we had about a year ago. We do have a lot of spending there. And this chart shows you, it's from Goldman Sachs, and it's a really nice chart. It shows you hyperscalers and AI CapEx spending, which is absolutely tremendous. And what I'd like to make a notation here is Goldman Sachs is looking for$1.4 trillion in hyperscaler AI CapEx spending by 2027. I remember showing a similar slide to this back in December, and this 1.4 trillion number was actually beyond 2030.

9:10So spending is happening at such a fast rate that Goldman Sachs actually put into this chart that they're looking for 1.4 trillion in AI CapEx spending by 2027. And just recently, we saw a lot of the MAG7 companies actually issuing bonds so they could raise capital. These companies are rich in cash, really rich in cash, super profitable, out there with bond issues, so they could spend more money on AI. And it's just really a testament to the revolution that's taking place. But unlike what we've seen in the past with the TMT bubble, which occurred around 99, 2000, 2001, companies now have real revenue and real earnings.

9:58And I was there for that period. and a lot of loans were being provided by vendors to companies that had absolutely no revenue and no earnings. And this time, we are seeing lots of capital going to companies that are earning money. And we own a lot of those stocks and we recommend a lot of those stocks in our portfolio. And you can see in terms of earnings, the S &P 500 earnings outlook continues to improve. So despite the AI bubble, despite interest rates being higher, despite inflation being higher for longer, we are seeing strong corporate profits. And that has helped to bolster the S &P to record levels up 9 % year to date.

10:38And in fact, S &P 500 earnings are expected to grow by 24 % year over year for the calendar year 2026, led pretty much by technology and energy. And stocks that are exposed to AI data centers and the energy transition because AI requires a lot of energy. And in addition, really, I don't want to leave out the geopolitical events with aerospace and defense spending and a lot of stockpiles having dwindled. There's going to be a lot of government spending in this area as well. There's continued reason to believe that earnings should continue to improve going forward. Every single sector except the health care sector is the only one where it shows that earnings will not be as high as March 31st.

11:25So another reason to be concerned, though, there is, you know, outside of inflation being higher than expected, interest rates being higher than expected, geopolitical events, we are also coming up on midterm elections. I mentioned this previously. And this is a seasonal impact that does occur. And you can see from the last 25 midterm elections and every single case, the largest drawdown in a 12-month period occurred prior to that midterm election. On average, there was a negative 18 % drawdown in the market prior to the midterm election. So certainly, with a lot of the economic data that's there, with interest rates potentially moving up, with inflation being higher than expected, and not knowing what's going to happen with geopolitical events on top of midterm elections, there is a lot of uncertainty.

12:18I will say, and this is a huge benefit to this, and there's a huge opportunity here. For those who have taken advantage of this in the past, and I know many investors who have, you will see for the period after midterm elections, the three-month period following it, on average, the market is up 5.8%. For the six-month period, it's up 10.5%. And for the 12-month period, it's up, on average, 14.8%. So really, there is an opportunity. If the market does weaken, it's probably most likely, according to history, opportunistic to take advantage of that market weakness. Based on the uncertainty, even though the market is trading near all-time highs, we should be prepped for this uncertainty.

13:02So what I wanted to highlight, and many of you may have seen this chart that we pulled together in the past, we took the last five market corrections going back to 2010 and we sort of drew a line in the sand and we said if the market pulled back 15 we would use that as an opportunity to buy the market and when we did if you bought into the s &p 500 when the market was down 15 and you held it for two years on average you were up almost 50 so that really demonstrates the power of being able to take advantage of the market dipping and not letting fear have you panicked, but actually taking advantage of the opportunity.

13:44And more importantly, instead of buying the S &P 500, if you bought our top 10 quant strong buys when the market pulled back and you held those for two years, on average, you would have been up 117%. So that is a real testament to buying stocks with strong fundamentals. And I will tell you, when the market goes into those corrective phases, even if the market's only pulling back 5 % or 10 % or 15%, usually stocks with strong fundamentals fall far harder and far faster. So it's not uncommon when the market has that kind of pullback to see many of our quants strong buys decline 20%, 25%, 30%, 35%, even 40 % in the initial phases of market pullback, but it creates a vast opportunity to buy stocks with strong fundamentals.

14:32And I use here a couple of quotes from some famous investors. I like to use the one from Peter Lynch, who famously said, the key to making money in stocks is not to get scared out of them. Fear and greed are moving the market. Headache selling during downtrends can lead to financial setbacks. And that is so true. If you get scared out of the market, when it cracks, that really can lead to a setback. One of our own writers here at CK Alpha, Colin Roach, says the stock market is the only market where things go on sale and all the customers run out of the store. And of course, Warren Buffett saying, be fearful when others are greedy and greedy when others are fearful.

