July 2026 Market Observations

Where We Were

2025 was another great year for equities, as well as fixed income – despite a cloud of despair present in so many minds around the country. President Trump rode a strong wave of economic hope and goodwill early in the year, mostly focused on dismantling selective government overreach and lowering taxes. That goodwill was quickly dashed against the rocks of see-saw tariff and trade policy changes, retaliation by quite important (and powerful) trade partners, as well as an unwise attack on the Federal Reserve and the members of the FOMC. As a result, confidence as well as economic and earnings growth projections tapered off between the end of Q1 and into Q2. That both coincided with, and likely caused, an overdue equity market correction between March and April.

Market conditions and confidence rose again after Q2 earnings results started to come in, as they did not reflect the doom-and-gloom forecasts of many an economist and talking head. Corporate earnings rode a tailwind of stronger-than-expected incomes, spending and net worth, as well as expanding margins and cash flow led by growth companies. Strong earnings results and forecasts continued throughout the rest of the year. Equity returns were strong across the board and led by foreign emerging markets (+34%), foreign developed markets (+31%), and US large cap growth (again, +22%). The S&P 500 rose +18%. Fixed income returns were extremely even across the board and generally well above their long-term averages, buoyed by tapering inflation and overall US economic growth projections (after inflation) of a bit less than 2%. The Aggregate Bond index rose 7%, while 7-10 year Treasurys, investment-grade corporates, mortgage-backed, and high yield bonds all returned 8+% on the year, proving once again that the Chicken Littles (“60/40 is dead”) should remain unheeded.

Where We Are

Source: Factset

All-time high territory, but off for the month. The S&P 500 index was off -1% in May, now up 10% YTD. Many stock indexes were flattish last month, consolidating after a 19% run since the end of March. Within the S&P 500, Growth was off -2% for the month, while Value was flat at 0%.

The US Aggregate Bond index is up 1.1% YTD. The 10-year T-Note yield is at 4.44%.

Q1 Results. With 100% of S&P 500 constituents reporting, 82% beat revenue estimates, with the average upside surprise being 2%. 85% beat EPS estimates, with the average beat coming in at 16%. Actual Q1 EPS growth is 29% vs. the 13% expected at the beginning of Q1.

S&P 500 earnings expectations. For 2025, final EPS was $270/share, up 13% vs. 2024. The 2026 estimate is $338 (+25%), 2027 is $395, (+17%), and 2028 is $453 (+15%). P/E ratios for ’26-28 are 22x, 19x and 16x. The P/E-to-Growth (PEG) ratios are 0.9, 1.1 and 1.1. The average EPS growth rate over the past 20 years is 7.5%; the average trailing and forward P/E ratios are 20x and 17x, while the 20-year average trailing PEG ratio is 2.6x. The consensus median price target for the SPX is 8940 vs. 8721 a month ago and 8390 sixty days ago, for an implied return of +19%. If achieved this calendar year, the implied total return for the S&P 500 in 2026 would be 29%.

Where We're Headed

Earnings estimates keep on rising….but so does volatility. We’re now looking at 25% EPS growth for the S&P 500 index in 2026. A year ago the expected 2026 growth rate was 10%. In dollar terms, the 2026 calendar year EPS estimate was $297 a year ago, whereas now the consensus view calls for $338. During the same time period, the 2027 estimate has risen from $334 to $395. 2028 consensus was $390, now $453. Meanwhile, the consensus median target price for the S&P 500 has risen from 6692 to 8940. Economic conditions and corporate performance have been much better than expected over at least the past two quarters, and they have provided a tailwind for stock values. For both Q425 and Q126, actual EPS growth reported was 2x that expected.

This month’s missive is short. Since earnings data, performance and valuation perspectives are well known to this audience, we just want to circle back to the perspective of consolidations following extraordinary price runs. This applies to AI theme companies in Tech, Industrials, Materials, Energy, Utilities, and other sectors, but also to selected broader indexes such as the Nasdaq 100 (QQQ) and the Russell 2000, whose YTD total returns now exceed 20%. They are also up 35% and 41% respectively from their March lows.

The table above is available in different forms, but its key takeaway is that most folks should not panic when inevitable (and healthy) corrections occur. They should not panic because most folks tend to have some cash and/or investment grade fixed income in the mix, and those asset classes tend to provide some offset for “risk off” equity markets. For an average portfolio with 60-70% equity exposure to the S&P 500, a -20% correction equates to a -10% to -12% decline in portfolio value, assuming the correction lasts a year (rare) and bond prices do not rise as money flows out of stocks. If they do the decline would be less.

Most folks can weather a temporary 10% or so “paper” decline in their portfolios, and many will fare better given that they have more Value or Dividend Achiever-type holdings. Those styles and strategies tend to provide higher dividend yields, which can boost risk-adjusted performance over time, and mitigate more downside risk. So let’s remember that most people don’t pay the sticker price of equity corrections, and there are many ways to minimize downside volatility with the appropriate portfolio tools. Meanwhile, we hope y’all enjoy America’s 250th birthday celebration!

Source: FactsetSource: Factset