Fed Week

This is Fed Week, and just as a chorus of voices has begun to warn investors that the FOMC could — or should — raise interest rates to fend off the rising inflation threat, crude oil prices began to fall. Lower oil prices are a major positive for the equity market and as we have often noted, if WTI crude future prices remain at $80 a barrel or less, inflation should slowly ratchet lower. It is clear that crude oil prices rise and fall on vacillating hope for peace in the Middle East and recent hope of an agreement may be dashed by a new wave of Iranian missiles fired on US forces in the Middle East. Still, we do not expect any major changes to Fed policy this week.

As we go to print, the September light crude future is trading at $77.98 a barrel, which means it is up 11% YOY. But more importantly, it is down 37% from the April 2026 closing price of $106.88 a barrel. In April, crude prices were up a shocking 84% YOY. Crude oil prices impact the broad economy with a lag, which means the April jump in crude oil prices led to the May 2026 CPI surge to 4.2%. With that in mind, remember that the WTI futures closed the month of June at $70.75. Therefore, the July CPI report may be more favorable than many expect. If so, it would be a big plus for both stocks and bonds and it is one reason we expect Fed policy to remain on hold in July.

Earnings Season

While the July FOMC meeting will dominate the financial headlines this week, the most important news is second quarter earnings season. Only two of the Magnificent 7 have reported earnings to date, and although Alphabet Inc. Class A (GOOGL – $333.71) beat expectations, its 2026 capital expenditure forecast triggered a significant selloff in AI-related stocks. Tesla Inc. (TSLA – $307.44) beat revenue estimates but missed earnings forecasts and noted that capital expenditure rose 142% to $5.79 billion with total 2026 capex spending expected to exceed $25 billion. Investors have turned skeptical about massive AI-related capital expenditures (which is reasonable) and coupled with the deleveraging of the tech-heavy South Korean stock market, and the Fitch third quarter Global Risk Outlook (warning of heavy capex spending on AI infrastructure), the AI leaders have come under substantial selling pressure. In the longer run, we believe this skepticism is healthy. This week’s earnings reports will include Microsoft Corp. (MSFT – $393.35) on Wednesday, and Apple Inc. (AAPL – $340.08) and Amazon.com (AMZN – $230.86) on Thursday. Nvidia Corp. (NVDA – $197.01) does not report until August 26, 2026. And though the market has discounted much of the risk in capex spending in current prices, we would not be surprised if the Mag 7 remain under pressure until NVDA reports.

More importantly, the AI selloff has materialized without causing major damage to the broader market. The S&P 500 is less than 2.5% away from its record high and the tech-heavy Nasdaq Composite is 8.2% from its all-time high. One reason for this resilience is that there has been rotation away from AI-related stocks and toward defensive and economically sensitive stocks. Note that over the last five trading sessions, the best performing areas of the market have been materials, healthcare, staples, homebuilders, and retail. See page 11. According to S&P data, the sectors that have outperformed the S&P index year-to-date have been energy, industrials, REITs, technology, and consumer staples. See page 12. What many investors may have missed, given the focus on AI and all its ramifications, is that the US economy appears to be doing quite well. This bodes well for a broad range of stocks. The initial estimate for second quarter GDP will be reported on Thursday, and the Federal Reserve Bank of Atlanta model is estimating growth of 1.5%. Real GDP increased 2.1% in the first quarter. We think the second quarter could exceed the Fed’s 1.5% estimate given the strength seen in retail sales, capital expenditures, and improvement in the goods trade balance. If so, it would explain why economically sensitive stocks are now outperforming the Magnificent 7.

Homeownership Declines

One area of the economy that continues to be in a slump is housing. The US homeownership rate fell from 65.3% to 65% in the second quarter of 2026, bringing the ratio below its long-term average of 65.3% for only the third time since December 2019. The Census Bureau estimates that total households in the US increased from 133.7 million at the end of 2025 to 134.0 million in June 2026, but households owning a home decreased from 87.8 million to 87.1 million in the same period. Younger households showed the greatest loss. Households under 35 years of age that owned a home fell from 36.8% to 35.2% and those in the 35 to 44 years of age bracket fell from 61.1% to 60.9%. Households 65 years of age or over increased homeownership from 78.4% to 78.6% in the first six months of 2026. See page 3.

