June started out to be the potential spoiler to the fast-tracked recovery from the late-March lows surrounding the Iran conflict. Unreliable conflict negotiations with Iran continued to loom, the Strait of Hormuz remained bottlenecked and mine-ridden, and a hot BLS jobs report brought inflation back to the forefront weeks before the first Fed meeting for the new Chair, Kevin Warsh. Unfortunately, markets do not react well to uncertainty, especially regarding foreign affairs or interest rates. The Fed meeting went largely as expected, Warsh’s comments reflected a resolve to combat inflation, while reflecting the difficulty of controlling inflation during a time of high volatility in energy prices. Hopes for immediate monetary easing have largely disappeared. Markets are now pricing in a 0% chance of a rate cut for the remainder of 2026. The likelihood is for steady rates throughout the back half of the year, but there is now a chance for a 0.25%-0.50% increase in Fed Funds Rates by October. Ultimately, this could primarily rely on energy prices and the situation in the Middle East, which seemed to be ameliorating by month end. The news that hostilities could be winding down allowed markets to recover significantly from June’s early losses. Diversified portfolios finished near the flat line for the month, and earnings growth estimates supported markets through excellent second-quarter results.
Following a strong second quarter, July on average has the best long-term performance of the summer season, particularly in the previous 14 years. Earnings data will begin to roll in over the coming weeks, and individual companies will be scrutinized for their profitability and projections for the future. Excitement will continue to build as earnings growth estimates for the full calendar year have been revised upward to 24%, from 16% expected earlier in the year. These projections are predominantly driven by large technology companies spending on capital infrastructure to support artificial intelligence; expectations for this spending have reached $754 billion. While this is supportive of a strong economy, we cannot expect to be void of volatility for the remainder of the year. As of this writing, President Trump has voided the Memorandum of Understanding and ceasefire with Iran following Iranian attack on tankers in the Strait of Hormuz. American military retaliation is underway, reigniting upward pressure on oil prices and supply chain constraints. Negotiations remain ongoing, but markets are looking for a durable de-escalation of hostilities to put the conflict to bed. If this occurs, history is on the market’s side. Since 1940, the S&P 500 has risen in the fourth quarter of midterm years 86% of the time, with additional strength in the 6 months following the mid-term election. Of course, this is a look at history, not a prediction of the future, but we remain positive going forward based on reasonable valuations and strong earnings growth.
Data sourced from Janney's “July Investment Perspectives"
