Gary’s Corner

• Market Recap

 Stocks were mixed last week.  The NASDAQ gained 1.7% while the S&P 500 was up 1.3%.  The Dow Jones Industrial Average dropped 0.5% and the MSCI EAFE Index gave back 1.4%.  The Cboe Volatility Index fell 7.4% and now sits at 15.0 which is slightly below the long-term average.  Bond prices fell 0.4% in aggregate as yields have continued to move higher.  The 30 year Treasury is yielding over 5%, the 10 year Treasury is yielding  over 4.5% and the 2 year Treasury yield is well above 4%.  Broad commodities rose over 3% for the week with oil up 4% and gold down slightly.  The U.S. Dollar was broadly mixed against major currencies.  This week will be jam packed with data as earnings season kicks off with big banks reporting plus the Federal Budget, Inflation measures CPI and PPI, Fed Chair Kevin Warsh’s testimony in front the House on Tuesday and Senate on Wednesday, Retail Sales, Wholesale Inventories, Housing Market Index, Pending Home Sales, University of Michigan’s Consumer Sentiment survey, Factory production and capacity utilization and Housing Starts.  I think earnings and the Middle East are most likely to move markets, but inflation and the new Fed Chair’s testimony will be closely watched as well.  There’s a lot going on for mid-July.   

 Q2 Earnings Expectations Are High

 The expected earnings growth rate for the S&P 500 for Q2 is 23.6%.  Expectations have gone up considerably since March 31 when the expected growth rate was 18.8%.  The typical improvement from expectations to actual results would push earnings growth up to over 29%.  That is slightly higher than last quarter and would be the highest growth since Q4 of 2021.  The growth rate has exceeded expected growth in 37 of the past 40 quarters.  The only exceptions were in Q1 of 2020 at the onset of the Covid pandemic and Q3 and Q4 of 2022 when the “transitory” inflation refused to transit.  This week 17 of the 31 Financials in the S&P 500 will report.  Earnings growth expectations are low for Financials this quarter with expected growth of 6.6% which ranks 8^th out of 11 S&P 500 sectors.  Consumer Finance and Insurance are expected to see negative earnings growth which is bringing the rest of the Financial sector down.  Energy, on the other hand, is expected to be the runaway winner in earnings growth in Q2.  Energy earnings are expected to grow 122.9% which is way above the 48.2% growth expected back on March 31.  Despite a significant drop in oil prices at the end of the quarter, the average price of a barrel of oil during Q2 was $92.55 which was 45% higher than Q2 of 2025 ($63.68).  10 of the 11 S&P 500 sectors are expected to be positive with Health Care being the only sector expected to decline.  Revenues are expected to grow 12.3% which would be the best revenue growth since the 13.9% seen in Q2 of 2022.  Profit margins are expected to remain high as well.  Net margins are expected to come in at 14.2% with is slightly down from last quarter’s record 14.8%.  Expectations remain high for the balance of the year with Q3 expected to see growth of 26.6% and Q4 at 24.3%.  The full year expectation is growth of 24.2%.  2027 growth is expected at 17.4%.  That expected growth has brought the price to earnings ratio (P/E) down to 20.5.  That is still rich, but just above the 5 year average of 19.9 and the 10 year average of 19.  These growth numbers are big.  I think there is plenty of room for enthusiasm and disappointment, so the next three weeks are going to be quite interesting.  (Source: Butters, J., Earnings Insight July 10, 2026, FactSet)

 Fed Minutes

 The Federal Reserve published the minutes of the Federal Open Market Committee (FOMC) last week and I was interested in any clues we might get about the new Fed Chair, Kevin Warsh.  The first thing I noticed is that Warsh is already making his presence felt in Fed communications in that the minutes were shorter.  This document was 15 pages and the last 4 meetings of the Powell era were 18,16, 18 and 18.  As someone who reads and recaps these meetings, I appreciate the relative brevity.  The minutes mention that inflation had moved higher due to higher energy costs from the war in Iran, but long-term inflation expectations were still around 2%.  There was a brief mention of private credit and how the Fed expects flows to be negative in the coming quarters.  The Fed mentioned pass through on tariffs, higher energy costs and the surge in demand for AI buildout as factors contributing to inflation being higher than the Fed’s 2% target.  Although the Fed did note that a gradual decline in housing was continuing.  Unemployment has been steady with very little change to the rate over the past year although wage growth has fallen from 3.9% last year to 3.4% this year.  Economic growth outside the U.S. has slowed according to the Fed with Canada, Mexico and the EU specifically mentioned as areas of weakness while high-income Asian economies were robust.  Europe and Asia have both responded to higher inflation by increasing interest rates.   The Fed stated that bank reserves are higher, short-term funding markets are stable, financial conditions are generally accommodative for large businesses and municipalities while somewhat restrictive for smaller companies.  The Fed believes credit to be generally available to most businesses and consumers.  The Fed noted that leveraged loans are picking up as private credit is declining.  The Fed sees similar growth in GDP as last year for 2026 with inflation slowing at the end of the year.  Risks to employment and GDP were seen to the downside while risks to inflation looked skewed to the upside.  There was some unity in the actions to leave rates unchanged as all voting members approved the actions and statement.  A majority of members saw advantages to a shorter official statement and most emphasized that they preferred not to repeat the language in the previous post meeting statement that had suggested an easing bias.  That is something that Warsh did specifically mention in his post meeting press conference where he mentioned the Fed removing future guidance.  I welcome the changes, and in my experience anyway, saying less is usually better than saying too much.  As President Abraham Lincoln said “Better to remain silent and be thought a fool than to speak out and remove all doubt.”  (Source: Federal Open Market Committee, Minutes of the Federal Open Market Committee June 16-17, 2026, The Federal Reserve)     