Overeducated and Underpaid

Millennials have had a different experience from previous generations since they entered the workforce burdened by student loans, soaring home prices, relatively high interest rates, and very high healthcare insurance costs. Homeownership has been far more difficult for millennials than for their parents, and it may explain the current trend of disillusionment and interest in socialism. Some young people are described as “overeducated and underpaid” due to a mismatch between their education and job opportunities. A large part of this mismatch is a result of the long-held view that everyone needs a college education. This has proven to be faulty thinking since many trades such as construction workers, electricians, and utility workers rank among the higher paid and most rewarding jobs for young adults.     

But the current slump in the housing market may bring hope to this young generation. New home sales increased from 618,000 units in May to 628,000 units in June; however, even with this uptick, sales declined 5.6% YOY. The average price of a single-family home fell from $525,200 to $475,400 in the month, a 6.5% YOY drop and a decline of 14% from its July 2022 high. The median price of a single-family home also fell from $412,000 to $398,300, a 2.7% YOY decline. See page 4. All in all, this shows a deceleration in the housing market, which has persisted over the last three years.

Sentiment indicators shifted in opposite directions in July. Conference Board confidence fell to 90.8 from an upwardly revised 92.2 in July. This decline came primarily from the decline in present conditions, which fell to 114.9 from an upwardly revised 118.5 in June. Expectations were unchanged at 74.7. University of Michigan sentiment climbed from 49.5 to 54.4 in July due primarily to a big increase in present conditions from 47.7 to 54.9. The expectations index also rose from 50.7 to 54.0. In general, sentiment indicators have been poor guides for the economy and have been oscillating at recessionary levels for most of the last six years. See page 5.

S&P 500 earnings continue to surprise to the upside, and equity valuations remain stable to lower at 21.2 times the IBES 2026 estimate and 18.3 times the 2027 estimate. We believe these are reasonable valuations given the fact that earnings have grown 22.6% over the last twelve months and are forecasted to increase 22.5% over the next twelve months. In sum, we remain a buyer on weakness.

Gail Dudack

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We can understand why many forecasters are warning of a bear market ahead. The Iran conflict appears far from over and Yemen’s Iran-aligned Houthis are blocking the Red Sea. WTI crude oil futures are trading back toward $85 a barrel which suggests inflation may not be under control. Goldman Sachs is warning that crude oil could climb above $120 a barrel in the fourth quarter if shipping disruptions continue. (Déjà vu?) And if crude oil prices spike, interest rates could rise, which would hurt an already weak consumer and housing market. Many technology leaders, including SpaceX (SPCX – $123.54) and Oracle Corp. (ORCL – $127.05), have had substantial debt offerings to underwrite large AI-related capital expenditures expected over the next twelve months. SPCX carries a BBB investment grade rating, but recent bond spreads of 1.62 points exceed even the BB junk average of 1.55. Oracle debt was just downgraded by S&P Global Ratings to BBB–, just one notch above speculative grade, or junk. These credit warnings make both bond and equity investors nervous since the bond market is often a predictor of equity market woes. Not surprisingly, the massive data-center spending initiated by many AI companies is coming under scrutiny as investors wonder when, or if, this spending will reap rewards. In short, there are plenty of risks for investors to worry about.

