US Strategy Weekly: Watching Oil and IPOs

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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