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The State of the Markets in 10 Charts…
1) Diversification Matters Again
A central tenet of investing is that nothing leads forever. We saw that concept play out in spades during the first half of 2026:
-Emerging Markets and International stocks outperformed US equities.
-Small and Mid-Cap stocks outperformed their Large Cap counterparts.
-Value stocks outperformed Growth names.
-And the Magnificent Seven group was actually down.
In short, diversification matters again.
2) The Small Cap Comeback
Entering 2026, US Small Caps (Russell 2000) had trailed US Large Caps (S&P 500) for five consecutive years, matching the record streak of underperformance from 1994-1998.
But in the first 6 months of this year, we saw a dramatic reversal, with Small Caps gaining over 22%. That was their best first half performance since 1991.
What about the 12% spread over Large Caps? That was the biggest Small Cap outperformance for a first half since 2001.
3) All-Time Highs Powered by the Earnings Expectations Boom
The S&P 500 closed at 24 all-time highs in the first half of the year.
What was the primary narrative driving the advance?
S&P 500 earnings, which are now expected to increase by 24% this year.
We’ve never seen earnings growth this high outside of post-recessionary rebounds. This is an unprecedented boom driven by the massive EPS gains in big tech.
4) Bad News/Good News For Bond Investors
The bad news: the US Bond Market has now been in a drawdown for 71 months, by far the longest in history.
The good news: the higher yields of today (10-year yield at 4.55% vs. 0.52% back in 2020) should mean much higher future returns.
5) Persistently High Inflation
The Fed’s preferred measure of inflation (Core PCE) has moved up to 3.4%, the highest level since October 2023. This is the 63rd consecutive reading above the Fed’s 2% target level.
6) From Rate CUTS to Rate HIKES
At the start of the year, the bond market was pricing in 2 Fed rate CUTS.
Today, it’s pricing in 1 to 2 Fed rate HIKES.
That’s a nearly 1% swing in expectations.
7) From Leaders to Laggards: Digital and Physical Gold
Bitcoin was the best performing major asset in 2024 (+121%).
Gold was the best performing major asset in 2025 (+64%).
In 2026, Bitcoin (-31%) and Gold (-7%) are the two worst performing major assets. This is something we haven’t seen before in any calendar year.
8) Free Falling Yen
The Japanese Yen is at its lowest level since 1986 against the US Dollar, losing 54% of its value from the 2011 peak.
9) When a Falling Unemployment Rate Isn’t Necessarily Good News
The unemployment rate fell in June, moving down to 4.2%.
Normally, that would be good news, a sign of economic strength.
But it didn’t fall because people who were unemployed found jobs. Instead, 720,000 people simply left the labor force, pushing the participation rate down to 61.5%. That’s the lowest level in more than five years.
10) A Loss of Purchasing Power
What could derail the consumer-driven US economy?
A loss of purchasing power with inflation outpacing wages.
After 35 consecutive months of positive YoY real wage growth, this important indicator has turned negative for the first time since April 2023.
And that’s it for this week. Thanks for reading!
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