If a Bear Market is a 20% Correction…

However, in our opinion, the bear market forecasted by many is already in progress. A recent article in Seeking Alpha (“30 for 30: Meet the 30 S&P 500 stocks that are down over 30% in 2026” July 15, 2026) noted that of the 500 stocks in the S&P index, 182 are in negative territory for the year, and 30 companies have declined more than 30% as of mid-July. The list includes stocks like Intuit Inc. (INTU – $289.92), Accenture PLC (ACN- $140.86), Adobe Inc. (ADBE – $227.16), Salesforce Inc. (CRM – $170.06), Oracle, Nike Inc. (NKE – $42.96), ServiceNow Inc. (NOW – $102.06), and Abbott Laboratories (ABT – $99.67).

However, this article is year-to-date performance, and it does not cover all the big declines seen this year. International Business Machine (IBM – $210.50) is currently down 36% from its recent peak. And many other stocks have had peak-to-trough declines of 25% or more this year. This list would include Tesla Inc. (TSLA – $378.93), Netflix Inc. (NFLX – $68.67), Meta Platforms Inc. (META – $643.81), and Micron Technology Inc. (MU – $970.82). Even Alphabet Inc. (GOOGL – $347.15) has had a 16% correction this year and the bellwether Nvidia Corp. (NVDA – $207.29) weathered an 18% peak-to-trough decline in 2026.

Although the broad market is overdue for a correction of 10% or more — and one may appear at the end of this consolidation phase – beneath the surface there has clearly been a rolling bear market. And there has been a simultaneous rotation in leadership. Over the last 20 trading sessions the best-performing areas of the market have been iShares Russell 1000 Growth ETF (IWF – $121.33), iShares Nasdaq Biotechnology ETF (IBB – $189.31), Energy Select Sector SPDR (XLE – $58.50), Health Care Select SPDR (XLV – $160.25), and SPDR S&P Bank ETF (KBE – $69.55). The worst performers have been the previous high flyers like iShares MSCI South Korea Capped ETF (EWY – $172.90) and SPDR S&P Semiconductor ETF (XSD – $528.66). See page 12 for details. Rotation of leadership is what keeps a bull market healthy and alive. In sum, we remain a buyer on weakness.

Valuing Equities

The main reason for our long-term bullish view is earnings growth and valuation. Second quarter earnings season is being scrutinized, which is good, but to date, the results have been excellent. The S&P 500 is currently trading at 22.8 times the IBES 2026 earnings estimate and 18.4 times the 2027 estimate. Neither of these price-to-earnings multiples are high given the fact that trailing earnings growth is currently 22.6% and forward earnings growth is projected to be 22.5%. Compare these PE multiples and growth rates to the long-term average PE multiple of 17.4 times and the long-term average earnings growth rate of 8.1%. One might almost call this stock market “cheap.” See pages 7 and 8.

Economic News

Retail sales for June were reported to have increased 0.2% in the month, down from the 1.0% monthly increase seen in May; however, this was misleading in terms of the strength of June sales. The seasonally adjusted total sales of retail and food service establishments increased 6.3% YOY which was the largest increase seen since the 8.1% increase in October 2022. Retail sales excluding autos increased 6.6% YOY. However, without seasonal adjustments, total retail sales increased an impressive 8.4% YOY, the best since September 2022, and retail sales excluding autos also rose 8.4% YOY. More importantly, retail sales excluding autos and gasoline station sales increased 7.2% YOY. In all categories retail sales exceeded inflation in nominal terms, which is how retail merchants measure performance. In sum, the consumer appears to be healthy! See page 3.

June PPI data showed inflation decelerating with the PPI finished goods index at 6.7% YOY, down from 8.8% YOY in May. Much of this decline is a result of the decline in the price of crude oil, which closed at $106.88 a barrel at the end of April and is currently at roughly $85 a barrel. WTI futures had year-over-year gains of 84%, 43%, 6.7%, and 19% at the end of the months of April, May, June, and July (to date) this year, respectively. In our view, a WTI oil price of $80 or less would be favorable for future inflation data and for the equity market. Fingers crossed. See page 4.  

