Productivity Driving Profits

• Job market resilience demonstrated by layoffs down 40% compared to the prior year, with moderating but stable labor costs
• US productivity growing above trend at 2.8% year-over-year as of Q1 2026, contributing to improved corporate efficiency
• Corporate profits and cash flow for both public and private US companies reached all-time highs in Q2 2026, with tech spending driven by AI infrastructure demand rippling through supply chains

Summary

Market Performance & Context:

RiverFront Investment Group's Q2 2026 analysis reveals strong market fundamentals despite earlier volatility. The S&P 500 and Nasdaq delivered their best quarterly performance in years following easing Iran tensions and retreating oil prices. Market breadth improved significantly, with international, equal-weight, and value benchmarks reaching new all-time highs alongside tech indices.

Key Economic Indicators:

• Labor Market: Layoffs decreased 40% year-over-year, demonstrating resilience despite some cooling in labor costs
• Productivity: U.S. productivity grew 2.8% year-over-year, above long-term trend levels
• Corporate Performance: Both public and private company earnings hit record highs, with profits and cash flows at all-time peaks

Sector Highlights:

Technology dominated through AI-driven demand for compute and storage hardware, creating positive ripple effects throughout supply chains. However, strength extended beyond tech, with value and international stocks also participating in the rally.

Market Outlook:

RiverFront acknowledges near-term concerns including potential 1990s-style bubble comparisons and political uncertainty that may sustain Q3 volatility. However, the firm maintains an optimistic stance, expecting stocks to finish 2026 higher based on solid fundamental support from the jobs market, productivity gains, and strong corporate profitability.

Investment Implications:

The broadening market participation beyond mega-cap tech stocks signals healthy bull market conditions. Strong productivity growth and record corporate profits suggest Corporate America remains fundamentally sound, supporting the case for continued equity exposure despite short-term volatility risks.