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State of the Market in 10 Charts…
1) Diversification Matters Again
The main principle in investing is that nothing leads forever. We see the concept implemented widely in the first half of 2026:
-Emerging Markets and International stocks outperform US equities.
-Small and medium cap stocks outperform large cap stocks.
-Value stocks outperform Growth names.
-And the group Magnificent Seven is actually down.
In short, diversification is important again.
2) The Return of Small Caps
Entering 2026, US Small Caps (Russell 2000) have trailed US Large Caps (S&P 500) for five consecutive years, matching the consecutive underperformance of 1994-1998.
But in the first 6 months of the year, we saw a dramatic reversal, with Small Caps up over 22%. It was their best first-half performance since 1991.
How about a 12% spread on Large Caps? It was the biggest Small Cap outperformance for a first half since 2001.
3) All-Time Highs Buoyed by Booming Earnings Expectations
The S&P 500 closed at 24 all-time highs in the first half of the year.
What are the key narratives driving this progress?
S&P 500 earnings, which are now expected to increase by 24% this year.
We’ve never seen earnings growth this high outside of the post-recession recovery. It’s an unprecedented boom driven by massive EPS increases in the big tech sector.
4) Bad News/Good News For Bond Investors
The bad news: The US Bond Market has now experienced a 71-month downturn, the longest in history.
The good news: higher yields today (10-year yield of 4.55% vs. 0.52% in 2020) mean much higher future returns.
5) Persistent High Inflation
The Fed’s preferred inflation measure (Core PCE) has risen to 3.4%, the highest level since October 2023. This is the 63rd consecutive reading above the Fed’s target level of 2%.
6) From Tariff CUTS to Tariff Increases
At the start of the year, the bond market was expecting 2x Fed interest rate cuts.
Currently, they are pricing in 1 to 2 Fed rate hikes.
That means a change in expectations of almost 1%.
7) From Leaders to Ladders: Digital and Physical Gold
Bitcoin is the best performing major asset in 2024 (+121%).
Gold is the best performing primary asset in 2025 (+64%).
In 2026, Bitcoin (-31%) and Gold (-7%) are the two worst performing major assets. This is something we have never seen before in any calendar year.
8) Yen Free Falling
The Japanese Yen is at its lowest level since 1986 against the US Dollar, losing 54% of its value from its peak in 2011.
9) When the Unemployment Rate Falls Not necessarily good news
The unemployment rate fell in June, falling to 4.2%.
Usually, this is good news, a sign of economic strength.
However, this figure did not decrease because unemployed people found work. In contrast, 720,000 people left the workforce, lowering the participation rate to 61.5%. That was the lowest level in more than five years.
10) Loss of Purchasing Power
What could derail the consumer-driven US economy?
Loss of purchasing power due to inflation outpacing wages.
After 35 consecutive months of positive YoY real wage growth, this important indicator turned negative for the first time since April 2023.
And that’s all for this week. Thanks for reading!
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