Housing, on the other hand, continues to be weak. The pending home sales index declined to 72.5 in June from 76.6 in May. This was the lowest reading since January 2026 and represented a decline of 0.3% YOY. The NAHB/Wells Fargo Housing Market Index declined in the month of July to 34 from 36 reported in June. All components of the index contracted and while all components remain above their 2025 lows, they were back to levels reported in April. See page 5.

Residential housing starts for June increased 3.5% YOY but this gain was entirely in multi-family housing. Single-family housing starts fell 3.2% YOY. New housing permits were 2.3% lower than a year ago and single-family housing permits were slightly better, but still marginally lower on a year-over-year basis. Total existing home sales rose 2.8% YOY in June, to 4.09 million units (annualized rate). Existing home inventory was 1.56 million units in June, up 6% YOY. Months of supply of single-family homes increased from 4.3 months to 4.6 months, which was the highest level seen since July 2016. See page 6.   

One could add the weakness in the housing market as another economic risk, particularly if interest rates rise. However, housing prices have been out of reach for many young potential buyers, and this slump may be a good thing for that consumer.

Gail Dudack

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Second Quarter Earnings Season

Second quarter earnings season is having a stellar start with bank earnings beating most analysts’ expectations. However, an announcement from JPMorgan Chase & Co. (JPM – $342.89) indicating it was raising expense forecasts for 2026 was greeted by heavy selling. Conversely, Goldman Sachs Group Inc. (GS – $1140.00) reported huge earnings gains as a result of corporate mergers, AI-driven capital raising, and active financial markets. The 94-point gain in Goldman’s stock was a boon to the Dow Jones Industrial Average. But International Business Machines Corp. (IBM – $217.07), also a DJIA stock, suffered a record one-day drop of 73 points, or 25%, as a result of pre-announcing lower-than-expected second quarter revenues and earnings. The explanation for this revision was that the tight inventories and expected price increases in semiconductors resulted in clients “temporarily” shifting capital expenditures toward servers, storage, cybersecurity, and memory purchases and away from mainframe and software investment. The fact that IBM was experiencing canceled or postponed contracts triggered selling in many mainframe and software stocks. In short, disappointments are being punished and good news is being celebrated. In our view, this is because investors are nervous that earnings growth may be decelerating and equity valuations may be deteriorating. It is a justifiable concern. So, right from the start this earnings season is markedly different from previous quarters and the environment is becoming a market of stocks rather than a stock or sector-driven market. We see this as a healthy shift; more importantly, it is not the behavior of a late-stage stock market bubble.

Oil and Inflation

We remain a buyer on weakness, but we are concerned that the rise in crude oil prices could reignite inflation. The recent cease fire with Iran may have seemed like a waste of time but it was a valuable pause. It allowed the oil trapped in the Strait of Hormuz to be shipped and it triggered a concentrated effort by oil producing countries to bypass the Strait by rerouting oil pipelines or to build new ones. Many countries began increasing investment in non-fossil fuels. Plus, countries like Venezuela and the US boosted production and found new markets for their oil. In time, we believe the Strait of Hormuz will be far less relevant than it is today. But today, crude oil prices are rising and that is a negative. However, even after renewed bombing and a war of words between Iran and the US, the August WTI light crude oil future (CLc1 – $79.93) remains well below the peak prices seen in April. This is important both for inflation and market sentiment.

What helped the stock and bond markets this week was June’s CPI report. Headline CPI was better than expected at 3.5% YOY, down from May’s 4.2% YOY. Core CPI was also surprisingly favorable at 2.6% YOY, down from May’s 2.9% YOY. This headline inflation number was the best since March and the core CPI pace was the lowest since February, before the Iran conflict began. See page 3. However, the report shows how sensitive the CPI is to the price of oil. In the month of June, the energy index fell 4.9% and this resulted in a 0.35% month-to-month decline in the CPI headline index. Nonetheless, this eased the fears of a fed funds rate hike in July.

