The first half of the year has reminded us that the stock market rarely grows in a straight line. It has reacted to changing economic data, rumors about the future of interest rates, geopolitical events (war, changes in international trade policy/preference, etc.), Congress’s inability to function, and continued drama around investing in artificial intelligence. In the midst of the instability, we have seen strong returns in the first half of the year.
On one side, we’ve seen people recognize much of the instability that shows up in the headlines. When we speak with these people, we look at history, which reminds us that markets have consistently rewarded disciplined, strategic, long-term investors who don’t forget about the basic rules of investing. Time in the market matters, and not every business has the same risks. When you look at each business in your portfolio on its own merits, and take care to put them together so they complement each other, most of the headlines just become noise.
On the other side, we see many looking at the easy money promised by the AI investment craze. We would remind these people of the old adage “easy come, easy go”. We’ve long said that if it sounds too good to be true, it probably is. Investing indiscriminately in the stock markets at this stage certainly reflects these principles. Good investors aren’t like my dog, Stetson, when he sees a squirrel. They don’t let themselves be distracted by the newest, shiny thing. Instead, they repeatedly buy good businesses that provide consistent passive income.
Market fluctuations happen every year, and 2026 is no exception, but there are also many exciting opportunities on the horizon! In this month’s update, we’ll take a closer look at the current economic landscape, discuss key themes influencing markets today, and share our perspective on what they may mean for you moving forward.
Economic Snapshot
Inflation
Few topics have received as much attention this year as inflation (again, nothing new), with changing feelings and predictions continuing to influence investors. CPI, or Consumer Price Index, is a measure of how much prices are changing for everyday goods and services over time. The U.S. Bureau of Labor Statistics released a report on July 14, 2026, that stated that CPI was 3.5% as of late June, meaning inflation has risen 3.5% year-over-year. When we look at the month-to-month numbers, inflation has decreased by 0.4%, largely due to the index for energy falling 5.7% in June after increasing consistently in March, April, and May. The question is whether that downward shift will continue into July as uncertainties surrounding the conflict in the Middle East continue to put pressure on energy prices.
While inflation has cooled considerably when we compare it to previous years, it remains high enough that the Federal Reserve, our nation’s central bank that is tasked with using different tools to keep our economy stable, is expected to take a cautious approach before lowering interest rates. For the everyday person, persistent inflation means everyday expenses like groceries continue to cost more than they did a year ago. For investors, inflation is one of the biggest drivers of interest rate decisions, making it an important indicator to watch. But the truth is, interest rates aren’t what drive markets, we can look at what people are investing in to see what the true drivers are.
In recent years, markets have scrutinized every Federal Reserve meeting and public comment closely, often reacting sharply to even small hints about future interest rate decisions. Since taking office, new Federal Reserve Chairman Kevin Warsh has signaled a different approach. Rather than providing detailed guidance about future policy, Warsh has emphasized that markets should focus on the underlying economic data instead of trying to anticipate the Fed’s next move. This is a step in the right direction and a huge positive for investors. Financial markets work best when they are free to move organically and are not being driven by constant speculation over recent headlines on each and every Federal Reserve speech or meeting.
Interest Rates
In that same vein, another important indicator to watch is the 10-year U.S. Treasury yield. Closely tied to inflation, the 10-year U.S. Treasury yield is the interest rate investors receive for lending money to the U.S. government for ten years. This rate has a heavy influence on mortgage rates and long-term borrowing rates. But it is important to note that the 10-year U.S. Treasury yield is different than the Fed Funds rate, which has more of an influence on short-term borrowing. Over the past few months, the 10-year Treasury yield has climbed to approximately 4.5%, reflecting expectations that interest rates may remain elevated while inflation continues to moderate. Higher yields generally increase borrowing costs for consumers and businesses, which can slow economic activity.
Housing
The state of the housing market is another popular topic often on the minds of many Americans. The U.S. House Price Index shows home prices continuing to rise at a modest pace, with annual growth of approximately 2.0%. While higher mortgage rates have made buying a home more expensive, limited housing inventory has continued to support prices by keeping supply tight. So, we’re in an environment where we can do one of two things: hope for rates to come down or build more! Although affordability remains a challenge for a lot of Americans, the steady pace of price appreciation suggests the housing market has found a healthier balance after the rapid gains seen in recent years.
