We're heading into the dog days of summer with plenty on the radar: AI throwing off volatility in both directions, ongoing conflict in both Iran and Ukraine that shows no sign of a clean resolution, and midterm elections on the horizon. Despite all that noise, the thing actually holding this market up hasn't changed—its earnings.
Markets: Strong, But Already Looking Past the Numbers
It's been a strong first half to start the year, and it reinforces a theme we've been talking about for nearly 18 months: the need to diversify alongside the Magnificent 7—not out of them. Investors who took that approach have been rewarded with strong performance from value, small caps, and international markets, developed and emerging alike.
The year-to-date numbers speak for themselves. Every major equity category is up nearly double digits. Commodities lead with 22.72%, followed by U.S. Small Cap and Emerging Markets not far behind. Meanwhile, the Aggregate Bond index is flat to slightly down at -0.34%.
Source: YCharts. Data as of 7/27/2026.
The Magnificent 7 are still part of the story, but now they're sharing the spotlight. Their stock prices have increased only modestly this year, even as earnings kept growing. That has brought valuations down to a more reasonable and investable range.
This has been a near-ideal path for valuations to reset. Historically, the market has closed gaps like this through falling stock prices. This time, earnings did the work instead, letting valuations reset while prices mostly just paused. Knock on wood, that continues.
Rates: From Cuts to Hikes
At the start of the year, many expected the Fed to cut rates. Part of that was a belief that Trump would name a successor Jerome Powell (who Trump himself had originally appointed to lead the Fed back in 2017) who would favor lower rates.
We’ll see how this plays out. For now, Kevin Warsh left rates unchanged on Wednesday, but indicated that the committee remains focused on inflation. Sticky inflation, combined with pressure from higher oil prices, has diminished the likelihood of cuts. The market has now flipped to pricing in rate hikes instead—a major reversal from where things stood just a few months ago.
Here's the silver lining: higher, persistent yields mean better prices for anyone buying bonds today, locking in higher income going forward. Given how far stocks have run, this could be a good time to rebalance by trimming appreciated positions and adding to bonds, which have been flat to slightly down.
The Job Market Puzzle
It’s important to remember that the Fed has two goals: keeping inflation under control and supporting full employment. Inflation has received most of the attention this year, in part because the headline unemployment rate looks healthy at 4.2%. But that number may not tell the full story about the labor market.
Labor force participation has fallen to 61.5%, its lowest level since the early days of the post-COVID recovery in March 2021, and it's continued to decline rather than level off. More working-age people are simply opting out of the workforce rather than being counted as "unemployed." They're not getting a paycheck either way, but they are also not reflected in the usual unemployment data. Whether the Fed starts paying closer attention to participation will depend on whether that translates into slower growth. We’ll continue watching it closely.
A Strong Year, Bought With Volatility
It's been a strong year in the market, and a genuinely volatile one. Oil shocks and AI headlines have each produced sharp, short bursts of turbulence. Even so, earnings have kept the market moving higher, showing that corporate America is on solid footing even when the headlines say otherwise. We'll need to remember this as more attention shifts to the midterm elections this November.
Midterms on the Horizon
You'll hear plenty about midterm years being historically weaker for the market. That's true, but it undersells the point: weaker still means positive. Going back to 1933, midterm years have averaged 8.6% for the S&P 500, which is still a solidly positive number. As with other market swings we've covered here, stock prices are ultimately driven by earnings and underlying business performance, not the calendar.
On the political outcome itself: if this cycle produces a Democratic-controlled House, or House and Senate, we don't think it looks much different from the gridlock already in place. Republicans currently control both chambers and the presidency, and that hasn't exactly produced a flood of legislation. The bigger headline risk we're watching is shutdown-style brinksmanship, which tends to put a temporary damper on markets when it flares up, even if it hasn't historically changed the longer-term trend.
Either way, markets have generally kept moving through election cycles regardless of the outcome. AI isn't going to pause for an election, and neither is the broader world—so a good financial plan shouldn't either.
Bottom Line
Across every one of these threads (earnings, rates, jobs, elections), the takeaway is the same: sitting on the sidelines waiting for clarity has rarely been the winning move. If any of this has you thinking about how much risk you're carrying, that's exactly the conversation to have with your advisor. Sitting down and stress-testing your plan against a downturn costs you nothing and can tell you a lot.
Have a great rest of your summer, and here's to a good fall.
