Hopes for a US-Iran peace deal wax and wane and with that ebb and flow, the price of crude oil falls or rises. As we have often stated, a price below $80 a barrel for WTI intermediate crude is good for both inflation and the stock market whereas a price above $80 a barrel is apt to be a hurdle for stocks. This is proving to be true in terms of the equity markets daily action. And it is probably one of the most important variables for the intermediate term.

Meanwhile, President Trump is waiting for the US naval blockade and economic sanctions to break down Iran’s IRGC until the Iranian government can no longer pay soldiers — hoping they revolt. But this strategy could prove risky. The IRGC is not a political party. It does not face a midterm election, and it does not live by a Western moral code. This waiting game could become a bigger problem in coming months for President Trump. But for investors, it is simple. It all depends upon the price of oil.

However, while geopolitics is messy and unpredictable, the earnings picture for the S&P 500 index continues to amaze us. The LSEG IBES consensus earnings estimate for 2026 increased $6.06 last week to $359.60 and the 2027 forecast rose $1.11 to $408.83. The consensus 2028 forecast increased $2.50 to $463.70. The S&P Dow Jones consensus earnings estimates were equally impressive with the 2026 estimate rising $2.84 to $357.78 and the 2027 forecasts increasing $2.16 to $405.90. Although we raised our earnings estimates a mere five weeks ago (“Raising Estimates” – July 7, 2026) to $350 and $400.75 for 2026 and 2027, respectively, due to the spectacular performance of second quarter results we are raising them once again. Our new estimates for 2026 and 2027 are $360 and $410 and we would not be surprised if these forecasts also get reviewed after third quarter earnings season.

In our Outlook for 2026 (December 24, 2025) we estimated earnings of $315 for the S&P 500 and indicated that an unchanged PE multiple (which was then 26 times) would equate to an S&P target of 8190. When we raised our earnings forecasts in July we noted that “the current trend in earnings, without multiple expansion, suggests a target of roughly SPX 8350 in December 2026.” We believe this latter target continues to be true, particularly when WTI futures are trading below $80 a barrel.

The equity market is now trading at 21.6 times the IBES 2026 estimate and 19.0 times the 2027 estimate. Furthermore, the forward earnings yield of 5.0% and dividend yield of 1.1% remain competitive even with a 10-year Treasury bond yield of 4.7%. S&P Dow Jones indicates that trailing earnings show a gain of 29.3% YOY. (Earnings expectations were for a 17.6% gain as recently as December.) This 29.3% is 3.6 times better than the 75-year average earnings of 8.1% YOY. Note that forward operating earnings growth is currently forecasted to be 21.4%, which means earnings growth will decelerate but remain impressive. See pages 8 and 9.   

Most economic data releases have been favorable for the economy, but last week’s jobs report was not. July’s employment report was a major disappointment with a loss of 23,000 jobs. Plus, previous months were revised down by a total of 103,000 jobs. And despite these losses, the household survey unemployment rate fell from 4.2% to 4.1%. The establishment report and household report are different surveys. The household’s decline in the unemployment rate was due to an estimated 265,000 loss in the civilian labor force, which is the sum of the 178,000 drop in the number of people unemployed, and a decline of 87,000 people employed. Meanwhile, the civilian noninstitutional population increased by 116,000. This combination of a rise in population but decline in the labor force resulted in declines in both the monthly participation rate and employment population ratio. July’s job losses were concentrated in government (53,000), leisure & hospitality (40,000), retail (20,000), and financial (14,000) sectors, according to the establishment report. Job gains were seen in the healthcare and construction sectors. See page 3.

Year-over-year gains or losses in employment in the two BLS surveys are our favorite ways to measure the health of the job market. However, the household survey has become very inconsistent due to annual revisions. The household survey’s year-over-year change in employment jumped significantly in January 2025 and fell dramatically in January 2026 as a result of annual Census Bureau corrections. In the month of January 2026, this adjustment included changes back to April 2020 and the entire revision was incorporated into the January 2026 estimate. The introduction of population controls in this BLS data makes it impossible to compare household survey estimates over time. The 2026 Census Bureau annual adjustment included updated demographic information from the 2020 Census, a departure from the “blended base” methodology introduced in recent years, as well as updated information on net international migration. Although the household data is messy, we find the steady declines seen in this survey — now showing a decline in employment of 0.6% YOY — to be worrisome. See page 3.