 Ceasefire Off Again in Iran

 It looks as though the ceasefire between the U.S. and Iran is off again.  Both sides have continued to trade attacks and escalation is looking more likely again.  It appears that the internal divisions in leadership in Iran have not been solved and that is resulting in mixed messages between negotiators and the Islamic Revolutionary Guard Corps (IRGC).  Iranian hard-liners believe the country has emerged as a regional hegemon due to the regime surviving the joint attacks from the U.S. and Israel.  Due to this new status, Iran looks to be more interested in controlling the Strait of Hormuz than it is in billions of frozen assets.  This line of thinking is that if Iran can cement permanent control of the Strait of Hormuz then it will dominate Gulf economies and subjugate those countries under its control.  Once this happens, sanctions relief will follow because Iran would effectively control a large portion of the world’s energy supply.  Karim Sadjadpour, Iran expert at the Carnegie Endowment for International Peace, summed it up like this “The Islamic Republic will become even more of a gangster regime.  Its takeaway from the war is that concessions are won through coercion – by attacking its neighbors, threatening the Strait of Hormuz and driving up the price of oil.  Like Putin’s Russia, the Islamic Republic believes that its security depends not on the prosperity of its people, but on the insecurity of its neighbors.”  The U.S. Treasury Department has rescinded the waiver it granted to Iran last month allowing it to sell oil in international markets.  Holly Dagres, a senior fellow at the Washington Institute of Near East Policy described the situation like this “The reason the Iranians are playing hardball at the moment is because they are trying to put pressure on President Trump, understanding that the war in unpopular in the U.S. and that the Strait of Hormuz has strangled the world economy.  They’re going to go for brinksmanship because they seem to be operating from the perspective that they’ve got the upper hand.”  Saudi geo-political expert, Salman Al-Ansari, believes that Iran is delusional given how much of its military has been degraded along with its network of proxies that have mostly been destroyed.  Al-Ansari said “All it has left is bullying, piracy, noise, and the ability to act as a spoiler.  These are not the qualities of a hegemon, but of a thug.”  While all those opinions may prove to be true, the Strait of Hormuz remains effectively closed, and I think that reality shows that Iran is not entirely wrong in its aims.  To this point, the U.S. has not really resorted to all-out war.  The U.S. has made several comments about not wanting to completely destroy the country so that it may recover.  I think there are two outcomes that are looking more and more likely to me: the first is that U.S. backs off and allows Iran to control the Strait of Hormuz and the second is that the U.S. begins to destroy infrastructure and possibly attempts to take Kharg Island.  I don’t really see a middle ground and it doesn’t appear that the politicians in Iran pushing for peace have the authority to do so. Unfortunately, I think this is going to get worse, potentially much worse, before it gets better.  Geo-politics aside, it is still unclear how this will affect the U.S. economy and markets.  It will surely not be good for the rest of the world, particularly Europe and Asia. (Sources: Trofimov, Y., Aspiring to Regional Domination, Iran Is Ready to Escalate Over Hormuz, The Wall Street Journal; Holliday, S., Pisani, J., Norman, L., U.S. and Iran Ramp Up Attacks in Fight Over Strait of Hormuz, The Wall Street Journal)

 Positioning Your Account

 I think we’re getting right back to where we were 2-3 months ago.  We are expecting great earnings but the cloud of war is still hanging over us.  This push-pull of good and bad has remained extreme in the 2020s.  I’m sure that readers understand the extreme shocks of this decade have made investing difficult at best.  In times like this, I try to think about the different outcomes, game them out and think about what impact that will have on investments, savings and retirement plans.  But I don’t know, and no one else does either.  And that is all well and good, it’s a tough job, blah, blah, blah.  But, the rubber is meeting the road, so we can’t do nothing.  In fact, doing nothing is still making a decision.  So, with that preamble, I think I still want to own more stocks.  I’m going to believe that earnings growth will continue its incredible run until I see results that are disappointing.  Given the inflation situation caused by the war, I don’t think I want to expend all my dry powder and I don’t want to buy at any price.  I think resuming a dollar cost averaging approach is prudent and I would be more aggressive if we see a 5+% pullback due to the war.  I would encourage investors to consider purchases in U.S. technology stocks, large, U.S. dividend payers, long-term bonds for investors seeking income and currencies and commodities for diversification.  At the end of the day, good earnings will fuel the market.  We’ll know to stop, or lighten up on stocks when the earnings disappoint.  Until then, I think markets will climb the wall of worry.  The wall is quite high these days. 

  All the best,

Gary

 

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