Of the four major heavyweight components of the CPI — transportation, food and beverages, housing, and medical care — transportation is the area most directly impacted by the price of oil. The CPI’s transportation index was up 6.5% YOY in June, down from 9.3% YOY in May, but still high, which is a concern since transportation impacts so many areas of the economy. For perspective, the average closing price for the August WTI crude oil future was $98 in April, $99 in May, and $81.80 in June. In other words, oil is unlikely to trigger higher inflation in the CPI unless the price of oil rises well above $80 a barrel. This is something we will be monitoring.

Meanwhile, all other heavyweight indices show inflation is trending below 3.7%, or the long-term average. Housing inflation was 3.3%, food and beverages inflation was 2.99%, medical care was 2.0%. Service inflation has been the stickiest part of the CPI for the last two years, but it fell to 3.2% YOY in June, with services less rent of shelter at 3.15% YOY. The impact of energy is seen in the nondurable goods which rose nearly 6% YOY (down from 8.0% YOY). Meanwhile, durable goods prices rose a modest 2.5% YOY. See page 4.

There were signs of improvement in the small business sector in June. The NFIB small business optimism index was 97.4, up 2.1 points from May and moving back toward its 52-year average of 98.0. June was the fourth consecutive reading below 98. Of the 10 index components, seven increased and three decreased. Most importantly, plans to raise prices fell while hiring plans rose. Expectations for both better business conditions and real sales improved substantially and primarily drove the rise in the Index. See page 5.

Tariffs, Trade, Deficits

But recent reports on the budget deficit were not so good. The Treasury’s deficit for June was $120.3 billion, down from $292.7 billion in May, but up substantially from the $27.0 billion surplus reported in June 2025. As a result, the 12-month deficit is now $1.8 trillion, up from $1.66 trillion seen in May. This means that total deficits over the last twelve months ending in June were 5.7% of GDP (1Q26), up from 5.2% in May. This is the first time there has been a monthly increase in the debt-to-GDP ratio of more than 0.1% since Scott Bessent became Treasury Secretary. Most months have seen steady declines in the debt-to-GDP ratio.

This 0.5% increase was largely due to the fact that the government issued tariff refunds of more than $49.2 billion in June, dragging custom duties down to a monthly net loss of $25.5 billion in the federal accounts. Tariff refunds totaled $22 billion in May 2026, when refunds began. A year ago, the June 2025 net customs collections were $26.6 billion and reduced the federal deficit by that amount. Net custom collections exceeded $100 billion for the first time in any fiscal year. In sum, tariffs, which were blocked by the Supreme Court, helped our trade balance, deficit, and GDP. The Supreme Court ruling was based on a technicality, and we expect the Trump administration will be able to reinstate targeted tariffs in the future. See page 6.

Technical Indicators

In general, our collection of indicators continues to display a bullish bias. But for example, the 10-day average of new daily highs is currently at 240 and the 10-day average of new lows is a 122. Typically, a 10-day average greater than 100 in new highs defines a bullish trend and vice versa. In this case, daily new highs are greater than new lows, but both are above 100. This is the definition of a neutral trend, but with a bullish bias. Our 25-day up/down volume oscillator is at 0.43, which means that over the last 25 trading sessions the volume in stocks advancing barely exceeded the volume in declining shares. A strong bull market typically sees this oscillator move over 3.0 on each new high because volume in advancing stocks is strong. This neutral reading in the volume oscillator reveals the fact that there has been persistent selling into strength. All in all, it means the market is at risk of having its first 10% pullback. But as we noted last week, even without any multiple expansion, current earnings suggest a target of roughly 8350 in the S&P 500 by year end, so we remain a buyer on weakness.

Gail Dudack

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We are raising our 2026 S&P 500 earnings estimate from $330 to $350 and our 2027 estimate from $382 to $400.75. These forecasts are in line with current consensus estimates and represent growth rates of 27.6% in 2026 and 14.5% in 2027. Note that in December 2025 we initiated earnings forecasts that were well above consensus and though we are only midway through the year, this is the second time we have raised our estimates.

