2nd Quarter Market Review & Outlook
Happy Birthday America! As we celebrate the semiquincentennial of the Declaration of Independence, it is a reminder that long-term strength has always been part of the American story. It is a moment to look beyond our current differences, and reflect on the heart of one of the greatest experiments ever undertaken.
It has been an interesting quarter. From a market perspective, equity markets closed higher, showing resilience even as investors weighed a changing mix of economic signals and interest-rate expectations.
On the economic side, we saw some trends that matter for what comes next: wage pressure has cooled somewhat, housing has remained under pressure, and inflation—while not looking like the dramatic post-COVID problem we saw earlier this decade—remains something we monitor closely. Even with these mixed signals, the bigger story is that the economy has continued to function well.
Looking forward, we believe Gross Domestic Product will continue to rise through 2028. That said, we expect the pace to be sluggish next year. Think of it less as a slowdown turning into a recession, and more as growth that is still present, but not as energetic. A big part of that outlook is the consumer.
Even with a lower savings rate and wages that have not kept pace with inflation, the consumer is still spending. We expect continued growth in retail sales through 2027, albeit within a slowing growth period. High-net-worth individuals and families are currently the primary drivers of this spending, while the working class has become less of an economic engine than in the past. Consumer spending makes up roughly two-thirds of overall GDP, so as the consumer goes, much of the economy follows. Furthermore, the wealth effect—driven by years of asset appreciation—underpins both this demand and the resilience of current consumer spending.
Regarding the markets, they are expensive by almost all measures and do not always follow the same course as the economy. Because current valuations leave little room for error, we have intentionally reduced volatility within our equity portfolios to address the risk that markets could move more sharply than the underlying economy suggests.
If you have questions about this, please ask your advisor. We want every client to understand not just what we’re doing, but why we’re doing it.
Potential headwinds include the Federal Reserve standing pat on, or even raising, short-term interest rates. We are also monitoring the bond market: if the 10-year Treasury yield sustains a level of 4.7% or higher, it could signal resurfacing inflation concerns.
Finally, we are watching the concentration in the S&P 500. The 10 largest U.S. stocks now represent roughly 40% of the index market cap, and while this in-and-of itself is not automatically a problem, we are paying attention to the circular structure of AI capital spending, and the lack of significant revenue resulting from it.
On inflation, we do not expect a return to post-COVID supply-side constraints, though it remains a watch item. While we may see inflation slowly rise next year, a weak housing market, lower wage pressures, and the recent oil and gas price spikes retreating should help keep it under control.
If the economy remains supported and inflation stays contained, growth can continue. However, because markets may react strongly to rates and inflation signals, we are staying disciplined and preparing for volatility rather than assuming a straight-line outcome.
If you have any questions, please do not hesitate to contact our office. And as always, we thank you for your trust.
Marc Henn, CFP®, CEPA®
CEO & Founder
Article
2026 Q1