July 2026 Market Update

There is a lot to question in today’s world, but one thing is clear – the U.S. economy continues to display remarkable resilience.  Corporate earnings maintain their steady climb, the labor market exceeds expectations, consumer spending is strong and the inflation picture, while elevated, will likely improve given lower energy costs over the balance of the year.  As a result, the stock market, which is currently trading at twenty-one times projected earnings, is not unreasonably valued, particularly when compared to its earnings growth potential.

Corporate earnings are largely driven by innovation and productivity growth – they are the DNA of our economic system.  Given that, when you combine the genius of our tech entrepreneurs with capital markets having access to tons of money, profit margins expand.  When that occurs, the result is often what happened in this past quarter – stock prices rising.  It is a marvel to behold.

One might think that given another six months of positive outcomes stock price valuations would be overly stretched.  Well, to be fair, the market is on the high side.  Yet, at current levels, it is actually trading at a lower valuation than where it began the year, despite many stocks being up double digits since January.  More surprisingly, the stock market is now trading at a valuation similar to where it stood six years ago, in the early days of COVID.

In other news, the IPO (Initial Public Offering) market has seen new life in 2026, and this past quarter witnessed the debut of SpaceX as a publicly traded company.  It was the largest IPO in history.  SpaceX is an amazing story, and investing in Elon Musk companies over the years has almost always been a successful strategy, albeit one light on current earnings to justify their success.  That is particularly true for SpaceX, sporting a multi-trillion valuation, but no real earnings . . . yet.

Likewise, we will have Anthropic and OpenAI also go public in upcoming months.  Their AI models are literally changing the world, more so each week and month. Through their large language models (Claude and ChatGPT, respectively) they produce tens of billions of dollars in revenues, have software already used by millions, have major enterprise partnerships in place and are well-funded. However, neither has sustained profits . . . yet. That is the key.  How long will it be before sustainable, growing profits can be realized? After some base level of expense, digital products like theirs are replicated with minimal incremental costs.  Thus, profits should climb, perhaps by the bucket-load.  We like all three of these companies, particularly SpaceX and Anthropic, but finding an attractive price to pay for initial purchases is difficult, especially in a momentum market such as we have.  It is always dangerous to rush to make an investment when many buyers of stocks seem willing to pay almost any price.

Markets staged a strong rebound in the second quarter, recovering the ground lost during the first quarter’s selloff and closing the first half of the year higher across nearly every major asset class.

• U.S. Large Cap stocks, as measured by the S&P 500, are now up 10% year-to-date, bolstered by resilient corporate earnings and with semiconductor stocks leading the charge.
• U.S. Small Cap stocks, as measured by the Russell 2000, have performed even better, up 23% for the year – a healthy sign the rally is broadening beyond the largest technology companies.
• International stocks also participated. Developed Markets have gained 9% year-to-date, while Emerging Markets have surged 24%.
• Bonds are up 1% for the year, as income from higher yields has been offset by the market price drag from a modest rise in interest rates.
• Commodities are up 14% year-to-date, but it has been a wild ride. Oil prices, which spiked earlier this year following the conflict in Iran, gave back much of those gains during the quarter amid a temporary ceasefire. Gold surged early also only to end the half down from the start of the year.

A changing of the guard occurred at the Federal Reserve in May. Kevin Warsh succeeded Jerome Powell as Fed Chair and led his first policy meeting in June, where the committee voted unanimously to hold interest rates steady.

Warsh has wasted little time putting his stamp on the institution. The Fed’s June policy statement was roughly a third the length of the prior one, reflecting Warsh’s preference for saying less about where interest rates are headed. He has emphasized the Fed’s determination to bring inflation back down to target.

Inflation has climbed to just over 4% – its highest level in roughly three years and more than double the Fed’s 2% target. Driven largely by this spring’s energy price shock, consumer prices are once again rising faster than the average worker’s paycheck, eroding purchasing power, as seen below.

The job market has given the Fed room to stay patient for now. As shown in the bottom right, monthly job growth has regained momentum in 2026 after a soft stretch last year.

Despite elevated inflation and a Fed signaling that rate cuts are off the table for now, stocks reached record highs in the second quarter, largely due to very healthy corporate profits.

Companies in the S&P 500 are not just earning more, they are keeping more of every dollar of sales. As shown to the right, profit margins have climbed for more than two decades and now sit near record levels. Productivity gains resulting from technology enhancements seem the likely driver for this.

Ultimately, earnings growth drives stock prices over the long-term. As seen below, the S&P 500 Index has tracked the earnings that its companies are expected to generate over the coming year. Prices and earnings drift apart at times, but rising profits have always been the engine behind long-term stock market gains.

The world’s largest technology companies are generating enormous amounts of cash — and spending nearly all of it. As shown to the right, the cash these companies produce from everyday operations has never been higher as a share of sales. But spending on data centers, semiconductor chips, and other long-term AI investments has grown even faster, leaving less cash left over than at any point in more than a decade. Estimates suggest that gap begins to close by 2028, but those projections depend on current and planned AI investments paying off.

Investors have taken notice. The Magnificent 7 — the mega-cap technology stocks that powered the market for much of the past three years — have declined 2% this year, even as the broader market has climbed. Investors are questioning whether the future return on investment will be justified by the massive expenditures of today.

Market leadership changes — and sometimes quickly. The stocks that dominate one period are rarely the leaders of the next, making a strong case for remaining diversified.

After years of anticipation, SpaceX went public in June in the largest initial public offering (IPO) in history, raising roughly $75 billion — nearly three times the previous record set by Saudi Aramco in 2019, as shown below.

That IPO record may not last long, as OpenAI and Anthropic – two of the largest artificial intelligence companies – each filed paperwork to go public, likely sometime later this year.

Excitement, however, is not the same as investment merit. As shown to the right, the 30 largest U.S. IPOs have, on average, trailed the S&P 500 over their first year of trading. Companies attracting the most attention at their debut have often seen much of their early growth prior to the IPO, i.e., before retail investors get access. That does not mean these companies will fail, but it is a reminder that discipline and diversification matter most when enthusiasm runs highest.