2026 Mid-Year Review & Second-Half Outlook

Market Performance and a Healthy Market Rotation

The first half of 2026 has been characterized by strong equity market performance despite a backdrop of geopolitical uncertainty, elevated interest rates, and ongoing inflation concerns. U.S. equities reached new record highs during the period, with the S&P 500 surpassing 7,600 for the first time. As of June 11th, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have gained +8.19%, +11.15%, and +6.97%, respectively, this year.¹ While the conflict in Iran has contributed to periods of heightened volatility, markets have remained remarkably resilient, supported by strong economic data, healthy corporate earnings, and continued investment across key growth areas of the economy.

More recently, investors have focused on the market pullback that began in June. Since June 5, the S&P 500 has declined approximately 2.7%, while the Nasdaq 100 has fallen more than 3.78%.² Much of the weakness has been concentrated in the market’s largest technology and AI-related beneficiaries. The Magnificent Seven declined approximately 7.2% as a group, while semiconductor stocks fell nearly 2.75%.³ Given the outsized role these companies have played in driving market returns, the correction generated significant headlines and renewed concerns about whether the technology-led rally was beginning to fade.

However, beneath the surface, the recent weakness appears less reflective of deteriorating fundamentals and more indicative of a healthy market rotation. Technology, semiconductor, and AI-related stocks entered this pullback following one of the strongest advances in market history, with many companies gaining more than 100% year-to-date prior to the correction. Investors had aggressively rewarded businesses tied to artificial intelligence, cloud infrastructure, networking equipment, data centers, and advanced chip manufacturing as capital spending accelerated across the AI ecosystem. Following gains of that magnitude, periods of profit-taking and consolidation are both normal and often necessary to sustain longer-term bull markets.

Importantly, the underlying fundamentals that supported the rally remain intact. Corporate capital expenditures continue to move higher, earnings expectations have steadily improved, and demand for AI-related infrastructure remains exceptionally strong. Rather than signaling the end of technology leadership, the recent pullback may represent a temporary pause that allows leadership to broaden across the market. Since June 5, we have seen the strongest performance in Consumer Staples, Real Estate, and Healthcare, up +3.8%, +1.9%, and +1.07%,⁴ creating a healthier and more balanced market backdrop as the second half of the year begins.

Inflation Remains Sticky, but the Consumer Continues to Hold Up

Inflation remained one of the market’s primary concerns during the first half of 2026, though recent data suggests price pressures may be approaching a peak. The latest Producer Price Index (PPI) report showed headline producer inflation rising 6.5% year-over-year, above expectations, while Core PPI came in at 4.9%, modestly below consensus estimates.⁵ Producer prices increased at their fastest pace since November 2022, driven in part by a 10.7% increase in energy prices during May.⁶ However, with WTI crude oil prices recently retraced back below their March 11 levels, some of the energy-driven inflation pressures may begin to ease in the months ahead.

A significant portion of today’s inflationary backdrop is being driven by the ongoing AI investment cycle. Demand for semiconductors, memory, chemicals, power equipment, and specialized infrastructure continues to outpace available supply, creating bottlenecks across multiple parts of the economy. At the same time, labor shortages in several areas tied to manufacturing, construction, engineering, and infrastructure development are contributing to higher input costs.

Despite inflation remaining above trend, the broader economic backdrop continues to show resilience. The consumer remains largely bifurcated, with higher-income households benefiting from strong equity markets, elevated home values, and healthy balance sheets, allowing spending activity to remain relatively firm despite higher prices. Importantly, many companies have indicated they are absorbing a portion of rising costs rather than fully passing them on to consumers, focusing instead on value, promotions, and market share preservation. Consumer spending has remained constructive as a result, with retail sales increasing 0.5% in April,⁷ marking the third consecutive monthly increase. Even despite higher gasoline prices and lingering inflation concerns, the consumer remains strong, with retailers like Walmart reporting revenue growth of 7.3% year-over-year to $177.75 billion while continuing to generate strong traffic growth across both Walmart U.S. and Sam’s Club locations.⁸ Costco likewise maintained impressive momentum, with core comparable sales averaging 6.6% domestically and 7.4% internationally over the past four quarters, while April net sales increased 13% and digital sales climbed nearly 19%.⁹ Combined with the Atlanta Fed GDPNow estimate of 3.3%,¹⁰ the data suggests economic growth remains above trend, supporting corporate earnings even as inflation remains somewhat sticky. While geopolitical developments and strong economic activity may prevent a rapid return to the Federal Reserve’s inflation target, the overall environment remains consistent with continued economic expansion rather than a meaningful slowdown.

