Economic Update: A Review of Second Quarter 2026

Equity markets rebounded during the quarter, supported by continued investment in artificial intelligence, strong corporate earnings and positive geopolitical news concerning at least a temporary cease fire between the United States and Iran. The S&P 500 was up over 15% during the quarter, marking the best quarterly performance for the U.S. stock market since 2020. 

The U.S. economy enters the second half of the year on solid footing, but recent data suggest that growth has moderated as businesses and consumers become more cautious. While recession fears have diminished compared to a year ago, economic growth appears to be settling into a slower pace. Investors continue to monitor AI spending, inflation trends, labor market conditions and Federal Reserve policy for clues regarding the direction of the economy during the second half of 2026.

U.S. Economy

Corporate earnings were exceptionally strong during the first quarter of 2026, with the S&P 500 achieving year-over-year earnings per share growth of roughly 28%. As of this writing, we don’t yet have earnings results for the second quarter, but S&P analysts expect them to be similarly strong. Overall, for 2026, Standard and Poor’s estimates 23% growth in earnings as compared to 2025. 

GDP growth is not expected to be as robust, however. According to the Bureau of Economic Analysis, U.S. GDP grew at an annualized rate of 2.1% during the first three months of the year. Early estimates suggest that growth remains positive during the second quarter, although momentum has begun to slow as the quarter has progressed. The Federal Reserve Bank of Atlanta's GDPNow model recently reduced its estimate for second-quarter growth to approximately 1.2%, down sharply from estimates above 3% earlier in the quarter, reflecting weaker investment and trade. 

The labor market remains healthy by historical standards but is also showing recent signs of slowing. Nonfarm payrolls increased by 172,000 jobs in May, per the Bureau of Labor Statistics. However, more recent data indicate that hiring slowed considerably in June, with payroll employment rising by only 57,000 jobs. The unemployment rate edged down to 4.2%, though part of that decline was attributable to a lower labor force participation rate. Wage growth has not kept up with inflation, as average real wages were down 0.1% in May, continuing a recent trend. Average real wages are now down 0.8% overall during the past twelve months. 

Inflation registered 4.2% year over year in May. That is well over the Fed’s target of 2.0%. But hopefully we will end up looking back at this time as inflation’s peak as energy prices have declined as of late. The Federal Reserve faces a familiar balancing act between jobs growth and inflation concerns. They recently met in June and decided to maintain the current 3.5 to 3.75% federal funds target range.

The Fed continues to project moderate economic growth alongside gradually easing inflation over the long run. However, in the short term, with inflation still well above target, CME options traders are expecting the next rate move to be an increase. As of this writing, traders estimate a 25% chance that the Fed will raise rates next month with approximately a 75% chance of at least one increase before the end of the year. 

There continues to be a noticeable difference between the manufacturing and service sectors. Manufacturing activity has struggled amid trade uncertainty and a softer global environment, while service-oriented industries such as healthcare and professional services have remained more resilient. 

International Economy

The global economy continues to expand, although growth remains uneven across regions. According to the International Monetary Fund's April 2026 World Economic Outlook, global GDP is expected to grow approximately 3.1% during 2026. The IMF noted that geopolitical tensions, elevated energy prices and ongoing trade fragmentation remain significant risks to the outlook.

The IMF projects Euro Area GDP growth to be only 1.1% during 2026 as the region contends with higher energy costs and weaker business investment. Inflation has moderated compared to recent years, but policymakers remain attentive to the economic effects of geopolitical uncertainty and energy market volatility. 

China's economy continues to face structural challenges including weak consumer confidence, demographic pressures and a continued adjustment within the real-estate sector. Nevertheless, government stimulus efforts and continued manufacturing activity have helped stabilize growth. The IMF expects emerging markets to continue to outperform developed economies, supported by favorable demographics and increasing participation in global supply chains. They expect 3.9% GDP growth from emerging and developing economies during 2026, with just 1.8% average GDP growth from advanced ones. 

Markets

The U.S. stock market had a strong second quarter. U.S. large-cap equities, as represented by the S&P 500 Index, finished up 15.20% during the quarter and are now up 10.21% total for the first half of the year. Developed international equity markets, as represented by the MSCI EAFE Index, performed slightly worse with a quarterly gain of 10.82% and a six-month gain of 9.44%. The MSCI Emerging Markets Index has performed the best of the three, with an increase of 24.05% as of quarter-end and an increase of 23.85% year to date.

Bond returns were small by comparison, but still positive. During the second quarter, the Bloomberg U.S. Aggregate Bond Index was up 0.67%, the Bloomberg Hedged Global Aggregate Bond Index was up 1.30% and the Bloomberg U.S. Inflation-Linked Bond Index was up 0.89%. Year-to-date, they are 0.62%, 1.15%, and 1.15% respectively. 

Energy prices declined, which caused commodities to fall back during the quarter. The Bloomberg Commodity Index lost 8.08% during the period but remains up 14.36% year to date. Real Estate, on the other hand, has performed well throughout the year. The Wilshire REIT Index was up 12.30% during the quarter and is up 17.67% year to date.

Outlook

The first half of 2026 has once again demonstrated the value of maintaining consistent long-term equity exposure. After a rough start during the first quarter, U.S. equities performed exceptionally well during the second and now show healthy gains for the year overall.  They have continued to benefit from strong earnings growth, particularly among technology companies tied to artificial intelligence and digital infrastructure. However, note that current valuations do remain elevated relative to historical averages, suggesting investors should maintain realistic return expectations going forward.

While economic growth appears to be slowing from the stronger pace seen in recent years, the available data continues to point toward expansion rather than contraction. A resilient labor market, moderating inflation and generally healthy corporate balance sheets provide support for the economy. Nevertheless, geopolitical developments, slowing hiring activity and continued policy uncertainty could contribute to market volatility during the remainder of the year.

As always, we recommend a diversified portfolio containing a reasonable amount of equity exposure for any investor with a long enough time horizon.