Additionally, mortgage rates of around 6%-6.5% are healthy and historically neutral. Current rates just feel high since we experienced dramatically suppressed mortgage rates after the 2008 housing crisis up until rates started to rise post Covid. The graph below shows how the 30-year rate has changed from 1975 all the way up until 2026, so when we take a more bird’s eye view, current mortgage rates are not in a crazy, rough place.
Gas Prices
Along with inflation and the housing market, gas prices remain a major concern for many people. Looking at the graph above, we can see that the national average gasoline prices increased sharply this spring before easing slightly in recent weeks, with prices currently averaging around $3.99 per gallon. Gas prices are heavily influenced by crude oil prices, global supply, refinery production, and geopolitical events. Because fuel is a necessary expense for most households, higher gas prices decrease disposable income and can contribute to broader inflation over the long term, while lower prices provide people with more spending power.
National Debt
It is no secret that the United States government has a huge debt problem. This chart compares four key indicators of the health of the U.S. economy: government spending, tax revenue, gross domestic product (GDP), and total federal debt. GDP is the total value of all goods and services produced in the United States each year and is commonly used to measure an economy’s size. Ideally, as the economy grows, tax revenue also grows. However, government spending has consistently outpaced tax revenue, creating an annual budget deficit, which is the difference between what the government spends and what it collects in taxes. Those yearly deficits accumulate over time (and accrue a ton of interest), becoming the national debt we see today.
But what does this mean for investors? Rising national debt doesn’t mean the economy or stock market suddenly stops growing. It does mean that the government has less financial flexibility and will eventually have to make a choice between raising taxes or reducing their spending (hopefully they will not choose option C which is to just keep accumulating debt and interest). While there are unknowns about what exact strategy Washington will decide to take, it doesn’t change the significance of staying invested and focused on a long-term plan.
Household Debt
While we are on the topic of debt, let’s look at it from a U.S. household perspective. This graph offers a good illustration as to where we are at as a country on household debt levels by showing the percentage of disposable income (amount of money left after taxes) that U.S. households spend on mortgage payments and consumer debt payments like credit cards, auto loans, and personal loans. Despite higher interest rates over the past few years, debt service payments remain near historical averages. Much of this resilience comes from homeowners who locked in super low mortgage rates around 2020 and people who have generally maintained steady income growth. While financial stress certainly exists in many households across the U.S., the broader picture is relatively solid. One thing to note is that it is clear that that percentage is on an upward trend as more people finance purchases at today’s interest rates. While this is a trend worth watching over time, current levels suggest that, overall, U.S. households remain in a relatively strong financial position. As long as employment stays steady and incomes grow, household balance sheets should remain supportive of the broader economy.
Employment & the Labor Force
Speaking of employment, the graph above compares two different measures of the labor market: the total number of Americans who are employed and the labor force participation rate, which measures the percentage of working-age adults who are either employed or actively looking for work. While employment has recovered from pandemic lows, the labor force participation rate remains well below its peak from the early 2000s. In other words, there are more Americans working than ever before, but there’s a smaller share of the working-age population who are participating in the workforce.
Several long-term trends have contributed to this shift, including an aging population, increased early retirements, and, in some industries, a mismatch between the skills employers’ need and those available in the workforce. On the positive side, we have seen the number of unemployed workers and job openings fall relatively in line with one another on a national scale. Of course, there will be variations across industries and local economies, but broadly speaking, the United States has bounced back from the labor shortage it experienced in prior years.
Small Businesses
Small businesses are often considered the backbone of the U.S. economy, so their outlook can provide valuable insight into where the economy may be headed. This graph tracks three measures: small business optimism, uncertainty, and plans to expand in the future. While uncertainty remains elevated compared to past levels, optimism has begun to stabilize and businesses are once again showing a greater willingness to invest and grow. Although many business owners continue to face challenges such as higher borrowing costs and labor shortages, the overall trend suggests confidence is gradually improving, which is an encouraging sign for future economic growth.