Labor Market and Economic Activity Continue to Support Growth

The labor market remained a key source of economic strength throughout the first half of 2026. While weekly jobless claims have moved higher in recent weeks, they remain well below levels historically associated with recessionary environments. The latest reading came in at 229,000, with the four-week moving average at 219,000, continuing to signal a healthy labor market.¹¹ Hiring activity has also remained constructive, with nonfarm payrolls increasing by 172,000 in May, marking the third consecutive month of more than 100,000 jobs added.¹² ADP employment data reinforced this trend, exceeding expectations with a gain of 122,000 jobs.¹³ Taken together, the labor market continues to demonstrate resilience despite elevated interest rates and geopolitical uncertainty.

Economic activity beyond employment has also remained encouraging. Both ISM Manufacturing and ISM Services exceeded expectations, coming in at 54.0 and 54.5, respectively,¹⁴ and remaining firmly in expansion territory. Manufacturing activity has now remained above the key expansionary threshold of 50 for five consecutive months, while the services sector has remained in expansion for 23 months. New orders and factory orders also surprised to the upside, providing further evidence that business activity remains healthy. These trends continue to support several long-term themes, including the reshoring of manufacturing capacity to the United States and the ongoing expansion of the AI infrastructure buildout. As a result, demand remains strong across a broad range of industries, including industrials, transportation, semiconductors, power infrastructure, and electrical equipment.

Perhaps the most encouraging development has been the combination of improving productivity and moderating labor cost pressures. First-quarter unit labor costs increased just 1.8%, while productivity rose 2.8% year-over-year.¹⁵ This is an important dynamic because stronger productivity growth allows companies to increase output without a corresponding increase in labor costs, helping to ease inflationary pressures while supporting profit margins. Combined with a healthy labor market and expanding business activity, these trends provide a favorable backdrop for continued economic growth and corporate earnings as we move into the second half of the year.

Sector Overview and Outlook:

AI and Semiconductors

The first half of 2026 reinforced artificial intelligence as the largest driver of earnings growth, capital investment, and equity performance across the economy. Following the March lows, the market rallied more than 16.62%,¹⁶ led primarily by companies positioned throughout the AI ecosystem. While investors have become accustomed to hearing about AI through the lens of large technology companies, the first quarter demonstrated that the impact extends far beyond a handful of market leaders. S&P 500 earnings per share grew 27.93% on revenue growth of 11.71%, reflecting significant operating leverage across corporate America.¹⁷

The largest benefactor of the AI trade was the semiconductor industry; memory has increasingly become the most important constraint in AI infrastructure. By the end of 2026, AI workloads are expected to consume roughly 70% of global high-end DRAM production, creating an environment where memory pricing could increase by as much as 70%. This environment allowed semiconductor stocks to dominate headlines, as names like Micron and SanDisk grew by 248% and 736% year-to-date, respectively.¹⁸ While tech did experience significant volatility towards the end of Q2, corporate investment remains strong, earnings estimates continue moving higher, and demand for AI computing power shows little sign of slowing. Rather than representing the end of technology leadership, the recent consolidation appears to be a healthy pause that allows other sectors to participate in the broader expansion while the long-term AI investment cycle continues to develop.

Industrials and Utilities

While software and semiconductors have received much of the attention surrounding artificial intelligence, one of the most important developments of 2026 has been the growing demand for physical infrastructure. As AI adoption accelerates, the industry’s primary challenges are increasingly tied to power generation, electrical infrastructure, grid capacity, and the ability to physically construct data centers at scale. In many ways, the next phase of AI growth will depend as much on industrial and utility companies as it does on software developers.

The data increasingly supports this view. Industrial companies are reporting average backlog growth of 33.75%, order growth of 24.77%, and organic growth of more than 11%.¹⁹ The strongest growth has emerged among power-related businesses, where companies are delivering approximately 35% sales growth and an extraordinary 300% earnings growth.²⁰ Utilities are also participating in this trend, posting sales growth of nearly 10% and earnings growth of 6% as electricity demand rises alongside data center construction. These figures suggest that AI demand is translating into tangible economic activity rather than remaining confined to technology spending alone.

Energy

Energy was one of the most closely watched sectors during the first half of 2026 as geopolitical tensions in the Middle East triggered a sharp repricing across global commodity markets. Rising conflict involving Iran and escalating attacks on transportation and energy infrastructure pushed oil prices toward a peak of $112 per barrel in April due to a prolonged disruption to global energy flows. Much of the concern centered on the Strait of Hormuz, one of the most strategically important waterways in the world, which facilitates more than 30% of global crude oil shipments and approximately 20% of global liquefied natural gas exports.

