Mid-Year Review & Outlook: A Resilient Economy Continues to Push Through Headwinds

• Labor market tightness driven by worker scarcity should keep unemployment near all-time lows even as job creation slows, with the broader unemployment measure for all Americans 16+ at historic lows
• S&P 500 earnings growth for 2026 is tracking above 24% with estimates being revised upward, representing a genuine bright spot that can support higher equity prices despite potential volatility
• Portfolio positioning emphasizes U.S. equities with targeted overweights in healthcare services, industrials, regional banks, and AI infrastructure, while favoring high-quality asset-backed and mortgage-backed securities in the 2031-2032 maturity range within fixed income

Mid-Year Economic Review: Strong Private Sector Growth and Earnings Support Equity Positioning

Key Economic Indicators

The U.S. economy demonstrates resilience in mid-2026, with private sector activity outpacing headline GDP growth, which has been weighed down by net exports. Real Final Sales to Private Domestic Purchasers reveals stronger underlying economic strength than GDP figures suggest.

Labor Market and Inflation Trends

The labor market remains tight rather than strong, with unemployment near all-time lows when measuring all Americans aged 16+. Worker scarcity is expected to keep jobs growth cooling while maintaining low unemployment. Inflation likely peaked in May 2026, driven by fading energy costs and slowing shelter inflation—now at its slowest pace since pre-pandemic levels. This trend supports a pause in Federal Reserve tightening.

Corporate Earnings Highlight

Corporate earnings represent a significant bright spot, with 2026 S&P 500 Index earnings tracking above 24% growth year-over-year. Estimates are being revised upward, contrary to typical patterns, supporting continued equity market strength.

Investment Strategy

Positioning remains overweight equities with U.S. emphasis. Specific equity tilts include:

• Healthcare service providers (recently added due to attractive valuations)
• Industrials
• Regional banks
• AI infrastructure and semiconductors

Fixed income allocations favor high-quality asset-backed and mortgage-backed securities with intermediate maturities (2031-2032), balancing interest rate risk and potential rate decline benefits.

Alternative allocations focus on multi-asset real return strategies and equity options overlays for income, diversification, and risk management.

Risk Factors

Weak inflation-adjusted income growth remains the primary concern, though insufficient to warrant a cautious outlook shift. The Cash Indicator shows no defensive signals, and credit spreads remain contained, reflecting market confidence despite ongoing volatility potential.