July 6, 2026
Economic Commentary
2026 Mid-Year Update
In the first half of 2026 investors weathered dramatic shifts in the economic and geopolitical landscape. While expectations have changed since the year began, the underlying economy has shown remarkable stamina. Meanwhile, a resilient labor market and an energy-driven spike in inflation have created a complex environment for Fed policymakers. Looking ahead to the second half of the year, the path forward on the war in Iran, monetary policy and AI infrastructure investments are likely to remain center stage.
A Bumpy Ride
In January, we discussed the core assumptions baked into the economic outlook. These variables included real GDP growth, inflation, job gains, fed funds rate expectations and corporate earnings.
The first six months of 2026 have delivered a vastly different narrative than what forecasters predicted in January as the Iran conflict drove increases in inflation and a shift in the monetary policy outlook. In spite of these shifts, broad market resilience has remained the overarching theme. Driven by a relentless secular expansion in artificial intelligence infrastructure, global equities have marched to historic highs. Year-to-date, global equities are up more than 11%. Domestic large caps are up 10.2%, while developed international and emerging market stocks have generated returns of 9.4% and 23.8%, respectively. At the same time, core bonds are up 0.7% and the 10-year Treasury bond rate sits at 4.47%. A balanced portfolio comprised of 60% stocks and 40% bonds is up 7.1% in the first six months of the year as financial markets have proven resilient in the face of uncertainty.
Labor Market Resilience
Despite a sweeping downsizing of the federal workforce, private enterprises have continued to hire new employees at a rate that has surprised economic skeptics. Monthly job gains for May came in at a robust 172k and employers added 565k jobs in Q2, more than doubling forecasts.
The national unemployment rate has held steady at 4.3%. While this is slightly up from the cyclical lows of prior years, it remains exceptionally low by historical standards, indicating a balanced labor market.
Inflation: Energy Shocks and Potential Abatement
Inflation re-emerged as a primary concern during the first half of the year, driven almost entirely by geopolitical supply shocks. Headline Consumer Price Index (CPI) inflation surged to an annual rate of 4.2% for the May reading, marking the highest annual rate the economy has seen since early 2023. This spike was heavily fueled by a 23.5% annualized jump in energy costs which is the direct result of the war in Iran and the subsequent blockades surrounding the critical Strait of Hormuz. Core CPI, which strips out volatile food and energy, has remained stickier at 2.9%, sitting above the central bank’s long-term 2% target.
Looking forward, however, there is reason to believe these localized price pressures may soon abate. Preliminary diplomatic breakthroughs indicate that a peace deal in the Middle East is near. While the micro-level political details of the agreement do not directly impact domestic productivity, the operational downstream implications are vital. The cooling of the conflict is expected to reopen the Strait of Hormuz, normalizing global crude oil and fertilizer shipments. This supply-side relief should act as a welcome deflationary tailwind for consumers in the fall.
A Conflicted Fed under New Leadership
The macroeconomic developments of 2026 have put the Federal Reserve in a delicate position, right alongside a historic changing of the guard. Chairman Warsh takes the helm at a crossroad where the executive branch has actively messaged a desire for aggressive interest rate cuts to encourage domestic borrowing, yet a 4.2% headline inflation print makes near-term cuts a mathematical impossibility for the wider Federal Open Market Committee (FOMC).
At the recent June meeting, the Fed unanimously voted to leave the benchmark federal funds rate unchanged at 3.50% to 3.75%. However, the updated “Dot Plot” revealed a distinctly hawkish shift:
- The Median Pivot: The median expectation among officials was revised to project one interest rate hike in 2026, a stark reversal from the March projections which signaled a rate cut.
- Committee Dispersion: The dots show wide disagreement. Eight members project no change through year-end, while a combined nine members expect anywhere from one to three hikes. Only a single participant still projects a cut.
Chairman Warsh has championed a supply-side regime change, arguing that massive, AI-driven productivity gains may allow the economy to support lower structural rates over the long run without stoking demand-driven inflation. For now, the bond market has fully adjusted to this hawkish baseline, pricing in exactly one rate hike for the remainder of 2026 and projecting a flat, unchanged rate path through 2027.
Retail Sales Surprises and a Historic IPO Pipeline
While the Fed maintains a moderately restrictive posture, the American consumer has consistently beaten expectations. Retail sales recently surprised significantly to the upside, expanding at a healthy 6.9% nominal rate. Even when factoring in the 4.2% inflation drag, real consumer spending remains in a positive expansion phase. While energy outlays at gas stations naturally led the nominal gains (+26.5%), robust growth in brick-and-mortar (+9.1%) and online retail (+12.2%) reinforces that consumer behavior remains exceptionally healthy.
Beyond the hard data, a historic milestone caught the world’s attention this month: SpaceX officially transitioned into a publicly traded company on June 12, 2026. Trading on the Nasdaq under the ticker symbol SPCX, the company raised a record-setting $75 billion to become the largest initial public offering (IPO) in stock market history. Extraordinary investor demand on opening day sent shares surging well past their debut price, pushing the company’s market capitalization above the $2 trillion threshold. With AI heavyweights OpenAI and Anthropic widely expected to follow SpaceX into the public sphere later this year, this listing marks a monumental opening act for a historic new capital-raising cycle on Wall Street.
Looking Forward – Capital Market Assumptions
As we evaluate the market experience going forward, we share our updated 10-year capital market assumptions below. These forecasts represent our long-term expectations for average annualized returns and volatility across major asset classes. We maintain that disciplined asset allocation outlasts short-term market-timing strategies.
We continue to recommend that clients maintain a full weight to global equities in accordance with their individualized risk profiles. Structurally, we remain constructive on U.S. small- and mid-cap equities as historical valuations normalize. Concurrently, given the heightened geopolitical and monetary policy crosscurrents, we continue to actively utilize diversifying liquid alternative strategies to capture return drivers uncorrelated to traditional equity and fixed-income benchmarks.
Despite an ever-changing global landscape, our disciplined approach, technical underwriting and long-term orientation serve us well as we endeavor to build comprehensive investment solutions that protect and grow your capital. On behalf of our entire team, thank you for your continued trust and partnership and we wish you the very best in the second half of the year.