Looking ahead, several developments suggest a more favorable outlook for energy prices over the short to intermediate term. Most notably, the conflict appears to be moving toward resolution, which would gradually restore global energy flows and ease logistical constraints throughout the region. Although inventories have been drawn down and volatility remains elevated, the market is beginning to shift its focus from supply destruction toward eventual normalization. At the same time, the United Arab Emirates’ decision to leave OPEC introduces an important new source of potential supply growth. Previously constrained by OPEC production quotas, the UAE now has the flexibility to increase output toward its roughly 5 million barrel-per-day production capacity once transportation routes normalize. Combined with the possibility of additional production increases from other global suppliers seeking to regain market share, the balance of risks is increasingly shifting toward greater supply availability rather than scarcity. While energy markets may remain volatile in the near term, the underlying setup appears increasingly supportive of lower oil prices and a more favorable inflation backdrop heading into 2027.

Space/SpaceX IPO

One of the most significant developments of 2026 has been the emergence of space as a legitimate and investable industry. SpaceX’s filing for a potential IPO valued at more than $2 trillion has captured investor attention not only because it could become the largest public offering in history, but because it signals the maturation of an industry that has historically been dominated by governments and defense contracts. Investors are increasingly recognizing that space is evolving into a commercial ecosystem supported by recurring revenue streams, scalable infrastructure, and growing enterprise demand.

What separates SpaceX from traditional aerospace companies is its integrated platform approach. Through the combination of launch services, Starlink satellite communications, artificial intelligence infrastructure, and digital connectivity, the company generated approximately $18.7 billion in revenue during 2025 while growing more than 30% annually.²¹ The company invested $20.7 billion into expansion efforts during the year, funding Starlink deployment, AI infrastructure development, and continued progress on Starship. Similar to the cloud computing buildout of the last decade, SpaceX is spending aggressively today in an effort to establish long-term leadership positions across several rapidly expanding markets.

Perhaps the most transformative opportunity remains Starship. SpaceX has already invested more than $15 billion into developing a fully reusable rocket system capable of dramatically reducing launch costs.²² Lower launch costs matter because they improve the economics of the entire space industry. More affordable access to orbit has the potential to accelerate satellite deployment, communications infrastructure, defense applications, and eventually space-based computing. Following the acquisition of xAI, the company has further positioned itself at the intersection of AI, communications, and transportation infrastructure. In many ways, investor enthusiasm surrounding SpaceX resembles the role Tesla played during the electric vehicle boom. This can be seen in space specific ETFSs such as the Procure Space ETF (UFO), rising over 40% this year, reflecting growing confidence that space commercialization may become one of the most important long-term investment themes of the coming decade.²³

Financials

Financial stocks entered 2026 as one of the more overlooked areas of the market, but first-quarter earnings have begun to shift investor sentiment. Across the major banking institutions, earnings generally exceeded expectations, particularly in net interest income and profitability metrics, while management teams maintained stable guidance despite ongoing macroeconomic uncertainty. This combination of improving earnings and consistent outlooks has helped reinforce confidence in the sector’s earnings power.

Performance among the largest institutions highlighted the resilience of the banking industry. Bank of America reported net income growth of 21%, supported by higher net interest income and stronger operating leverage.²⁴ Morgan Stanley delivered record revenue and 31% EPS growth, benefiting from strength across wealth management, trading, and investment banking.²⁵ Goldman Sachs produced 24% EPS growth while continuing to benefit from advisory activity, capital markets engagement, and strong client financing demand.²⁶ These results demonstrate that banks are participating in multiple areas of economic activity rather than relying solely on traditional lending operations.

Perhaps the most significant catalyst for the sector is the evolving regulatory environment. Proposed changes to capital requirements could reduce common equity capital requirements by approximately 4.8% for large banks and as much as 7.8% for smaller institutions.²⁷ These adjustments effectively free capital for additional lending, dividend growth, and share repurchases. Combined with healthy loan growth, strong capital markets activity, and continued client engagement, the sector appears increasingly positioned to benefit from a broadening market environment. After several years of technology dominance, financials may be among the most attractive beneficiaries of improving economic confidence heading into 2027.

Value

After an extraordinary rally in AI-related stocks, many of the market’s largest technology companies entered the year trading at elevated valuations, prompting investors to look elsewhere for opportunities. While the long-term outlook for AI remains highly constructive, the recent consolidation in technology has encouraged a rotation toward quality value stocks with stable earnings, strong cash flows, and more attractive valuations.

