Summer has a way of changing one’s perspective. Vacations replace routines, families gather, and this year, attention turns to the FIFA World Cup. While every match brings its share of excitement and surprises, the tournament also serves as a reminder that success is rarely determined by a single play. Championships are won through preparation, discipline, and perseverance in the face of inevitable adversity. Investing is no different. Despite strong headline gains in 2026, financial markets have experienced their own share of challenges this year amid escalating geopolitical tensions, concerns around the impact of artificial intelligence (“AI”), and shifting economic data. As with successful teams, successful investors benefit from remaining committed to a thoughtful long-term plan instead of reacting to headlines or bumps along the way. Our investment process is built accordingly, focusing on strategic asset allocation, security selection, portfolio rebalancing, tax-loss harvesting, and ongoing monitoring of each client’s savings and spending rates to help our clients reach their goals.
The U.S. economy, as measured by GDP, grew a healthy 2.6% in the first quarter of 2026 compared with a year earlier. Economic growth has been supported by strong business investment, particularly in AI and continued fiscal spending. While these factors have provided meaningful tailwinds, we do not believe they are sustainable at their current pace and expect economic growth to moderate toward 1–2% by year-end. Consumer spending has remained resilient despite higher energy prices, but there are signs of increasing divergence beneath the surface. Lower income households are showing signs of strain, reflected in weaker discretionary spending and rising delinquency rates on credit cards and auto loans. Many of these households have drawn down savings to offset the higher cost of living over the past several years. In contrast, higher income households have generally benefitted from rising home values and stronger equity markets. The labor market remains relatively tight, with unemployment at 4.2%, but it is no longer as strong as headline figures alone might suggest. Real wage growth has continued to moderate, and slower growth in the working age population, influenced in part by changes in immigration policy, may constrain labor force expansion going forward. These crosscurrents present a challenging backdrop for the Federal Reserve’s new leadership. For now, a healthy economy continues to support corporate earnings, allowing equity markets to climb the proverbial “wall of worry.”
US Large Cap Equities, as measured by the S&P 500 Index, returned 15% in the second quarter and now stand at +10% for the year. Future corporate earnings estimates continue to march higher as 2026 S&P 500 earnings are now expected to grow 25% this year (to $338/share), while 2027 earnings are expected to grow 17% (to $395). Current valuations at 20x forward Price-to-Earnings, as compared to 17x historically, appear reasonable, but only if these earnings expectations are ultimately achieved. We have seen some of the dominant stocks of the past few years, including the Magnificent Seven, lose momentum this year. After accounting for nearly 50% of the S&P 500’s return over the last three years, the Magnificent Seven have been roughly flat this year, while the remaining 493 companies in the index have gained approximately 15%. We view this broadening of the market rally as a healthy development. However, we are seeing some early signs of excesses and extreme optimism, including the increasing use of leverage and derivatives by individual investors. This is not surprising given the strong bull market investors have enjoyed, but something we will be carefully watching. We remain Neutral weight in our asset allocation models. US Mid Cap Equities (S&P 400 Index) and US Small Cap Equities (S&P 600 Index) returned +15% and +20%, respectively, in the second quarter of 2026. Despite the strong rally, these asset classes continue to trade at reasonable valuations (16-17x forward earnings) given years of trailing their large counterparts. We remain Neutral to US Mid Cap and US Small Cap Equity.
Non–US Equities also regained their footing in the second quarter of 2026. Non-US Developed Markets Equities, as measured by the MSCI EAFE Index, returned +11% in the second quarter and are now +10% YTD. Emerging Market Equities, as measured by the MSCI EM Index, returned +24% in the second quarter and are now +24% YTD. The rebound in international equity prices largely reflected a decline in energy prices as the war in Iran deescalated. Unlike the US, many of these international countries are net oil importers, making their economies more susceptible to changes in prices. As geopolitical tensions eased, investors were able to again focus on the strong fundamentals supporting these markets: accelerating corporate earnings, attractive valuations relative to the US, and relatively stronger economic activity. However, we believe current valuations reasonably reflect the risks associated with tensions re-escalating and/or global growth slowing from the energy price shock. We remain Neutral weight in our models.
Under Kevin Warsh’s new leadership, the Federal Reserve maintained the federal funds target range at 3.50%–3.75% in June. More importantly, Mr. Warsh emphasized the Fed’s commitment to restoring price stability following a period of inflation that has remained above its 2% target. Those remarks removed expectations in the market for interest rate cuts in 2026, with some investors now pricing in the possibility of additional rate hikes. Our base case remains that the Fed will stay on hold as policymakers continue to evaluate incoming inflation, labor market, and GDP data. Unlike the end of the “zero interest rate era”, when we intentionally reduced the interest rate sensitivity (duration) of our fixed income portfolios, we have returned to a more neutral duration posture. Today’s bond market offers an attractive opportunity to earn compelling yields without taking excessive interest rate or credit risk. We continue to build laddered portfolios using high quality municipal bonds, Investment Grade corporates, and U.S. Treasuries with staggered maturities. This approach allows us to lock in attractive levels of income while maintaining the flexibility to reinvest funds as bonds mature and opportunities evolve across the yield curve. We cannot predict the precise path of interest rates, but we can position client portfolios to generate attractive risk adjusted returns across a range of outcomes. We remain Overweight to US Investment Grade Bonds and TIPs in our asset allocation models. High yield spreads have widened slightly this year but remain near historically tight levels. We are seeing some opportunities arise and will be prepared to take advantage of them if and when we believe investors will be adequately compensated for taking the additional credit risk. We remain Underweight Strategic Bonds.
The nation’s fiscal trajectory remains a longer-term concern. Federal debt held by the public now stands at roughly 100% of GDP, approaching levels last seen following World War II. While history demonstrates that elevated debt burdens can be reduced through a combination of sustained economic growth, modest inflation, and fiscal discipline, the process requires deliberate action over many years. We believe advances in productivity, particularly those driven by AI, could provide a meaningful tailwind, but they are unlikely to solve the problem on their own. Importantly, we do not view a U.S. debt crisis as imminent. The size and dynamism of the American economy, the dollar’s role as the world’s reserve currency, and the country’s deep capital markets provide significant advantages. However, the absence of an immediate crisis should not be mistaken for the absence of risk. The Congressional Budget Office projects debt will continue to rise as a share of the economy over the coming decades while interest costs consume an increasing share of federal resources. The longer meaningful reforms are delayed, the more difficult and disruptive the eventual adjustment is likely to become. Addressing these challenges will ultimately require political resolve rather than financial engineering, and we believe beginning that process sooner rather than later offers the greatest opportunity to preserve long-term economic prosperity.
We would not be surprised to see increased volatility in the months ahead, whether driven by central bank policy, geopolitical events, midterm elections, or something entirely unexpected. The S&P 500 is up more than 120% since the end of the last official bear market in October 2022 and has gained 53% since its April 2025 low. History reminds us that volatility is a normal part of investing; the S&P 500 has experienced a decline of 10% or more roughly once a year and corrections of 10%–20% every two to three years. We are not sounding the alarm. Volatility is the price investors pay to earn the long-term equity risk premium. Market corrections can be healthy for the market, tempering excessive optimism and speculation while creating more attractive opportunities for long-term investors. They create opportunities for disciplined long-term investors to put cash to work, harvest tax losses where appropriate, and realign portfolios with their asset allocation targets. Should such an opportunity present itself in the months ahead, we will continue to manage portfolios as we always do: with discipline, patience, and a long-term perspective.