Also note that 2026 and 2027 follow an earnings gain of 17.6% in 2025. This means these three years might generate a combined earnings gain of 59.6% which would represent the best period for S&P 500 earnings since 2009 (14.8%), 2010 (47.3%), and 2011 (15.1%) and their three-year gain of 77.3%. This earlier three-year period was also followed by another solid earnings increase of 10.2% in 2012. However, it also was preceded by the financial crisis of 2008 and an earnings decline of 40%. See page 15.

The drivers of the current earnings spurt began with the tax law change (One Big Beautiful Bill Act signed July 4, 2025, effective for the 2025 tax year) which allowed capital expenditures to be deducted in the same year as expensed. This stimulated capital investment. Equally important, it was coupled with a massive investment demand in AI infrastructure including, but not exclusive to, semiconductors, data centers, and utilities to support these data centers. Earnings are also improving as businesses find new efficiencies, i.e., margin improvements from implementing AI software. It has been a “perfect storm” for earnings growth. However, after four consecutive quarters of positive earnings surprises, we believe earnings surprises will become more difficult to generate in the second half of the year.

The second half of 2026 will certainly be impacted by the midterm elections; however, in July we expect the market will focus on 1.) the price of oil and 2.) second quarter earnings results. We expect earnings will be solid and supportive. If the price of WTI crude oil (CLc1 – $70.44) remains at $70 or less, we foresee a decline in headline inflation. This will help households in terms of lowering energy expenses and could lead to stronger-than-expected economic activity in the third quarter. It could also lead to lower long-term interest rates (helpful to the housing market) and higher PE multiples.

The 2026 stock market has been driven more by fundamentals than sentiment. For example, in the twelve months ending June 2026, the S&P 500 index was up 21% YOY and S&P 500 earnings were up 22% YOY. On page 3 we have two charts, the first with the S&P Index overlaid with actual 12-month earnings forecasts. The scale in this chart is 20 to one, or $50 of earnings equals 1000 points in the SPX. The second chart plots the SPX with a history of S&P 500 forecasted earnings multiplied by 21. Note that while both charts are similar, a PE of 21 is a much better fit to the S&P index than 20 times, and each breach below this level has been a buying opportunity for investors.

If oil remains below $70 a barrel, and inflation falls from the current 3.5% to 4.2% range to 3% to 3.5%, PE multiples could expand beyond 21 times. Even so, the current trend in earnings, without multiple expansion, suggests a target of roughly SPX 8350 in December 2026.

The charts on page 3 also show that the 2000 bubble top was preceded by two years of overvaluation. The December 2021 top was preceded by nine months of declining earnings, i.e., overvaluation. All in all, we do not believe the current market environment is bubbly or overvalued.

There are always risks. As we go to print there is news that the US has revoked the general license for Iran oil sales and is bombing Iran. We do not believe President Trump will authorize any destruction of Iran’s energy infrastructure, at least before the midterm elections, and if not, it should not impact the equity market. But despite the recent strength seen in retail sales and consumer credit, the job market is a concern.

The June BLS employment report was a disappointment with the addition of 57,000 payrolls in the month and revisions that decreased previous reports by 74,000 jobs. Most of this weakness was in the leisure and hospitality sector, which lost 61,000 jobs in June. The losses in leisure and hospitality seem inconsistent with the fact that the US is hosting the FIFA World Cup games from mid-June to mid-July. Since the games have attracted significant crowds from all over the world, it will be interesting to see if there is an upward revision to the leisure and hospitality sector with July data. See page 4.

The household and establishment surveys continue to diverge, and June’s household survey indicated a loss of 507,000 jobs and a decrease in the labor force of 720,000 workers. These huge decreases explain why the participation rate declined to 61.5%. However, the disparate trends in the household and establishment surveys continue to grow as seen on page 5. The six-month average job growth for the establishment survey is now 92,000 jobs; whereas the household survey shows a massive decrease of 288,000 jobs per month. Note that swings in household data have become more extreme in the last few years which makes us question the reliability of the data. Since the pace of job loss in the household survey is the equivalent of a recession, it is difficult to trust the data. See page 5.

