Mid-Year Review & Outlook: A Resilient Economy Continues to Push Through Headwinds

Economic growth is stronger than headline GDP suggests. Private sector activity currently outpaces GDP, which has been dragged down by net exports. The labor market is tight, not strong. Worker scarcity should keep jobs growth cooling and unemployment low. Inflation likely peaked in May. Led by fading energy costs and cooling housing inflation, current levels support a pause by the U.S. Federal Reserve. Weak inflation-adjusted income growth remains the key risk flag. Though not enough to turn our outlook cautious, income growth is a concern. Corporate earnings are a bright spot. With 2026 S&P 500 Index earnings growth tracking above 24% and estimates being revised up, corporate earnings are solid. Our positioning remains overweight equities and emphasizing the U.S. Our equity tilts include health care services, industrials, regional banks, and AI infrastructure. Within fixed income we favor high-quality ABS/MBS. Regarding our alternative allocations, we continue to focus on multi-asset real return and equity options overlay strategies for income, diversification, and risk management. We added a healthcare service providers ETF to our Growth, Moderate Growth, and Conservative Growth Strategies to better participate in a broadening equity market after years of narrow, tech-driven leadership. Healthcare service provider valuations appear unusually attractive, while the fundamental outlook is improving as pricing, utilization, and earnings trends stabilize. The addition may enhance portfolio resilience by adding exposure to an industry supported by durable healthcare demand, with return drivers that are less dependent on the market’s recent AI-investment theme. The first half of 2026 has been defined by crosscurrents with a geopolitical shock in the energy market, a labor market that keeps surprising to the upside even as its underlying capacity shrinks, and a corporate earnings environment that continues to ride the wave of economic growth and infrastructure investments. U.S. economic momentum, as quantified by GDP, has moderated from the robust pace set in mid-2025, but the composition remains encouraging with business investment, consumer spending, and government outlays still contributing. Importantly, private sector economic activity, as measured by Real Final Sales to Private Domestic Purchasers, appears to be stronger than overall GDP growth, which has been negatively impacted by net-exports. Our work continues to suggest that current GDP growth underestimates the strength of the private sector even as inflation adjusted income has weakened and remains the primary risk factor according to our Recession Tracker framework. The labor market reaccelerated this past quarter and defied expectations of a slowdown. However, we anticipate slowing jobs creation based primarily on the lack of available workers rather than businesses being more cautious. The official unemployment rate (U-3) ignores individuals that are not looking for work. In contrast, we prefer a broader measure using all Americans that are 16 years or older. Using this larger population set, the unemployment rate is near an all-time low. Whether in high school, a retirement home, or somewhere in between, the U.S does not have much slack in our potential labor force. Importantly, this scarcity of available workers should keep the unemployment rate low even as jobs growth cools toward a more modest pace into next year. Additionally, the much-discussed inflation story seems to have turned a corner. This past May probably marked the high point for the cycle as energy driven price spikes continue to fade and shelter costs, which are by far the largest and stickiest component of the inflation basket, have wa...