Doc’s Economic Insights

July 2026

US stock prices surged during the second quarter, largely due to declining oil prices and strong corporate earnings.  April began with stocks rising relentlessly on hopes for a ceasefire between the US and Iran that might reopen the Strait of Hormuz.  These hopes were realized on April 8 when President Trump announced a temporary ceasefire.  By the time Iran announced that the Strait would reopen for commercial traffic on April 17, the S&P 500 was at a record high up more than 9% for the month overall.  Stocks pulled back over the next two sessions, as the temporary ceasefire was scheduled to expire and negotiations on a permanent ceasefire broke off.  The stock market rally resumed with the S&P 500 achieving another record high on April 22 after President Trump announced the temporary ceasefire had been extended indefinitely.  On April 24, strong earnings from semiconductor manufacturer Intel triggered a rally in chip makers that pushed the S&P 500 to yet another record high.  The S&P 500 posted additional record highs on April 27 and 30, returning 10.49% for the month of April overall.

May’s market activity was driven largely by investors responding enthusiastically to strong earnings from technology companies, though concerns about inflation and rising bond yields did temper the rally.  Apple’s report of better-than-expected sales got the month off to a solid start.  Reports of strong results by Micron Technologies, Advanced Micro Devices, and Cisco Systems during subsequent sessions sustained a strong rally in ‘chip’ stocks that pushed the S&P 500 to multiple new record highs.  By the close on May 14, the S&P 500 was up more than 4% for the month overall.  Stocks fell sharply on May 15, as fears that rising oil prices would trigger inflation pushed long-term bond yields higher.  Inflation fears pressured stocks through the May 19 close, contributing to a decline of nearly 2% from the S&P 500’s record high on the 15^th.  Stocks resumed their rally on May 20, after oil prices declined and inflation fears eased.  With technology shares leading the way, the S&P 500 went on to post three new record closing highs during the remainder of the month, returning 5.26% for the month of May overall.

During June, technology stocks were pressured by concerns that they might not earn enough return on their Artificial Intelligence (AI) investments, and the US Federal reserve might need to raise interest rates before year end to combat inflation.  June began with ‘chip’ stocks extending their gains, propelling the S&P 500 to fresh record highs on the 1^st and 2^nd.  However, cracks were beginning to show in the technology rally.  On June 2, Alphabet declined 4% after announcing it planned to borrow $80 billion to fund its AI investments.  On June 3, rising treasury yields contributed to additional declines in Alphabet as well as other firms with large, planned investments in AI such as Amazon, Microsoft, and Oracle.  Stocks extended their losses on June 5 after a stronger than expected employment report pushed the yield of the 10-year US treasury above 4.5%.  June 10 saw stocks decline further after the report that consumer prices had increased 4.2% over the 12 months ended in May, the largest increase in prices over a 12-month period since 2023.  At the June 10 close, the S&P 500 was down more than 4% for the month overall.  Stocks began to rally back on June 11 after President Trump announced he had canceled planned military strikes on Iran.  The rally continued for two more sessions, helped along by strong participation in SpaceX’s initial public offering on June 12 and hopes for an end to the Iran conflict.  By the close on June 12, the S&P 500 had recovered nearly all its earlier losses.  Stocks declined sharply on June 17, when it was revealed after the conclusion of the Federal Open Market Committee meeting that nearly half of the FOMC members expected they would need to raise interest rates before the end of the year.  Stocks tumbled again on June 23, when sharp declines in Korean chipmakers triggered a global plunge in ‘chip’ stocks.  After trading in a tight band for several sessions, stocks began to recover on June 29 with Alphabet leading the way as it was added to the Dow Industrials index.

The S&P 500 returned -0.95% for the month of June, 14.99% for the second quarter, and 10.21% for the year-to-date.

Although we remain optimistic about the stock markets’ long-term prospects, stock prices are likely to remain under pressure near-term due to concerns about inflationary pressure as well as the profitability of AI investments.  It now appears the Federal Reserve is more likely to raise than lower the Federal Funds rate before the end of the year.  Also, valuations appear elevated for many of the companies participating in the buildout of AI data centers.

It should be noted that some segments of the market are likely to hold up better than others.  Stock valuations outside of the technology sector continue to be attractive.  Market volatility also leads investors to rotate their portfolios toward stable stocks.  For further details, please see below.

 

The Economy:

• Consumer spending remains strong, providing near-term support for the economy.
• The US unemployment rate has stabilized around 4.3% to 4.4%.
• Monetary policy overall is likely to remain supportive, even if the Fed increases rates modestly later this year.
• Although aggregate corporate earnings growth for 2026 is currently expected to exceed 13%, this rate of earnings growth is unlikely to be sustained for two reasons.
  • First, current earnings include appreciation in the value of ownership stakes in unlisted AI companies such as OpenAI and Anthropic.  The book values of those stakes may go down after the AI companies complete their planned initial public offerings and/or enthusiasm for AI investments decline.
  • Second, the profits earned by technology companies selling chips and other equipment needed in AI data centers are fully reflected in aggregate earnings while the full costs paid for the chips and equipment by the builders/operators of data centers are not.  Those costs will be depreciated over time, reducing aggregate future earnings.

 

Investment Valuations & Rotation Toward Stability:

• Investors continue to reassess the valuations of technology shares.  Many stocks outside this sector have attractive valuations.  This is a great environment for active stock managers, particularly ones that look for stocks with reasonable valuations.
• In volatile markets, investors tend to rotate toward stocks that have provided more stable returns in the past.  Stocks that possess economic moats tend to have more stable returns and often benefit in these environments.

 

This report has been generated from information that Arbor Financial believes to be reliable and accurate. We do not represent or warrant the accuracy or completeness of the information contained in this report. As such, all calculations, estimates, and opinions included in this report constitute our best judgment as of this date and may be subject to change.  Past performance does not guarantee future results.