2026 Second Quarter Letter
July 30, 2026 • By David K. MacLeod, CFP®, CFA
In the first half of 2026, markets rebounded from the end-of-March lows amid stable U.S. economic growth fueled by artificial intelligence (AI) capital spending, strong corporate earnings growth, and easing fears about war in the Middle East. The S&P 500 Index was up 10% year-to-date, while U.S. small-cap stocks increased by 23%. Despite a strengthening U.S. dollar, emerging-market stocks gained 24%, and developed international stocks climbed higher by 10%, adding to strong returns posted in 2025. Gold fell 7%, and silver dropped 17%. Bond returns were slightly positive as interest rates ticked higher.
Economic growth has been steady with real gross domestic product (GDP) growth trending at 2%, supported by business investment, while a growing trade deficit is weighing on growth. The job market is strong with a 4% unemployment rate and regular monthly job gains combined with low layoffs. Inflation spiked over 4% in May, but that appears to have been a peak. With the Iran war ceasefire in place, oil and gas prices have dropped, which has reduced inflationary pressures. Lower energy costs combined with easing shelter costs could lead to inflation dropping below 2% by 2027. The Federal Reserve under new Chair Kevin Warsh is watching the inflation numbers closely as they weigh whether to raise interest rates a little bit later this year.
Corporate profits have been remarkably resilient in 2026, fueling the stock market higher. Large U.S. companies continue to post double-digit earnings growth year-over-year, and analysts expect the second-quarter growth rate to be about 22%. Although the largest “Magnificent 7” technology companies continue to invest heavily in artificial intelligence, their stock prices have suffered recently as the market has shifted to reward the beneficiaries of AI spending in hardware, power, and semiconductor stocks as they build out the technology infrastructure that powers AI. The largest tech companies are expected to spend over $700 billion on AI. We continue to emphasize the importance of managing the stock market’s concentration in AI stocks by recommending diversification in small, value, and international stocks.
In the financial plans we’ve written for clients since the 1980s, we’ve included a page on our investing philosophy. One point that’s stayed the same ever since is the importance of diversification in an uncertain economic environment. The economic outlook is still uncertain today. We continue to recommend a disciplined approach to investing. If we had gotten caught up in all the bad news about the war when stocks hit their recent low point, we would have missed out on the 15-20% stock market gains that followed.
On a personal note, our paraplanner Kaden Wingerd recently got married to Addie Willmer. Say congratulations to Kaden next time you visit our office.
If you haven’t already done so, please provide us with a copy of your 2025 tax returns. We plan to review client tax returns throughout 2026. As always, please feel free to call or email us if you have any questions or want to schedule a meeting.