The first half of 2026 delivered exactly what investors hope for but rarely get: broad strength across major asset classes, powerful earnings growth, and meaningful contributions from both U.S. and international markets. Here’s a recap of how we got here—and what to watch as we move into the second half of the year.
A Strong First Half: Markets Surprised to the Upside
Across the board, performance exceeded expectations. The diversified portfolio posted solid gains, supported by standout results in U.S. small caps, developed international and emerging market equities.
· U.S. Equities: The S&P 500 climbed 8.8% YTD, with large-cap growth leading at 10.1% through June 8th. Earnings growth was the biggest story—S&P 500 earnings rose 28%, more than double the 13% forecast. AI continued to reshape the landscape, boosting revenue per employee and margins for mega-cap leaders while leaving smaller companies struggling to keep pace.
· International Equities: International markets outperformed expectations as well. MSCI EAFE earnings grew 18% (vs. 7% forecast), and emerging markets surged with 33% earnings growth (vs. 6% forecast). Country-level stimulus—Japan’s $136B package, South Korea’s 1.3% of GDP, and China’s domestic-demand push—helped fuel returns.
· Bonds: Despite inflation remaining sticky (CPI 4.2%, Core PCE 3.3%), bond funds delivered modest but positive returns. Credit conditions improved, default rates declined, and corporate balance sheets remained healthy. With markets pricing in a 75% chance of additional Fed rate hikes, yields stayed attractive.
· Alternatives: Alternative income strategies provided stability, with yields near 9%. Private markets were a highlight—The Private Shares Fund benefited from a major IPO, where SpaceX is expected to achieve a $1.75 trillion valuation, up 40% from its current valuation in the fund.
Portfolio Positioning: Thoughtful Adjustments, Not Big Swings
Given the market conditions, T. M. Wealth Management made measured changes:
- Reduced U.S. Large-Cap Core exposure due to elevated valuations.
- Increased Emerging Markets and Developed International allocations to capture broadening global growth and favorable valuations.
- Maintained Alternatives and Bonds, emphasizing diversification and yield.
- Rebalanced to lock in gains and return to target weights.
Second Half Outlook: What We are Watching
The outlook remains steady—no major changes to the firm’s positioning—but several key variables will shape the next six months:
U.S. Equity
- Earnings expectations are high with a forecast for 22.8% growth. With U.S. equities “priced for perfection” any misses will be severely punished.
- Oil prices above $90 could pressure margins.
- Employment strength remains critical.
- Productivity gains from AI are still not fully visible beyond the Mag 7, will that expand?
- Geopolitical risks remain elevated, including mid-term elections in the fourth quarter.
International Equity
- Oil prices have a larger impact abroad and could stall recent profit growth.
- Dollar strength or weakness will influence returns to U.S. investors.
- Elevated inflation has increased the potential for rate hikes in key markets.
Bonds
- With the most recent CPI print showing inflation back above the 4% level at 4.2%, bond investors are increasingly cautious.
- With rates higher for longer, do default rates continue to decline or does the recent trend reverse?
- With Kevin Warsh set to take over as the new Chairman of the Federal Reserve, policy uncertainty is elevated. We will be closely monitoring how he balances increased inflation (does he view this as temporary), the President’s desire for rate cuts, and Warsh’s desire to shrink the Fed balance sheet.
Bottom Line: Stay Invested, Stay Diversified
The first half of 2026 rewarded disciplined investors. The second half will likely be more volatile, but the core philosophy remains unchanged:
· Focus on time in the market—not market timing. This drives long-term success.
· Diversification remains the only “free lunch” in investing. Staying diversified to smooth the ups and downs in your portfolio is critical to achieving the goals in your financial plan.
With earnings still strong, global growth broadening, alternatives providing further diversification and yields offering real protection, the portfolio is positioned to navigate whatever the back half of the year brings.