Mid-Year 2026: What the First Half Teaches Investors About the Road Ahead

There is an old saying that smooth seas do not make skillful sailors. In the world of investing, the first half of 2026 has put this idea to the test. Investors confronted significant challenges, including the war in Iran, oil prices pushing inflation to multi-year highs, and ongoing questions surrounding artificial intelligence (AI). Despite these headwinds, markets climbed to new all-time highs, corporate earnings expanded at a double-digit pace, and a broad range of asset classes delivered strong performance. The opening six months of the year serve as a powerful reminder of the value of staying invested and keeping a longer time horizon in view.

This lesson carries even greater weight today, given that the current business cycle has now entered its seventh year while the market cycle is approaching its fifth. For many investors, it can feel as though the same concerns, including inflation, Federal Reserve policy, and valuations, have been cycling in and out of the spotlight for years. Navigating these competing challenges is not simply a feature of investing; it is precisely why those who stay the course tend to be rewarded over the long run.

There will almost certainly be unexpected developments in the second half of the year, including shifts in the ongoing Middle East conflict, the upcoming midterm election, and new market activity such as initial public offerings (IPOs). The key question for investors is how to maintain perspective as these events unfold.
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Key market and economic highlights from the first half of 2026¹

• The S&P 500, Nasdaq, and Dow Jones Industrial Average returned 9.6%, 12.8%, and 8.9% year-to-date through the end of June, respectively. The second quarter was historically strong, with the S&P 500 returning 14.9%, the Nasdaq 21.4%, and the Dow 12.9%.

• The Bloomberg U.S. Aggregate Bond Index rose 0.6% year-to-date. The 10-year Treasury yield ended the second quarter at 4.47%, up from 4.17% at the start of the year.

• Developed market international stocks (MSCI EAFE) gained 7.7% and emerging market stocks (MSCI EM) returned 22.7% year-to-date, both in U.S. dollar terms.

• The Bloomberg Commodities Index rose 12.3% year-to-date, driven by a strong first quarter gain of 23.3%, which was partially offset by a decline of 8.9% in the second quarter.

• Brent crude peaked just under $120 per barrel in May before closing the quarter at $73 per barrel.

• Gold prices fell to $4,007 per ounce while Bitcoin declined to a recent low of $58,633.

• Headline CPI rose 4.2% year-over-year in May, driven largely by energy prices. Core CPI, which excludes food and energy, rose 2.9%.

• The Federal Reserve kept rates unchanged at 3.50% to 3.75% through the first half of the year. Kevin Warsh was sworn in as Fed Chair in May.
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The current business cycle is now in its seventh year

It may come as a surprise to some investors that the current business cycle began in April 2020, in the depths of the pandemic, and recently passed its sixth anniversary in the second quarter. There have been multiple moments when economists and market participants feared a return to recession, most notably when inflation peaked in 2022 and when tariffs disrupted global trade last year. Through each of these episodes, the economy proved resilient, continuing to grow despite the challenges it faced.

The business cycle touches every aspect of investing and financial planning, from mortgage costs to annual wage growth. A healthy economy drives consumer spending and business investment, which in turn fuels corporate earnings and ultimately stock market returns. While the stock market and the broader economy are not identical, they are frequently closely connected. The chart above places the current cycle in historical context. The longest expansions on record, including the cycle that followed the 2008 financial crisis and the 1990s expansion during the dot-com boom, each lasted a decade or more.

How does the economy look today? Inflation remains elevated but could ease if oil prices hold near current levels. The labor market has regained momentum, reversing concerns from last year about sluggish hiring. The dollar has stabilized and shown more recent strength; trade remains uncertain but has found firmer footing, and business investment has picked up. Consumers are expressing some pessimism, yet continue to spend on both everyday necessities and discretionary items. On balance, the economy appears healthy despite some mixed signals, a backdrop that has historically been supportive for financial markets over time.

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Broad asset class participation has supported portfolios in 2026

A wide range of global asset classes have contributed positively to portfolios so far this year, extending the trend seen in 2025. This breadth includes not only large cap stocks represented by the S&P 500, but also small caps, emerging markets, and commodities, as illustrated in the chart above. The second quarter, in particular, was among the strongest on record, partly because the onset of the war in Iran meant that the market recovery began right at the start of April.

Several themes have underpinned these returns, including the strength of the economy, hopes for a peace agreement in Iran, and enthusiasm surrounding AI. Many of these factors have driven meaningful corporate earnings growth, with profits for S&P 500 companies rising more than 20% over the past twelve months.² This strong environment has also sparked a wave of high-profile IPOs, including the listing of SpaceX in the second quarter, with the anticipated listings of OpenAI and Anthropic, both AI companies, also on the horizon.

While investors often focus on the initial days of an IPO when headlines are most prominent, the real benefits for long-term investors tend to accumulate over time. These listings broaden the opportunity set available to all investors, which is especially meaningful given that many companies have been choosing to remain private for longer periods. What ultimately matters is how these businesses perform over the years and decades ahead. The largest technology companies of today, for example, built their value through many market and economic cycles.