The labor force participation ratio fell from 61.5 to 61.4 in July and the employment population ratio declined from 59.0 to 58.9. But more importantly, the longer term trend shows both ratios have been declining since the 2023 highs of 62.8 and 60.4, respectively. While labor participation peaked in 2023, the data shows that the total labor force peaked in 2025. This latter statistic could be the result of several factors, including voluntary deportations of illegal immigrants and aging baby boomers moving into retirement. See page 4.  

BLS data on foreign-born and native-born employment shows that foreign civilian population peaked at 50.4 million in March 2025. In the same month, the foreign civilian labor force peaked at 33.7 million, and foreign employment peaked at 32.2 million. The data shows that since March 2025 foreign employment has declined by 1.7 million, and the foreign population has plunged by 23.3 million. In short, this supports our theory of why the labor force peaked in 2025. Note that in July 2026, the unemployment rate for foreign-born workers fell to 3.3%, well below the national average of 4.1%. See page 5.

It is rare for the ISM manufacturing index to outperform the nonmanufacturing index, but that is what occurred in July 2026 for the first time since March 2021. The manufacturing index increased from 53.3 in June to 55.6 in July, while the nonmanufacturing index rose only slightly from 54.0 to 54.1. Also, the ISM nonmanufacturing index for employment fell to 47.4 in July, below the breakeven 50 level, which is a worrisome sign for the service sector. Conversely, the employment index in the manufacturing survey rose to 52.8 in July. The best news in the nonmanufacturing survey was that production jumped from 55.4 to 59.1 in the month and six of nine components rose in the month – although one of those was prices paid. See page 6.

There was little change in our technical indicators this week, but the bias remains bullish. Our view of buying on weakness is unchanged.

Gail Dudack

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Those Who Forget History are Doomed to Repeat it

George Santayana

Our paraphrasing of this famous quote from philosopher George Santayana is important for understanding many bits of life including world conflicts, political movements, or even economic and stock market forecasting. But since courses on the rise and fall of civilizations and economic cycles have not been a staple of higher education for several decades, an understanding of history may be what is missing in current political and economic debates. In particular, we find the distress expressed by some about Federal Reserve Chair Kevin Warsh and his return to a less transparent Fed to be fascinating. Note the word “return.” Decades ago, when we entered the financial world, there were no Fed statements, no Fed Chair press conferences, and no ever-present speeches by Federal Reserve Board members. Economists read and analyzed economic data and did not rely on the Fed for their forecast.

In fact, until the Financial Crisis of 2008, the Federal Reserve was relatively opaque. The Fed Chair did make bi-annual presentations to Congress and occasional speeches, but Fed members discussed economics not Fed policy. In fact, Alan Greenspan became synonymous with Fed Speak, a way of making wordy statements without much substance. This was purposeful in order to keep monetary policy unknown, which in turn would dampen speculation, and allow Fed policy to have maximum impact. There was only one way to monitor Fed policy and that was by monitoring the Fed’s transactions in the open market. Most bond trading desks had a designated “Fed Watcher” whose job it was to observe the Fed’s trades and announce them to the trading desk. The Fed’s transactions were, and still are, executed by the Federal Reserve Bank of New York through designated primary dealers (https://www.newyorkfed.org/markets/primarydealers#primary-dealers). However, the role of “Fed Watcher” disappeared once the Fed became transparent.

The transparency began with Ben Bernanke during the Financial Crisis when the entire banking system was in jeopardy and the Fed initiated a large number of emergency measures to stabilize the balance sheets of the banks and calm the markets. And though the banking crisis is long over, and most emergency measures have ended, the transparency remains. Financial markets are inherently risky, but a transparent Fed eliminates a major unknown, or risk, for investors. This creates a safety net and inspires speculation.

It is important to know that recent history is not the norm, and the Federal Reserve is not supposed to be a cornerstone of equity investing. Chair Warsh is aware of this and wants investors and markets to monitor economic data for decision making, and not rely on the Fed. But the blowback is surprising. 

