Quarterly Edge – Q2 2026: Inflation, Jobs & Market Risks

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Hello and welcome back to another edition of the blue Chip Partners quarterly Edge, in which I discuss our outlook for the upcoming quarter with my esteemed colleague, Dan Seder.

By the way, I’m Daniel Dusina, chief investment officer at blue Chip partners. For those of you who do not know me.

Thanks for joining, Dan. You bet. Thanks for having me. And I’m Dan Seder, managing partner. As always, a fun conversation. Looking forward to it. Daniel, thanks for having me. Let’s start with the economy. So big picture.

Lots going on. Plenty to discuss. Where’s the economy at? What’s going on?

Yeah. So there’s obviously a lot in flux right now with ongoing conflict in the Middle East. So what I’d like to focus on is two very high level, relatively simple items. The first would be the labor market. The second would be inflation. The reason I’m going to be focusing on these is that, number one, they are very valuable inputs for the Federal Reserve. But also these were two primary points of concern of mine if you recall three months ago when we entered this year.

So the labor market, just to start off, I think it’s been a very uneven story thus far, and we have some additional information relative to where we were three months ago. But at the same time, there’s a lot of choppiness that has been occurring.

Realistically, some of the pessimists out there with regards to the US economy will point to the labor market and charts showing slower levels of job creation and a higher unemployment rate. That is true. But what I would push back on is that we have been in this relatively slower growth environment for not just the last three months, but for multiple years. It’s not unhealthy—it’s normal. It’s cyclicality in the economy that is expected year in and year out.

Slower growth in the economy is an economic data point, not necessarily a market issue. There are explanations for this. If you look back to 2025, corporations were cautious due to uncertainty around tariffs. They weren’t laying off people in mass, but they also weren’t aggressively hiring.

We’re seeing similar behavior this year, potentially driven by uncertainty around artificial intelligence and how enterprises are thinking about it.

Where I am more constructive is that we have not seen a surge in layoffs. Layoffs are relatively contained and even slightly lower than this time last year. We’re also not seeing a sharp increase in unemployment. Some of the data is still influenced by the government shutdown in late 2025, but overall, this feels more like a slowdown in growth rather than a recession, at least from a labor perspective.

And as the Fed manages full employment, the unemployment rate is still relatively low historically.

Exactly. That’s supported by a generally robust economy. Growth may slow, but it still looks less recessionary.

Anything else on the economy before we shift?

Yes—touching on inflation. Inflation has been a major topic since 2022. We’ve seen a relatively smooth downward trend in consumer prices. The question now is whether we’re in the final stretch.

What’s happening in the Middle East is raising inflation expectations. Earlier this year, investors expected rate cuts. Now, rate hikes are back in the conversation.

That said, I don’t necessarily believe inflation will surge higher solely due to oil disruptions. Energy is only about 6% of CPI, so it’s not the primary driver.

If you want to make the case for sustained inflation, you also need to include food. Both energy and food are critical components of consumer spending.

There’s also an often-overlooked factor: fertilizer. A large amount of global fertilizer supply moves through the Strait of Hormuz. If both oil and fertilizer supply are disrupted, that could have a more meaningful inflation impact.

Energy plus food makes up about 20% of CPI, which is much more significant.

Another consideration is that CPI data is lagged. There are newer measures, like Truflation, that attempt to provide more real-time inflation insights. These suggest inflation may currently be below the Fed’s target, though recent data has shown a short-term increase.

Overall, inflation is better, but not fully behind us. Unless there is a prolonged conflict disrupting supply chains, it’s unlikely to be the defining story of 2026.

Let’s shift to markets. Starting with stocks.

The market has paused after a strong run, but it’s not far from all-time highs. Looking beyond headline indexes, the picture is more nuanced.

For example, the equal-weighted S&P 500 is outperforming the cap-weighted version, indicating broader participation across companies rather than concentration in a few large names.

We’re also seeing value stocks outperform growth stocks at levels not seen since 2022.

Value stocks are typically more established companies trading below their intrinsic value, while growth stocks are expected to grow faster than the market average.

Growth has dominated for years, but value outperformance often occurs during periods of market stress.

There are similarities between today and 2022—concerns around economic growth, inflation, global conflict, and interest rates.

The takeaway is not to exit the market, but to be selective and understand what you own.

Another area gaining interest is small caps. Historically, small caps benefit from lower interest rates and improving manufacturing conditions.

Manufacturing has been weak since 2022, but recent data shows signs of expansion. Historically, when manufacturing rebounds, small caps have often outperformed large caps.

This is an area worth watching.

Now shifting to bonds.

Interest rates have moved higher recently, but the focus should be on spreads. The message for bond investors is to keep it simple.

High-yield bonds are not currently offering enough compensation for the additional risk. Spreads remain historically tight, even after recent increases.

Spreads can also serve as an early indicator of market stress. If spreads widen significantly, that could signal increased risk before it shows up in equities.

For now, the approach is to maintain balance and avoid reaching for yield unnecessarily.

If investors are taking on more risk in bonds to chase yield, they may effectively be increasing their exposure to equity-like risk.

The key takeaway is simple: keep it simple.

That wraps up the economy, stocks, and bonds. Thank you for joining us.

Thank you all for listening and watching. Until next time, we’re signing off.