Market Update

Economic & Market Update | July 2026
Market returns through June 30, 2026

Overview
The U.S. economy continues to expand, but momentum is moderating. Inflation improved meaningfully in June, the labor market remains stable but is hiring more slowly, and business surveys continue to indicate growth. Markets have also broadened beyond the largest technology companies, which is a constructive development for diversified investors. The outlook remains positive, although elevated inflation, geopolitical risk, and a cautious Federal Reserve argue for maintaining a balanced approach.

Economic Update
Real U.S. gross domestic product grew at a 2.1% annualized rate in the first quarter. More recent data suggest that second-quarter growth slowed, with the Atlanta Federal Reserve's GDPNow estimate at 1.3% as of July 8. Consumer spending remains an important source of support, while manufacturing and services surveys both remained in expansion territory in June. Housing continues to be constrained by affordability and elevated borrowing costs.

June inflation data were encouraging. The Consumer Price Index declined 0.4% during the month and increased 3.5% from a year earlier. Core CPI, which excludes food and energy, was unchanged for the month and rose 2.6% over the past year. Lower energy prices drove much of the improvement, but the modest 0.1% rise in shelter costs was also welcome. Inflation remains above the Federal Reserve's 2% objective, so one favorable report does not yet establish a sustained trend. We believe inflation will continue to be one of the biggest factors to monitor this year.

The labor market continues to show signs of cooling but without showing broad distress. Employers added 57,000 jobs in June, the unemployment rate held at 4.2%, and average hourly earnings increased 3.5% over the prior year. Payroll gains have slowed substantially, and participation declined to 61.5%, suggesting that the labor market is becoming less dynamic even as overall conditions remain relatively stable.

Federal Reserve
The Federal Reserve held the federal funds target range at 3.50% to 3.75% in June. Policymakers continue to balance above target inflation against slower hiring and moderating growth. The June CPI report reduced the immediate pressure for another rate increase, but the Fed is likely to remain data dependent. Its next policy meeting is scheduled towards the end of this month (July 28–29).

Market Update
Markets broadened during June. The S&P 500 Index declined 1.0% for the month but remained up 10.2% for the year through June 30. The Nasdaq Composite fell 2.8% in June and was up 13.1% year to date. Small-company stocks performed especially well. The Russell 2000 gained 3.7% in June and 22.6% year to date. International developed stocks returned 9.4% for the year, while emerging markets led major equity categories with a 23.8% year-to-date gain.

Fixed-income returns were modest but positive in June. The Bloomberg U.S. Aggregate Bond Index gained 0.2% for the month and 0.6% year to date. Credit spreads remain relatively tight, which supports a preference for quality and selectivity rather than reaching aggressively for yield. Second-quarter earnings are expected to be strong, although U.S. large-company valuations remain above long-term averages.

2Q26 Earnings season has already kicked off this week with mixed reports from the large money center banks. Earnings season has previously been a consistently positive catalyst driving financial markets in recent quarters. While it is too soon to pass judgement, analyst estimates remain quite lofty and the bar for earnings is quite high. The most recent example is IBM, which suffered losses of about 22% today after guidance fell short of Consensus. Continued earnings growth will be the key to trend continuation, so we will be monitoring this catalyst closing in the coming weeks.

Investment Perspective
The current environment favors disciplined diversification. Broader equity participation is healthy, but investors should remain mindful of elevated valuations and geopolitical uncertainty as the ongoing US/Iran conflict continues to remain dynamic. High quality bond exposure has provided income and portfolio stability, while international equities and small cap U.S. companies have reduced portfolio dependence on a narrow group of volatile market leaders. Near term attention will focus on corporate earnings, the July Federal Reserve meeting, the July 30 release of second quarter GDP, and June inflation data along with energy prices.

In summary, the economy is still expanding, inflation improved in June, and market leadership has broadened. The appropriate posture remains constructive but measured, with an emphasis on quality, diversification, and ongoing risk management.