15:09And basically, when I summarize all these, I sort of have my own quote I like to use, fear fades, the market will always return to fundamentals. And that's why you really want to take advantage of stocks with strong fundamentals during these pullbacks. And we have our own track record to prove that. We have a product called AlphaPix. AlphaPix has been out since July of 2022. And with AlphaPix, we basically recommend our two strongest quant ideas every month. And we've asked a portfolio of about 40 stocks. And what I wanted to highlight here is in September 2022, the mini crash which occurred, the market was down about 17%.

15:49If you bought into AlphaPix when the market was down 17%, I believe in many of the stocks and AlphaPix were getting hit much harder than the market. Had you bought in at that point when the market was off 17 % and you held it, you would now be up 396%. And then even a little bit more recently, if you went to the first quarter of 2025, when the market corrected about 12 % on Liberation Day, the market was down 12%. If you bought AlphaPix at that point, stocks with very strong fundamentals, you would be up 146 % now. And even more recently, this year, in March 26, when we had the oil shock, the market pulled back 8.5%.

16:31And if you bought AlphaPix at that point, you would be up 41 % already. So it's a real testament to buying stocks with strong fundamentals during these corrective phases. Sentiment can be high, anxiety can run high. And really, the purpose of Quant is to help eliminate emotion from investing. When people ask, what is Quant? Quant really is not that different than what many analysts do. I was an analyst myself, and I worked at Morgan Stanley. And many analysts at Morgan Stanley or Goldman Sachs or Merrill Lynch, they tend to look at fundamental factors. And Quant isn't really any different. It looks at fundamental factors, but it does use a lot of data and math and algos to help identify investment opportunities.

17:17The quant could be different for many models. Our particular model is focused on what I call GARP+. GARP would be growth at a reasonable price. And then we sort of have the plus aspect because we also look at momentum and positive EPS revisions. And there are a number of analysts that look at those factors as well. But what quant does is it employs the power of computer processing. So instead of, when I was an analyst, I could only cover maybe 20 stocks at one given period. And when you cover 20 stocks, maybe you can write a full report on each stock, maybe twice a month, and then you have alerts that you might put out as well on a monthly basis.

17:54You're really limited into how much you can write and provide content. The power of computer processing enables us to basically go through close to 5 ,000 stocks on a daily basis. and every single morning we go through companies' balance sheets, income statements, cash flow statements, and hundreds of financial metrics, and we look at stocks, and we compare them to other stocks in the sector, and we score them. So Quant gives us the ability on a daily basis to issue a directional recommendation, whether it be a strong buy or a strong sell, by using data on a daily basis and comparing companies to other companies in the sector.

18:34So it really gives us a great ability to rank stocks, and differentiate the strong from the weak. And we have a really good track record with our strategy. These are all simulated trades. This actually is not even a back test. This goes back about five years, take all our quant strong buys, and on a daily basis, we enter into a portfolio and we measure the returns. I put this out here as a demonstration of the overall strategy. And you can see our quant performance is up 179 % over a five-year period, just being the quant strong buys. against Wall Street strong buys, measuring that on a daily basis, being up only 15.89%.

19:14So you're looking at our quantity system up 179 % compared to Wall Street strong buys up only 15%. And the S &P 500 for the same period up 52%. So at any given day, we can have anywhere from 380 to 400 strong buys that are in this portfolio. So this really demonstrates that the overall GARP strategy that we employ works well. We could also see our performance for this year alone is working very well. The quant system is up 22 % versus the S &P up 12.78%. And this is actually a rare year where Wall Street analysts are actually doing fairly well. They're up about 13%. But you could see over the different time horizons, whether it's five years or just year to date, the quant system is handedly beating it.

20:00So now I want to provide a recap on our top 10 stocks from January. I'll actually show you the performance for a couple other periods here. This is the actual top 10 stocks for H1. For 2026, the return from January 6 to June 29 was really 70%. That is a huge return for 10 stocks compared to the S &P for the same period up 8.32%. But we do have a track record, if you go to 2025 and you measure stocks that we recommended on January 9th, 2025 through the end of June this year, you can see we're up 91 % in those stocks versus the S &P up 27%. If you took our recommendations from January of 2024 through June of this year, it's up a whopping 329 % compared to the S &P up 60%.