These positive trends do come with a caveat: U.S. stock valuations are historically elevated. The S&P 500 currently trades at a price-to-earnings ratio of 20x, above the long-term historical average of 16x.³ Valuation ratios like these do not reliably predict what markets will do over the next one to two years. Rather, they serve as useful guides when building long-term portfolios, particularly when weighing other asset classes and risk management considerations. Taken together, this year's asset class performance underscores the importance of maintaining a balanced approach.

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Inflation remains a concern, though easing oil prices offer some relief

The fluctuations in the Iran conflict have affected the U.S. economy primarily through energy markets. Disruptions to oil transportation through the Strait of Hormuz pushed Brent crude to nearly $120 per barrel before prices pulled back sharply. In recent weeks, oil has fallen to around $70 per barrel, close to pre-conflict levels. Gasoline prices followed a similar trajectory on a delayed basis, peaking above $4.50 per gallon nationally before retreating below $4.00 per gallon more recently.⁴

These energy price swings have had a direct impact on inflation. The Consumer Price Index rose 4.2% year-over-year in May, its highest reading in several years, with the gasoline component surging 40.5% over the same period. Notably, core CPI, which excludes food and energy, rose only 2.9%.⁵ This distinction shows that inflationary pressure has been concentrated in fuel costs and has not yet spread more broadly through the economy.

With oil prices having retreated recently, many economists are hopeful that inflation may be near its peak. This pattern echoes prior geopolitical shocks that disrupted oil supply, such as Russia’s invasion of Ukraine in 2022, and others shown in the chart above. In those instances, once conditions stabilized, oil prices often recovered toward more normal levels, and inflation rates subsequently came back down over time.

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Market volatility has remained manageable through the first half

Investors have become accustomed to short-lived bouts of volatility triggered by macroeconomic events. Over just the past year, developments including tariffs, the Middle East conflict, and uncertainty surrounding the Fed have each produced brief market swings. This can be observed through the VIX, a widely used measure of stock market volatility. The current VIX reading of 16 sits below its long-term average of 18.4 and is well below recent peaks, as illustrated in the chart above. This also highlights that periods of elevated volatility can represent some of the most compelling opportunities for investors.

Another useful way to gauge how market moves affect investors is to examine the largest pullback within a given year. So far in 2026, the S&P 500’s largest peak-to-trough decline has been 9%. While such pullbacks are never comfortable to experience, markets have a historical tendency to rebound when investors least anticipate it. Today, not only has the market fully recovered from its earlier decline, but the S&P 500 has reached 24 new all-time highs so far this year.⁶

The first half of 2026 reinforces that the greatest risk for investors navigating volatile periods is not the volatility itself, but rather how they respond to it. The temptation to time the market during uncertain stretches is understandable, but it can frequently work against long-term goals. A more effective approach is to hold a well-constructed portfolio designed to weather all phases of the market cycle while remaining aligned with long-term financial objectives. This kind of preparation is what positions investors to handle the inevitable uncertainties that the second half of the year may bring.

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The case for staying invested remains as strong as ever

One consequence of investors stepping out of markets during volatile periods is what is often described as “cash on the sidelines.” The central challenge with this approach is determining when to re-enter. The chart above illustrates just how much capital is currently sitting in cash. Money market fund assets have reached a record $7.9 trillion, more than double their pre-pandemic level when interest rates were near zero. This reflects both years of market uncertainty and a period of higher short-term rates that made holding cash more appealing.

While cash can feel safe and dependable in the short term, the challenge is that cash yields often fail to keep pace with inflation. For example, current average rates on certificates of deposit mean that the real return from cash is currently negative after adjusting for inflation.⁷ Even when nominal yields on money market funds and short-term instruments appear attractive, there are potential headwinds from both inflation and the difficulty of sustaining those rates over time. As a result, the purchasing power of cash holdings can erode gradually.

This is why holding a balanced portfolio that can participate in growth, generate income, and preserve capital remains so important. That imperative will only intensify as the current market and economic cycle continues to mature.

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The bottom line? The first half of 2026 has rewarded investors who stayed diversified and maintained a long-term perspective, even as geopolitical and economic headlines created short-term uncertainty.

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References

1. All figures are as of June 30, 2026 and are on a price return basis unless otherwise noted

2. Clearnomics research and LSEG data as of June 30, 2026

3. Ibid.

4. https://gasprices.aaa.com/

5. https://www.bls.gov/news.release/cpi.nr0.htm

6. Clearnomics research and Standard & Poor’s data as of June 30, 2026

7. Clearnomics research and FDIC data as of June 30, 2026

Index Descriptions

S&P 500

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Dow Jones Industrial Average

The Dow Jones Industrial Average consists of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

NASDAQ

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

MSCI Emerging Markets Index

The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices:  Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.

MSCI EAFE Index

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.  The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

Bloomberg US Aggregate Bond Index‍

The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

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