Reality vs Illusion

Scott Poore, AIF^®, AWMA^®, APMA^®

August 13, 2026

Markets are trading in unusual patterns of late that are reminiscent of previous bull market runs. Some of the best investing lessons can be learned by looking back at the history of markets and how previous cycles eventually came to an end. This week's musings are inspired bythe 1999 film "The Matrix." Here is some trivia about the film:

Hollywood was not ready for the film when it was introduced. Movie executives described it as "the script that nobody understands." So much so that the studio limited the budget on the film to $63 million, which after ground-breaking special effects were paid for, that left very little room for exotic film locations and expensive wardrobes. The film, however, earned $473 million worldwide at the box office, one of the top 5 highest grossing movies that year.
Now over twenty years later, most forget that the movie won 4 Oscars. It won for each of the four categories in which it was nominated - Best Film Editing, Best Sound, Best Sound Effects, and Best Visual Effects.
Will Smith was originally cast as Neo and the studio wanted Val Kilmer for the role of Morpheus. Smith turned it down to shoot "Wild Wild West." Smith later stated he had no regrets as he thought "Keanu was brilliant as Neo." Sandra Bullock was originally offered the role of Trinity, but turned it down. She later stated she regretted her decision.
The Wachowski brothers labored over the script for five and a half years. When it was pitched to studio executives, there was difficulty imagining how it would translate onto the screen. The brothers hired leading illustrators to create over 600 storyboards to help executives imagine the script coming to life.
By 2002, the famous "Bullet Time" scene where Neo dodges bullets had appeared or been spoofed in over 20 different movies.
The principal cast spent four months with martial arts experts learning various forms of fighting. They had originally estimated just a few weeks of training.

Here's what we've seen so far this week...

Control vs Rebellion. One of the themes running through the film "The Matrix" is the contrast of control and rebellion. In the film, humans resist the controlled environment of the Matrix to liberate minds and bodies from that domination. In the land of reality, investors are sometimes swayed by financial media causing fear over temporary events, such as the rise this year of inflation. After spiking in March, April, and May of this year due to the onset of the U.S.-Iran conflict, inflation has receded over the last two months.¹ The Consumer Price Index for July came in as expected +0.1%, dropping the year-over-year reading to 3.4% (below the historical average of 3.5%).¹ Declines in fuel and gas were the primary contributors to the low CPI reading.² Had airline fare, the largest increase among categories, adjusted to the decline in fuel, it's possible the July reading for CPI could have been flat. The prices for key items such has dairy, fruits, vegetables, meats, poultry, fish, & eggs all declined in July.² On Thursday, the Producer Price Index showed a similar decline, coming in at 0% versus the expectation of +0.2% and dropping from 5.5% to 4.7% on a year-over-year basis.^{3 4} The Cleveland Federal Reserve is currently expecting a +0.3% increase in inflation for the August report, which, if true, would keep the year-over-year reading stable at 3.4%.⁵ The price of oil seems to have stabilized over the past few weeks between $84 and $76/barrel.6 Any improvement on the U.S.-Iran front could help lower the expectation for August's CPI release. For the time being, futures on the September Fed meeting have changed over the past few weeks. Just one month ago, there was a 24% probability of a 50 basis point rate hike and a 51% probability of at least a 25 basis point rate hike.⁷ After this week's CPI and PPI reports, the probability of no rate hike has jumped from just a 25% probability one month ago to a 66% probability.⁷ If this were to indeed be the result at the September FOMC meeting, a stable rate environment could provide some room for equities to continue marching higher in 2026.

Humanity vs Technology. Another, more obvious, theme in "The Matrix" is the pitting of humanity vs machine. Since the dawn of the 20th century, the question of man being replaced by machine has raged in philosophical circles. The question for investors isn't as much man vs machine, but man vs man. Are the companies involved in AI being responsible with spending and financing? That question is uncertain at best. According to J.P. Morgan, the largest companies involved in AI are investing in one another at an alarming amount.⁸ This form of investing draws into question the diversity and independence of each company's earnings and revenues related to AI. Should an event call into question the revenue growth of AI as a whole or the future growth of that industry, there is a possibility each of the companies on this graphic could be affected. The type of "circular financing" going on in the AI space comes under even more scrutiny when looking at the current composition of the market in terms of size and concentration. Currently, 5 of the eleven companies in the graphic above - Nvidia, Microsoft, Amazon, Google, & Meta - are among the top 10 names in the S&P 500 Index by market capitalization.⁹ Four other companies not shown in the graphic above, but are in the top 10 S&P 500 holdings that also are heavily invested in AI include Apple¹⁰, Broadcom¹¹, JP Morgan¹², & Berkshire Hathaway¹³. These names currently represent 40% of the composition of the S&P 500 Index, which surpasses the peak of 27% in the top 10 of the index in 1999.¹⁴ Again, any event or catalyst that were to call into question the prospects for growth in AI, the prices of these top 10 companies could decline, thereby, pulling the price of one of the largest indices in the world down with it. On the brighter side, one contrast between 2000 and today is the presence of earnings growth. As visible in the graphic, there was a considerable gap between the market cap of the top 10 companies in the S&P 500 and their respective earnings in 1999-2000. Today, there is only as slight gap between the market cap of the largest S&P 500 companies and their respective earnings. That being said, investors would be wise to heed the lessons of the past.

Reality vs Illusion. The primary theme that is at the heart of "The Matrix" is reality versus illusion. The construct that was the Matrix was simulated to satisfy humans. Once removed from the Matrix, reality was more bleak. The bull market cycle of the past few years has helped aid investor behavior that is problematic, similar to behavior at the peak of the Dot.com era. Some of that behavior has to do with the excitement of AI and concentration in AI-related investments. As of April, 2026, Morningstar found that there were 48 ETFs assigned with the AI investment thematic tag with an average age of approximately 3 years.¹⁵ Assets in these ETFs have grown to more than $19 billion in that short amount of time. Similarly, at the end of 1998, there were only four dedicated internet mutual funds. By March of 2000, at least 35 new mutual funds had been launched that invested primarily in internet companies. Assets in these 39 internet mutual funds totaled approximately $7 billion.¹⁶ In 2000, the internet boom hit a peak and the Nasdaq Composite Index declined by more than 70% over the next two years.¹⁷ However, even though the Dot.com crash was highly-attributable to the Nasdaq, the S&P 500 Index was also pulled down by nearly 50% over that same time period due to the concentration in some of those same internet-related stocks. The appreciation in investment accounts and retirement balances due to the current bull market cycle is allowing investors to access their retirement funds for hardship withdrawals for either emergency needs or discretionary purchases. While the number of hardship withdrawals was relatively flat from 2016 to 2019, those numbers have steadily increased since about mid-2020. Last year, a record 6% of retirement participants took hardship withdrawals from their accounts.¹⁸ That compares to 4% hardship withdrawals in 1998, which was elevated at that time.¹⁹ The point being, investors are becoming less responsible with their investment accounts due to a market that has grown substantially over the last 3 years. Consistent investing over the long-term based on risk tolerance could be a better approach compared to chasing after the returns of a concentrated index or benchmark. When the music stops and there are only a couple of chairs left, the investors with no seat available could experience considerable losses if their portfolio is concentrated or positioned more aggressively than their stated risk tolerance.

Click here to watch the famous "Bullet Dodge" scene.....

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.