20:55And if you went back to 2023, and the stocks we bought in January then and held it to June of this year, we are up 232 % versus the S &P up 101%. So that average total return is up 180 % using our quant top 10 versus the S &P up about 50 % for the same period. So our strategy really does work very well. Whether we're looking at all the quants, stocks, which were written strong by, all 380 to 400, or just our top 10 recommendations, it has excellent performance. I want to give an idea to people because we get this question all the time. We have a great track record for our top 10 stocks and a lot of people ask me, how do I do it?

21:37Do I just go to the screen? Do I just pull the top 10 stocks? And I will say I do go to our quant screen and I do set some parameters and criteria. So I am only looking for quant strong buys with preferred factors and fundamentals. and I added tilt towards top and bottom line growth. And everyone has the capability to do this on our screening tool. So I'll put a little bit of a tilt on growth. And then I also add a little diversification with market cap and sector diversification. So if you were to see the names that I present here, it is not necessarily in the sequential order that you would see if you ran our quantum screen.

22:20And the reason being, when people buy these top 10, I don't want it to be a full list of technology stocks. I want some diversification. I personally believe diversification is very important. It helps to minimize risk and maximize returns. So even when it just comes down to my top 10 list, I like to add that diversification through sectors, through market cap. And I do believe that helps to provide good returns over the long period. And once I highlight the sectors, I try to find the best stocks within those asset classes. that have the best growth, the best valuation of framework, the best probability.

22:57So typically, when you see the list, some of the names would be on the quant list on that top part sequentially, but you have to go down a little bit further to see some of the other names that I recommend. For the most part, if you're looking at the top 30 stocks, you'll see most of the stocks will coincide with that. I do want to say, though, and we've had this question, when a stock goes to a sell from the top 10, do you sell it immediately? This is a list that I actually do not change. So where with the AlphaPix portfolio or the ProQuant portfolio or the Quant Growth and Income, where those are actively managed, this top 10 is just a static list of our top 10 stocks.

23:36We don't make any changes. So a stock falls to sell. We're not giving you any guidance. It's really up to you as an individual to make a move. If a stock goes to hold or sell, you can decide to either keep it in your portfolio or remove it. This is a static list for us, so we do not make any changes. So top 10 stocks for 2025, as I mentioned, they're up 91%. You could see 7 out of 10 names have generated a positive return with 4 stocks returning triple digits. And you look at this, you could see AGX had a return of 322%. Celesica with a return of 266%. Credo with a return of 245%. and DXP with a return of 101%.

24:23That was a heck of a list that we put out there. And you can see really 70 % of the stocks are up and three stocks which are down. And what's really nice to highlight is the stocks that are down. I mean, one being down 54%, no question about it, that's a lot. But you can see the stocks to the upside far, far, far outperformed those that fell. And if we take a look at our top 10 stocks for 2026, which are through the end of June, they were up close to 70%. And we take it to today, they're up close to 57%. As I mentioned, the markets have been really volatile in the first week of July, especially with geopolitical events and a lot of the AI companies, the investors believing that they've been overextended in terms of valuation have sold off.

25:08So we've gone literally from being up 70 % to up 57 % in a short period. Irregardless, I'll take a 57 % return any day of the week. Eight out of the 10 names have generated positive returns with eight stocks providing double-digit returns or better. We have Micron Technology up 200%, Advanced Microsystems up 148%, Sienna up 98%, Coherent up 71%, ATI, which is an aerospace and defense company, up 55%, percent, Allstate Financial up almost 23 percent, and Celestica up 19 percent, and NSA up 12.2 percent. All the stocks that are up are beating the S &P 500. We have two names that are down, Barrick Mining and Wilden down 21 percent and 34 percent respectively.

26:04Having said that, stripping out the performance and just looking at our factor grades. We identify five core factors and when we recommend stocks, we want them to be collectively strong on those factors, which are value, growth, profitability, momentum, and EPS revisions. And you can see for the most part, all top 10 stocks really look quite good on these various metrics. The majority of the stocks are still strong buy or buy. We have three companies that have a hold. And hold to me means hold. It doesn't mean sell. And even with our Alphapix product, if a stock drops from a strong buy or buy to hold, we keep it in the Alphapix portfolio for 180 days.

26:47So again, hold means hold. It does not mean sell. You know, part of the reason why, for a coherent evaluation grade dropped to a D. So it's gotten a little bit expensive. But the growth grade is still an A for the company. It still has a very strong momentum. And analysts are still very positive. you can see it has a B grade for EPS revisions. So that means the majority of analysts are taking their estimates up as opposed to taking it down. And again, these are all sector relative grades. So whenever you look at the valuation grade or the growth grade for this company, you know it's relative to the sector.