Jul 10 • 6 min read
State of the Markets (Q2 2026)
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Q2 is in the books—so what really mattered? Between renewed inflation concerns, weak consumer sentiment, tariff uncertainty, and questions about interest rates, 2026 has given investors plenty to worry about. But underneath the headlines, the picture is more balanced than it feels. Consumers are cautious but still holding cash, companies continue to generate strong profits, and markets are reminding investors why diversification matters. In today’s email:
My goal is to cut through the noise and help you stay focused on the bigger, long-term picture as we head into the second half of 2026. *** Before we dive in, did you catch this week's podcast? 👇 Q2 Asset Class PerformanceHere are the 2026 market returns through the second quarter (ending 6/30/26): Stock Indexes:
Bond Indexes:
The State of the Consumer1.) Gas Prices and Inflation Moved Back Into Focus Inflation was one of the biggest storylines of the second quarter, driven largely by a sharp rise in energy prices tied to the conflict with Iran. Gas prices climbed above $4 per gallon, and Personal Consumption Expenditures, or PCE, rose to 4.1%, the highest reading in roughly three years. But there was one encouraging detail beneath the headline number: Core PCE, which excludes food and energy, came in lower at 3.4%. That is still higher than anyone would like, but it suggests the recent spike was driven more by energy than by broad-based inflation across the economy. If tensions with Iran continue to ease and oil prices keep moving lower, inflation may begin to settle back down in the months ahead. 2.) Consumer Sentiment Hit a Historic Low Against that backdrop, consumer sentiment fell sharply in May, reaching the lowest level in the survey’s history. For context, the survey dates back to 1952. In other words, consumers were less optimistic about the economy than they were during the Vietnam War, the stagflation of the 1970s, the aftermath of 9/11 and the tech crash, the Great Financial Crisis, and the global shutdown in 2020. Sentiment has improved slightly since that May low, but it remains historically depressed. And given the stronger parts of the economy, along with the stock market’s recent resilience, the gap between the hard data and how people feel remains striking. 3.) Investors Are Holding a Lot of Cash Even as asset prices have continued to climb, investors are also sitting on a record amount of cash. And it’s not just the dollar amount that stands out. Cash as a percentage of total financial assets has climbed above 8%, the highest level in more than three decades. That matters because cash can serve as a buffer during periods of market stress. While no one knows when the next downturn will arrive, households, in aggregate, appear to have more dry powder and more flexibility than they’ve had in quite some time. The State of the Companies1.) Trade Policy Uncertainty Is Finally Declining The constantly shifting nature of tariffs has made it difficult for companies to plan with confidence. When trade rules are announced, revised, paused, or reintroduced with little warning, businesses are forced to make import, export, pricing, and production decisions based on the rules in place at that exact moment. That makes long-term planning harder, and often less useful, than it would be in a more predictable environment. So, it is encouraging to see trade policy uncertainty decline over the past few months. If that trend continues, companies may have a better foundation for managing costs, planning production, and making longer-term decisions in the months ahead. 2.) Corporate Profits Continue to Impress Despite the economic uncertainty that defined much of the first half of the year, corporate America has continued to generate remarkably strong profits. According to the most recent data, after-tax corporate profits now represent 12.4% of U.S. gross domestic product. To put that in perspective, that is the second-highest quarterly reading on record, with data going back to 1947. So, while headlines often focus on uncertainty, volatility, and the next potential risk, corporate earnings help explain why the stock market has continued to climb. Businesses, in aggregate, are still producing profits at an unusually high level. 3.) Companies Are Also Investing in Their Future Strong profits are not the only encouraging sign. Companies are also putting more money back into their businesses. Capital expenditures, or investments in things like equipment, technology, facilities, and production capacity, are sitting near all-time highs. That matters because capital spending often serves as a forward-looking indicator. When companies are willing to invest in future growth, it can signal confidence in the business environment ahead. In other words, corporate America is not just generating strong profits today. Many companies are also making the investments needed to support growth in the years ahead. The State of Investing1.) Diversification Is Doing Its Job From the Great Financial Crisis through 2024, large-cap U.S. stocks dominated the investing landscape, with technology stocks leading the way. But the shift that began last year has continued into this year. Several areas of the market have started to outperform, including small-cap stocks and emerging markets, which have more than doubled the return of the S&P 500 through the first half of the year. At the same time, the “Magnificent 7” stocks have recently started to lose some of their leadership, trailing the other 493 companies in the S&P 500 by a wide margin. This is exactly why diversification matters. Market leadership changes, often without warning. And because we never know when the tide will turn, the best approach is to be positioned before it does. 2.) Don’t Expect Rate Cuts Anytime Soon Some investors were concerned that Kevin Warsh, the new Chair of the Federal Reserve, might push for rate cuts sooner than warranted. But his first press conference seemed to ease at least some of those concerns. Rather than signaling a quick pivot toward lower rates, Warsh emphasized the Fed’s commitment to price stability. Given the lingering effects of inflation—and the fact that inflation remains above the Fed’s long-term target—that focus should be viewed as encouraging. For now, rate cuts appear unlikely in the near term. In fact, if inflation proves more persistent than expected, additional rate hikes may still be on the table. As always, time will tell. 3.) Supposed “Safe Havens” Can Be Riskier Than People Think Gold is often described as a "safe haven" asset because investors tend to buy it during periods of uncertainty. But "safe haven" does not always mean stable. Despite the headline turmoil this year, gold has not provided the steadiness many investors expect. After peaking earlier in the year, it is now down roughly 25% from that high, even as many other asset classes have moved higher. That does not mean gold has no role in a portfolio. But it is a useful reminder that no asset is automatically safe simply because it has that reputation. Like anything else, gold can be volatile, fall sharply, and should be evaluated based on how it actually behaves, not just how people talk about it. Bottom LineThe second quarter was a reminder that discomfort and resilience can coexist. Consumers are feeling the strain of higher prices and uncertainty, while companies continue to generate strong profits and invest for future growth. For investors, the first half of the year reinforced the value of staying diversified, avoiding overconfidence in any single asset class, and keeping a long-term plan in place. The goal is not to predict every headline or market rotation, but to remain prepared for uncertainty while continuing to participate in progress. 📚 What I've Been Reading
Thank you for reading! Please reply to this email with comments, questions, and/or feedback. Stay wealthy, Taylor Schulte, CFP® |