Historically, some of the healthiest bull markets occur when leadership expands beyond a narrow group of stocks, and that is precisely what began to unfold during the first half of the year.
Among the primary beneficiaries of this rotation were traditionally value sectors like large-cap retailers, real estate, financials, and utilities. Investors increasingly gravitated toward companies capable of delivering consistent earnings growth regardless of economic conditions, particularly as concerns surrounding AI valuations intensified. As leadership continues to broaden across the market, we believe quality retail and consumer companies remain well-positioned to participate in the next phase of the bull market.

Fixed Income

Fixed Income markets in the second half of 2026 are expected to be influenced by two competing forces: a continuing demand for safety amid geopolitical tensions and renewed inflationary pressures stemming from higher energy prices.

Inflation has remained persistently above the Fed’s 2% target, driven by elevated commodity prices linked to the conflict in the Middle East, tariffs, and supply-chain disruptions.

Kevin Warsh was sworn in as the new Federal Reserve Governor and Board Chair in late May, assuming leadership in a difficult period that is further exasperated by President Trump’s explicit expectation that the Fed cuts interest rates. The June 16-17 FOMC meeting will be Kevin Warsh’s first as Chair and will include an updated Summary of Economic Projections (SEP), which will be the first SEP with Iran implications included. While market participants widely expect the Fed to hold rates steady at the June FOMC meeting, the accompanying policy statement is likely to face heightened attention. In April, three policymakers dissented over the statements implied easing bias, while outgoing Fed Governor Stephan Miran dissented in favor of a rate cut. The resulting 8-4 vote represented the largest interest division at the Fed since October 1992.

Markets have since repriced for expected patience from the Fed. The federal funds rate is currently anticipated to remain steady in the 3.50-3.75% range, with some pricing now incorporating the possibility of rate hikes rather than rate cuts throughout 2026.

One notable positive theme has been the market’s capacity to absorb elevated supply with minimal disruption. In the corporate bond market, gross issuance reached a record $1.085 trillion year-to-date, representing a 26% increase from the same period last year. Credit spreads have tightened further and remain near their long-term averages, while underlying fundamentals continue to exhibit stability. The spread differential between BBB-rated and A-rated corporates has narrowed to its tightest level since 2010.

In response, we maintain a defensive posture within credit, favoring higher-quality issuers and reducing exposure to lower-rated bonds. We believe this positioning is prudent, as risks appear skewed to the downside. Overall, while yields remain attractive, the risk-reward balance is more measured than earlier in the year. Although markets have navigated higher supply and geopolitical risks relatively well, the outlook is less certain, warranting a continued cautious approach.

Sources:

1. Bloomberg: As of June 12, 2026 ↩︎
2. Bloomberg: As of June 12, 2026 ↩︎
3. Bloomberg: As of June 12, 2026 ↩︎
4. Bloomberg: As of June 12, 2026 ↩︎
5. Bloomberg: As of June 11, 2026 ↩︎
6. Bloomberg: As of June 11, 2026 ↩︎
7. Bloomberg: As of May 14, 2026 ↩︎
8. WMT Earnings: As of May 21, 2026 ↩︎
9. COST Sales Results Call: As of May 6, 2026 ↩︎
10. Federal Reserve Bank of Atlanta: As of June 9, 2026 ↩︎
11. Department of Labor: As of June 11, 2026 ↩︎
12. Bloomberg: As of June 5, 2026 ↩︎
13. Bloomberg: As of June 3, 2026 ↩︎
14. Bloomberg: As of June 3, 2026 ↩︎
15. Bloomberg: As of June 4, 2026 ↩︎
16. Bloomberg: As of June 12, 2026 ↩︎
17. Bloomberg: As of June 12, 2026 ↩︎
18. Bloomberg: As of June 12, 2026 ↩︎
19. Bloomberg, as of May 5, 2026 ↩︎
20. Bloomberg as of May 4, 2026 ↩︎
21. SpaceX Form S-1: As of May 20, 2026 ↩︎
22. SpaceX Form S-1: As of May 20, 2026 ↩︎
23. Bloomberg: As of June 12, 2026 ↩︎
24. Bank Of America Q1 26’ Earnings Call: As of April 15, 2026 ↩︎
25. Morgan Stanley Q1 26’ Earnings Call: As of April 15, 2026 ↩︎
26. Goldman Sachs Q1 26’ Earnings Call: As of April 13, 2026 ↩︎
27. Bloomberg News: As of March 19, 2026 ↩︎

Disclosures
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