Update on the Markets:
| Index | 2nd Quarter 2026 | Full Year 2026 |
|---|---|---|
| S & P 500 (Large US Stocks) | 15.2% | 9.9% |
| Russell 2000 (Small US Stocks) | 20.8% | 22.2% |
| FTSE All-World ex-US (International Stocks) | 11.9% | 12.7% |
| Barclays US Aggregate (Bonds) | 1.1% | 1.3% |
July 2026
Key takeaways
► Strong first half of the year
► Inflation remains sticky
► Consumers strained
► Earnings expectations may be too optimistic
► Lots to worry about this summer
S & P posts strongest quarter since 2020
Despite all of the following:
- Conflict in the Middle East
- Restricted Strait of Hormuz
- Oil prices spiking up and then retreating
- Shock at the gas pump
- New Federal Reserve Chair
- Sticky inflation
- Steady labor market
- Talk of possible rate hikes
- War in Ukraine
Phew! Despite all of that, the S& P 500 rose 14.9% in the second quarter. Small US stocks did even better (finally!): Up 21% for the quarter and over 22% for the first half of the year – its best first half performance since 1991. The Artificial Intelligence (AI) build-out played a significant role, but beyond that, many stocks outside the Mag 7 were fundamentally undervalued, and investors scooped them up. The rally is broadening out past the mega-tech companies. The Equal-Weight S & P rose 11%.
The quarterly change in the S&P 500 over the last decade
It’s all about earnings…and investors getting better at ignoring the saber-rattling in the Middle East and not always reacting to what President Trump types on Truth Social. First-quarter 2026 US corporate profits surged to a record high, with total annualized profits reaching $4.42 trillion, up from $4.35 trillion in the 4th quarter of 2025. S & P 500 earnings growth reached nearly 28% year-over-year. Many investors are expecting the good news – expanding corporate profits, AI innovation, an eventual peace deal in the Middle East, and a solid economy- to keep rolling in.
Inflation is sticking around
Consumer Price Index for All Urban Consumers (CPI-U): 12-month percent change
Inflation remains a concern. As the price of oil has fallen to pre-Iran war levels, its spike will soon fade out of the readings. The worry now is costs tied to the AI buildout: computer equipment, software, data centers, water, power, grids, etc. Companies’ AI capex continues to accelerate.
Consumers are stretched
On top of inflation, the consumer on the lower leg of the K-shaped economy has to deal with a “low-fire, low-hire” labor market. Real wages are trending lower. Sticky inflation, lower real wages, and fewer job opportunities will strain the average consumer. Consumer spending consistently accounts for approximately 68-70% of the US Gross Domestic Product (GDP), making it the primary driver of the American economy. We shall see how this plays out in the all-important holiday shopping season.
Overly optimistic earnings expectations?
Analysts are projecting full-year 2026 earnings growth to top out near 25%. The long-term historical average earnings growth rate for the S&P 500 is between 6% and 8% annually. Again, it’s all about AI. The tremendous AI buildout is fanning out demand for everything from chips to water.
Is the AI hype all too optimistic? The jury is split. The bullish case points to robust capex spending and strong profits. Bears warn of lofty expectations, circular AI financing, and temporary accounting gains.
What to do?
Take a little off the table. This advice may come as a surprise, as stock performance in the second quarter was phenomenal despite all the headwinds. However, that’s what concerns me. No doubt the AI phenomenon and what it will eventually do for everything from corporate efficiency to health care is nothing short of astounding.
But perhaps the exuberance is a bit overdone. BlackRock framed it well, asking whether AI can turn today’s scarcity into tomorrow’s abundance. At the end of the day, the whole AI promise must translate into dramatically higher productivity, higher margins, and stronger earnings. If it doesn’t, then today’s valuations will be very difficult to justify.
Stocks are trading at lofty levels: The forward Price/Earnings (P/E) (based on estimated earnings for the upcoming year) sits around 25.53. The historical average P/E is approximately 16.23. Add to this unresolved conflicts in the Middle East, sticky inflation, a new Fed Chair, considerable discontent among Fed governors, midterm elections, and summer, which is usually not a great time for stocks… well, you get the picture. I think the year will end well, but we may hit an air pocket or two in the next few months. For now, set aside some money and buy the dips as we’re still in a bull market. Short-term bonds are a great place to invest while you’re waiting. You can earn 4.00-5.00%. Also, consider short floating-rate bonds, which offer some protection against inflation.
Uncertainty always remains. History has consistently shown that maintaining a disciplined, long-term perspective has been one of the most effective ways to navigate changing market conditions. We continue to believe that a well-diversified portfolio aligned with your goals is the best way to pursue long-term success across different market cycles.
We appreciate the trust you place in us to manage your investments. As always, we are available to discuss your portfolio, answer any questions, or review your financial goals in greater detail.
Thank you for your continued confidence.
Sincerely,
Henry
Henry Gorecki, CFP®
HG Wealth Management LLC
401 N Michigan Ave, Suite 1200
Chicago, IL 60611
312-723-5116