On a more positive note, the misery index, which is the sum of inflation and the unemployment rate, is upbeat. This is a tool to demonstrate how favorable or hostile the economic environment is for the average household since it is directly impacted by inflation and employment. In June, the misery index eased from 8.5% to 8.4% and remains well within the normal range of 5.7% to 12.5%. Note that the last hostile reading was in June 2022 when inflation was 9.1% and unemployment was 6.7%. See page 6. 

After months of lagging sales, total vehicle unit sales rose 3% in June, up 4.1% YOY. And for the first time in a while, foreign vehicle sales rose more than domestic sales. Total foreign vehicle sales increased 10.7% YOY, led by imported trucks which rose 14.6% YOY. Domestic unit sales increased 2.6% YOY, led by domestic truck sales which grew a similar 2.6% YOY. See page 6.

The ISM services index decreased from 54.5 in May to 54 in June, but the employment index jumped to 51.2 and into expansion territory for the first time since February. The ISM manufacturing index eased from 54.0 to 53.3, but the employment index also rose from 48.6 to 49.7. The combined employment index is now at 100.9, the highest since February 2025. This is encouraging and again it suggests there are problems in the BLS household survey. In both ISM surveys the prices paid index fell, which is also positive news for future inflation. From a technical perspective, it is noteworthy that over the last 25 trading sessions, despite a string of all-time highs in the averages, the percentage of volume in advancing stocks has only exceeded 50% seven times. This means there has been significant selling into strength in the June-July market. In sum, the recent rally has not been impressive, and we would not be surprised to see a correction or sideways market in the near term. Even so, we remain a buyer on weakness.  

Gail Dudack

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The stock market has been resilient in the face of on-again, off-again negotiations on a memorandum of understanding (MOU) with Iranian officials and a tenuous 60-day ceasefire. But with August WTI crude oil futures (CLc1 – $69.50) trading below $70 a barrel, it is not surprising that equities were unfazed and scored the best second quarter performance in six years. The indices registered gains of 12.9% in the DJIA, 14.0% in the S&P 500, 19.6% in the Nasdaq Composite Index, and 20.6% in the Russell 2000 Index. The DJIA and Russell 2000 index closed the quarter with record highs of 52,319.20 and 3024.37, respectively.

However, the only index with a better year-to-date performance than its second-quarter performance was the Russell 2000 index! Year-to-date gains were 8.9% in the DJIA, 9.6% in the S&P 500, 12.8% in the Nasdaq Composite index, and 21.9% in the Russell 2000. Market commentators continue to call 2026 a narrow AI-led stock market, but the excellent performance by the Russell index indicates otherwise. The NYSE cumulative advance/decline line also recorded an all-time high at the end of June, which also suggests 2026 is a broad-based advance.

Still, from a technical perspective there may be a reason to be cautious near-term. In the last two trading days of June, while the DJIA was hitting new highs, the percentage of volume in advancing stocks was 45% and 37%, respectively. The fact that advancing volume was not well above 50% indicates a significant amount of selling was taking place as stocks moved higher. This selling could be related to quarterly rebalancing by mutual funds and money managers, or it could be investors rotating out of previous market leaders into more economically sensitive stocks. It could also be traders taking profits ahead of a long holiday weekend, but more importantly, it could be a sign of buyer fatigue. All in all, it would not be a surprise if the market had a pullback or took a pause. If so, we remain a buyer on weakness.

Our long-term bullishness is based upon the stock market’s solid fundamental underpinnings. It may surprise some that the S&P 500 Index is up 21% in the twelve months ending in June and 12-month trailing earnings have increased 22%! In short, earnings, not sentiment, have been driving stocks higher this year.

