Economic Commentary Q2 2026

Hello,

I hope all is well and that you are enjoying a positive and joy-filled first half of 2026! 

The markets have proven resilient once again in 2026 despite a litany of challenges. The S&P 500 index has gained 8.56% YTD as of May 12th, 2026 [1]. The Dow Jones index has gained 3.53% YTD as of the close of business on May 12th, 2026 [2]. Market benchmarks sold off during a challenging stretch from late February through the end of March, only to stage a powerful rally in April driven by robust Q1 corporate earnings and optimism regarding a ceasefire in the Middle East. Coming into 2026, it generally felt like an ideal setup for the markets. We were in an environment with an expectation that the Fed would lower rates at least once, if not more, during the year and that we would see corporations continuing to spend aggressively on AI. The latter is happening as expected; however, the situation in the Middle East has dampened the prospects of rate cuts this year as inflation remains stubborn.

What lies ahead for our markets—and our economy—as we navigate the second half of 2026? Recent inflation data showed CPI at 3.8% in April, sharply higher than the 2.7% we were at in December of 2025 and 2.4% in February of 2026 [3]. A core catalyst of this reversal has been higher energy costs, accounting for 40% of the total jump in inflation in April. The index for gasoline prices was up more than 28% from a year ago [4]. At the root of this surge is the closure of global shipping via the Strait of Hormuz, holding up roughly 20 million barrels of oil daily and 25% of the global seaborne oil trade. In spite of this, while Brent Crude has gotten as high as $118.03 in recent weeks, it has remained fairly entrenched around $100. How has the stock market been able to stage a powerful recovery rally under the pressure of rapid oil price increases and renewed inflation? The answer is a combination of events. First, Middle Eastern producers rerouted 5 to 6 million barrels of crude per day through the Red Sea. Second, the IEA (International Energy Agency) coordinated the largest release of strategic reserves in history, with the U.S. alone putting 1.4 million barrels a day on the water. Third, temporary waivers were implemented on the purchase of Russian oil, and lastly, and I would argue most importantly, United States crude production now exceeds 13 million barrels a day, which helps to insulate the U.S. against foreign shocks [5]. Additionally, on the economic front in the U.S., corporate earnings remain robust. As of May 8th, 2026, for Q1 2026, with 89% of S&P 500 companies reporting results, 84% of those companies reported positive EPS (Earnings Per Share), and 80% of S&P 500 companies gave a positive revenue surprise. For Q1 2026, the blended (year-over-year) earnings growth rate for the S&P 500 is 27.7%, which would be the highest growth rate reported by the index since Q4 of 2021 [6]. U.S. real GDP increased at 2% annual rate in Q1 of 2026, up from the .5% in the previous quarter, driven primarily by the growth in AI investments, and unemployment remained steady at 4.3% in April of 2026.

The question of what the Fed will do with rates in the second half of the year is anyone’s guess. The markets are currently not pricing in a rate cut, and the expectation is that the Fed will keep rates the same throughout 2026. As I shared in past commentaries, the adaptability and continued growth of our economy start and end with us, the American consumer. Consumer debt in the U.S. hit a record $18.8 trillion at the end of 2025 [7]. While the debt situation feels scary, the flow of serious delinquency (90 days or more delinquent) across all consumer debt metrics rose only slightly from 2.45% in Q1 of 2025 to 2.83% in Q1 of 2026 [8]. Despite elevated costs, Americans remain resourceful and committed to meeting debt obligations. Ultimately, it is important that inflation be contained and lowered, with the most impactful variable being energy prices. It is certainly plausible that energy prices could drop before the high usage summer travel season. This could improve the chances for a Fed rate cut later in 2026 and further bolster the recent market rally. The flip side—in which energy prices and inflation accelerate—is the situation we hope to avoid and continue to monitor closely.
 
While so much remains uncertain and tricky when it comes to the economy and markets, I remain optimistic! As we have historically, I believe whatever situation we encounter, we will continue persevering through any adversity!  

I remain steadfast in my belief in long-term planning, preparation, and proper diversification, while aligning your portfolio to your comfort level for risk. Time and time again, it is proven that markets cannot be timed. No one has a crystal ball, and no one knows what major world event will occur next. Our best strategy is to be well-diversified across asset classes and remain optimistic and vigilant during times of fear and panic. Our companies remain some of the best in the world, providing goods and services to every corner of the earth. Our people are some of the brightest and hardest-working in the world. I believe in the long-term trajectory of the U.S. and global economy!

Thank you for the opportunity to serve you. My priority remains and always will be to ensure that you continue to receive high-quality guidance and a client service experience second to none. While I continue to reach out via phone and e-mail, please know that I am available via Zoom, FaceTime, any other digital technology you prefer and in person if you would like to meet. I am happy to meet with you at any one of my offices or at your home or near your home, whatever you prefer and with whatever you are most comfortable.

Wishing you, your family, friends, colleagues, and community continued hope, health, and positivity in the coming weeks, months, and beyond!

Thanks!