Market Themes to Watch
Middle East Conflict and Energy Markets
One of the largest sources of headlines this year has been the conflict involving Iran and Israel. Investors are closely watching developments there since the Middle East produces a significant share of the world's oil, and disruptions to shipping through the Strait of Hormuz, one of the world's busiest oil transit routes, could reduce global energy supplies. Recent tensions have already contributed to higher oil prices and renewed volatility in energy markets. Higher oil prices can eventually work their way into inflation by increasing transportation and manufacturing costs, so it is something to keep an eye on.
Is the AI Rally Losing Momentum?
Artificial intelligence has been one of the strongest drivers of stock market performance over the past few years, particularly among large tech companies. While AI could represent a transformational long-term opportunity, investors have recently become more selective as valuations have climbed to historically high levels. Rather than questioning AI's potential, the market is beginning to ask whether current stock prices already reflect years of future growth. Companies will increasingly need to demonstrate that heavy AI investments are translating into meaningful revenue and profits, not just speculative growth. I have no doubt that AI will continue to revolutionize innovation and continue to become more useful in daily life, but which companies will come out as winners is where the unpredictability lies.
A Great Rotation?
One potential theme to watch in the coming months is a rotation from high-growth, AI driven tech stocks toward more value-oriented companies. When we think of value-oriented companies, we think of the businesses that are stocking our grocery stores, keeping our lights on, and supplying everyday products we rely on without a second thought. These are companies that provide essential goods and services you and I will continue to use regardless of the economic environment. As investors become more selective and question whether current AI valuations fully reflect future earnings potential, investments may begin shifting toward sectors with lower valuations, more stable cash flows, and established businesses. While artificial intelligence is expected to remain a powerful long-term growth driver, markets often rotate leadership as expectations evolve so we will continue to monitor if any major shifts start to emerge.
Compelling Investments
We’ve spent some time talking about the challenges in the investment world, but there are also many reasons to remain optimistic. As we celebrate America’s 250th birthday this month, it’s a fitting reminder that innovation, entrepreneurship, and resilient businesses have long been drivers of economic growth and prosperity.
While much of the market’s attention has been on AI, there are many high-quality companies out there with strong leadership, healthy balance sheets, and consistent earnings that continue to create long-term value for their owners and consumers. Corporate earnings have stayed strong, showing that success isn’t only found in a handful of dominating companies.
Artificial intelligence is also entering a new phase. Rather than simply generating speculative excitement, businesses are increasingly finding new ways to apply AI practically to boost productivity and efficiency. As adoption across sectors expands, opportunities may go beyond the companies developing AI to those using it to strengthen their business models.
While productivity gains from major technological advances can take years to fully materialize, history suggests that patient, long-term investors are often rewarded as innovation becomes more embedded across industries.
Our Perspective
The challenges we’re seeing today are not out of the ordinary to long-term investors. Markets will always have ups and downs, and today’s environment is no exception. Geopolitical events and changing expectations around artificial intelligence may continue to create short-term volatility, but they don’t change the long-held principles of disciplined investing.
Rather than reacting to every headline, we believe it’s important to stay focused on what matters most: owning high-quality businesses, maintaining a strategically diversified portfolio, and keeping your investments aligned with your long-term goals. Taking a calculated diversification approach allows us to avoid putting all our eggs in one basket, helping create a more resilient portfolio over time.
History reminds us that patient investors have been rewarded over time. Since 2000, the S&P 500 has delivered average annual returns of roughly 8%. While long-term market growth is an important driver of accumulation, successful investing is about more than simply participating in the market. A thoughtful financial plan includes a well-designed distribution and liquidity strategy, ensuring you have cash available when you need it without being forced to sell investments during periods of market downturns. This approach helps make retirement income more sustainable while allowing the rest of your portfolio to remain invested for long-term growth.
Above all, we believe successful investing is about more than managing a portfolio, it’s about helping navigate what we can’t control with confidence and what we can with clarity. Markets will continue to evolve, but your financial plan should provide you with stability through every stage. We remain committed to helping you make thoughtful decisions, adapt when needed, and stay focused on the goals that matter most to you.