It is also important to understand that easy monetary policy during the 2022-2025 period resulted in an inverted yield curve for nearly four years. (For reference, the COVID-19 Recession was short and took place in February to April of 2020.) See page 3. Inverted yield curves are usually predecessors of recessions and occur when the Fed is aggressively lowering interest rates to support a weakening economy. Conversely, a steepening yield curve is a normal curve and characteristic of economic expansions. With this historical perspective, we are puzzled by economists who have issued warnings in response to the present steepening of the yield curve. Moreover, the yield curve is not unusually steep. The 30-year-to-2-year spread is currently 98 basis points versus the long-term average of 82 basis points. See our 60-year history of yield curves on page 3. Long-term interest rates are driven by many factors, including sovereign deficits, inflation, but most importantly the state of the economy.

In terms of the US economy, there is plenty of good news to report. The ISM Manufacturing Index rose from 53.3 in June to 55.6 in July and is positive for a seventh straight month. This follows all but three of the 38 months between November 2022 and December 2025 when it was in recession territory. All components increased in July except for prices paid and customers’ inventories. The employment index increased again, moving into expansion territory above 50, for the first time in 33 months. See page 4. This bodes well for the third quarter.

Real GDP grew 1.5% (SAAR) in the second quarter after increasing 2.1% in the first quarter. This may appear to be a deceleration in economic activity, but personal consumption expenditures were up 2.12% in the quarter, a big increase from 0.37% in the first quarter. Gross private domestic investment increased 0.53% in the quarter, down from 1.35% in the first quarter. However, the factors that lowered second quarter GDP were government investment (subtracting 0.14%), a decline in inventories (subtracting 0.67%), and net exports (subtracting 1.01%). Imports rose 1.51% in the quarter, led by increased semiconductor intake due to fears of limited supply and rising prices. See page 5.

The GDP price deflator rose 4.3% YOY in the second quarter, after increasing 3.3% YOY in the first quarter. This increase is negative. However, inflation is closely linked to the price of oil, which rose nearly 42% YOY in the first quarter. Since crude oil prices affect the economy with a lag, energy negatively impacted inflation numbers in the second quarter. (The current drop in crude oil is a potential plus for the third quarter.) A chart of the GDP deflator with the 10-year Treasury bond yield clearly shows that interest rates have not been a good predictor of inflation. Nevertheless, the 4.7% yield in the 10-year Treasury bond at the end of June is justified by the 4.3% increase in the GDP deflator at the end of the quarter. See page 6.

Equity indices are at record highs as we go to print, fueled by fresh hopes for a Mideast deal, tumbling crude oil prices, and solid earnings reports from AI-related companies. Second quarter earnings season has been superb to date. Last week the LSEG IBES consensus earnings estimate for 2026 rose $3.84 to $353.54, the 2027 forecast rose $1.86 to $407.72, and the 2028 forecast increased $3.80 to $461.17. The S&P Dow Jones consensus earnings estimate jumped $6.29 for 2026 to $354.94 and rose $1.55 to $403.74 for 2027. These increases follow a steady stream of rising forecasts this year! The market is now trading at 21.9 times the IBES 2026 estimate and 19.0 times the 2027 estimate. The S&P’s forward earnings yield of 5.2% and dividend yield of 1.1% compare well to a rising 10-year Treasury bond yield of 4.6%. Plus, the S&P Dow Jones consensus 12-month trailing sum of operating earnings shows a gain of 25.9% YOY, which is far better than the 75-year average of 8.1% YOY. Forward operating earnings growth is also strong at 22.5% YOY. See page 8.

Combining 2026 and 2027 S&P Dow Jones earnings estimates, the 12-month forward PE multiple is 17.5 times and below its long-term average of 17.9 times. When this PE is added to inflation of 3.5%, it comes to 21.0, which places it within the normal range of 15.0 to 24.4. In short, the equity market is at a new high, but valuation has improved due to excellent earnings growth. See page 9.

Technical indicators have also recovered in the last two trading sessions. The NYSE cumulative advance/decline line rose to a record high on August 4, 2026, confirming new highs in the DJIA, S&P 500, and Russell 2000 index. Volume in stocks advancing rose to 70% and 69% in the last two trading sessions, the best in many months. In sum, we remain a buyer on weakness.

Gail Dudack

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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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