Q2 Review
U.S. Stocks
Major indexes finished the quarter strongly, with growth stocks and technology leading gains.
Investor optimism was driven by:
Continued enthusiasm around artificial intelligence.
Strong corporate earnings from many large-cap companies.
Expectations that the Federal Reserve could begin lowering interest rates later in 2026 if inflation continues to cool.
Interest Rates & Bonds
Treasury yields were volatile as investors weighed:
Moderating inflation.
A still-resilient labor market.
Fed commentary emphasizing a data-dependent approach.
High-quality bonds produced modest returns while continuing to offer yields that remain attractive relative to recent years.
Inflation
Inflation continued to trend lower compared with 2025, though it remained above the Fed's long-run 2% target.
Housing and certain service categories remained stickier than goods prices.
Economy
The U.S. economy remained surprisingly resilient.
Consumer spending held up reasonably well despite higher borrowing costs.
Employment stayed relatively healthy, although hiring showed signs of slowing compared with earlier in the year.
Outlook for the Rest if 2026
The outlook for the second half of 2026 is constructive, but it's also one of the most finely balanced markets we've seen in years. The consensus among major investment firms is that the bull market can continue, but future gains are likely to be driven more by earnings than by expanding valuations.
Bullish factors
Corporate earnings remain exceptionally strong. This has been the biggest surprise of 2026. Analysts have consistently raised earnings estimates rather than cutting them, which is unusual. Much of the strength comes from:
AI infrastructure spending
Technology
Energy
Communication services
As long as earnings continue growing at a healthy pace, stocks can justify today's valuations.
The U.S. economy is still expanding. Most economists expect GDP growth around 2–3% for 2026—not spectacular, but enough to support corporate profits without signaling recession. Consumer spending and business investment remain relatively resilient.
AI investment remains a powerful tailwind. Companies continue investing hundreds of billions of dollars into AI infrastructure, data centers, chips, software, and power generation. That spending is benefiting far more than just the mega-cap technology names.
Risks that could create volatility
Valuations are no longer cheap. After a strong first half, the market has less room for disappointment. If earnings merely meet expectations instead of exceeding them, stocks could consolidate or correct.
Inflation and interest rates. Markets remain highly sensitive to inflation data. If inflation stays elevated:
bond yields could rise
valuation multiples could compress
high-growth stocks may underperform
Recent surveys suggest the Federal Reserve may keep rates higher for longer than investors hoped.
Bottom line
The foundation for equities remains solid because earnings growth has been unusually strong and the U.S. economy has avoided recession. However, after the market's impressive first-half rally, expectations are high and valuations leave less room for error. That makes the second half of 2026 more likely to feature increased volatility and more selective leadership than the broad, powerful gains seen earlier in the year.
Historically we see peaks in July and August, with corrections in the fall, followed by rallies into year end. Our base case is a continuation of this general pattern. A correction could be in the range of 10-15%, with the ensuing rally taking us up to our year-end target of 7500.