Second Quarter 2026 Market Update
With a tip of the cap to Major League Baseball getting into full swing during Q2, lets go “around the horn” and field some relevant market questions. But first, for those curious or unfamiliar, the term “around the horn” was in reference to the long nautical route between the Atlantic Ocean and Pacific Ocean, before the Panama Canal, by which a vessel would have to sail around the tip of South America at Cape Horn.
On the baseball field, it is often used to describe the complexity of and speed at which players throw the baseball around the infield when completing what is called a 5-4-3 double play.
For example, a groundball is fielded by the third baseman who throws to the second baseman (who records an out at second base) who then throws the ball to the first baseman to complete the double play. This feels like a fitting analogy coming out of Q1 and underway in Q2 as markets continue to process fast-moving, interconnected developments all around the globe.
Has the market been right to keep looking through bad news?
So far, yes.
That may be surprising to some investors given the list of reasons stocks “should” have struggled, namely military conflict with Iran and the Strait of Hormuz being under blockade. But the market’s initial de-risking into correction territory at the end of the first quarter and subsequent rebound isn’t entirely irrational. It has been rooted in the belief that the conflict would de-escalate, and corporate earnings estimates are increasing.
Are earnings strong enough to keep the rally going?
Yes, right now, they are.
FactSet reported the blended earnings growth rate for Q1 stood at 13.2%, which would mark a sixth straight quarter of double-digit earnings growth if it holds.
Analysts expect Q2 EPS growth of 20.1%, up from 15% forecasted in February and full-year 2026 earnings growth of 18.0% up from ~15% forecasted earlier in the year.
What is the story about inflation?
That depends on who is telling it.
The Bureau of Labor Statistics (BLS) March CPI report showed headline inflation rising 3.3% year-over-year, up sharply from 2.4% in February, while core CPI moved to 2.6% from 2.5%. The largest impact came from energy, which rose 12.5% over the prior year.
Truflation’s CPI Index tells a very different story showing inflation rising just 1.77% year-over-year.
The discrepancy between the two is because they differ in terms of data volume, frequency and calculation. For example, Truflation integrates more data points (over 15 million) across more categories than the BLS. Another key difference is found in Housing measurement. The BLS uses Owners’ Equivalent Rent (OER) which comprises over 30% of the index and is an imputed measure of what homeowners would theoretically pay to rent their homes.
Truflation measures Housing with direct market data such as real-time rents and mortgage payment data and weights housing at around 23% of the index.
Why does this matter? The Truflation index removes much of the lag imbedded in the traditional CPI series. To illustrate, in 2021 & 2022, the Truflation CPI was climbing higher, sooner than the official CPI numbers, whereas now, it is much lower.
Will a new Fed chair get tested?
Likely.
If confirmed, Kevin Warsh will take over as the new Fed Chair after Jerome Powell’s term ends. Markets have a history of testing the new Chair and sometimes by fire. Any uncertainty around policy, communication, the Fed’s decision framework or forward guidance can produce bouts of volatility. We are not saying this will happen, we are saying do not be surprised if it does.
Is private credit under stress?
Yes, but that doesn’t automatically mean systemic.
Private Credit is a broad term and a complex topic. It refers to loans borrowers receive from non-bank lenders such as asset managers or insurance companies. Unlike public debt markets, private debt markets operate with limited transparency. Current stress stems from valuation scrutiny especially around the AI disruption story in software related companies, investor redemption requests, slower fundraising by managers and liquidity terms.
Due to the black box nature of these private credit funds, investors are left to trust there is in fact a Wizard and not simply a man behind the curtain. That makes confidence in this asset class one of the most powerful stories in markets right now.
The final word.
In our view, the market still deserves the benefit of the doubt, but not complacency. There is a fundamentally supported case for equities to continue to work and for fixed income to complement a diversified portfolio.
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Disclosures
Ables, Iannone, Moore & Associates, Inc. (“AIMA”) is an independent, fee-only registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration as an investment adviser does not imply a certain level of skill or training. The information contained herein is provided for educational and informational purposes only and should not be construed as personalized investment advice.
Opinions expressed are subject to change without notice and are not intended as a forecast, guarantee, or assurance of future results. All investing involves risk, including the potential loss of principal. Past performance is not indicative of future results.
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