Second quarter earnings season will begin in several weeks and LSEG IBES estimates show analysts are expecting earnings to grow 24% YOY. This follows a stunning increase of 29.4% YOY in the first quarter. Although positive surprises will be more difficult to generate now that analysts have become more optimistic and have raised forecasts, we do think the second quarter earnings season will be good, particularly if gasoline prices continue to fall and inflation eases.

Plus, there are a number of reasons to be bullish on the US economy. GDP grew 2.1% in the final estimate for the first quarter and this was an upward revision from the initial estimate of 1.6%. Key contributors to this growth were nonresidential fixed investment, as well as exports, government spending, and consumer spending. Residential investment, on the other hand, continues to be weak. The upward revisions to first quarter GDP were largely due to a decrease in imports, particularly in consumer goods and capital goods (excluding automotive) and in transport services. Note that imports are deducted when calculating GDP, so these revisions were favorable. See page 3.

Fixed investment in intellectual property, as well as equipment and software, led GDP growth in the first quarter. The steady rise in capital spending this year is a result of a tax law change that allows companies to deduct investment in the year in which it is made. This part of the Big Beautiful Bill has been a boon to the economy. Inventory investment, structures and residential investment, and federal spending all detracted from year-over-year GDP growth. Examining government spending in the first quarter of the year, we found that national defense spending increased year-over-year, while federal nondefense outlays declined for the second quarter in a row. Given the conflict with Iran, it is not surprising to see defense spending rise, but we were surprised it grew less than 5% YOY. We also found an interesting pattern in defense spending. There were significant cuts in national defense during the Nixon, Clinton and Obama presidencies and each decrease in spending became more extreme. There were counterbalancing increases in defense spending during the Reagan, G.W. Bush, and Trump presidencies and surprisingly, each increase in spending was less extreme than the previous. See page 4.

Personal income was unexpectedly strong in May, rising 3.8% YOY, up from 2.6% in April. Disposable income rose 4.1% YOY (a sign of lower taxes) but since CPI was up 4.2% YOY and the PCE deflator rose 4.1% YOY, real personal disposable income was flat year-over-year. Nevertheless, unchanged is better than the decline of 1.1% YOY seen in April’s real personal disposable income report. See page 5.

The personal savings rate was stable in May at 3% but had been ratcheting lower since the 4.4% seen in January. However, despite the weak growth seen in real personal disposable income, personal consumption was surprisingly strong in May, rising 6.3% YOY, up from 5.6% in April. The biggest increase in expenditure was in nondurable goods (includes gasoline stations) which increased 8.0% YOY. Still, it was notable that durable goods spending also rose 7.2% YOY, up from 5.4% in April. See page 6.

We do not place much credence in sentiment indicators any longer, but according to the final report, the University of Michigan Consumer Sentiment Index rose to 49.5 in June from May’s record low of 44.8. The prior record of 50, reached in June 2022, indicates how low confidence remains. The positive revision in sentiment from the initial report for May suggests confidence was on the rise in recent weeks; nevertheless, confidence surveys have been extremely low for four straight years and therefore are of little use. The Conference Board’s Consumer Confidence Index ticked up to 91.2 in June from a downwardly revised 90.6 in May. The survey showed that sentiment around the present state of the economy weakened, and this offset an improvement in expectations. See page 7.

The SpaceX (SPCX – $170.86) record IPO on June 12, 2026 raised $75 billion and since active IPO offerings can be the sign of a market peak this is a topic we plan to monitor. New Federal Reserve Z.1 data provides information on equity issuance and retirement by nonfinancial corporations, but unfortunately it includes both common and preferred shares in both S and C corporations. This means the Fed’s data will include stock that is not traded on US exchanges. Nevertheless, the patterns of issuance and retirements are interesting. The peak issuance of equity at the March 2000 market high is distinctive. The data also demonstrates that total outstanding stock has been shrinking for most of the last 30 years. But if trends are important, take note that this changed in the first quarter of 2026 when net issuance turned positive. And this was prior to the SpaceX IPO. See page 8.
Gail Dudack

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