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Welcome back to another edition
of the Blue Chip Partners Quarterly Edge.
where I have my esteemed colleague,
Dan Seder, who will ask me some questions
so I can share what some of my thoughts
are for the market
in the third quarter of 2026.
Nice. Looking forward to it.
So, Daniel, there’s, three
consistent themes that we talked about.
We talked about the economy.
We talked about stocks.
We talked about bonds.
Let’s kick things off with the economy.
Anything notable from the second quarter?
What are we seeing in the economy?
Yeah.
Well, it’s been, a very eventful year
so far, I would say.
At the onset of 2026,
I don’t think anyone could have
anticipated, the economic impact
from, global conflict.
Right?
I mean, that’s
certainly wasn’t on my bingo card,
but it’s something that you always have to
be prepared for.
So what I want to talk through,
and the two biggest things
I’m thinking about today
are labor and inflation.
And that might sound obvious.
That’s what the fed focuses on.
But that’s really where we have
seen the most meaningful developments.
So Take a trip down memory lane
as it pertains to the labor market
all the way back to 2025 when you kind of
had the tariff tantrum kick up.
Basically, from that point on,
we were in this low, higher, low
fire environment because companies didn’t
know what the ultimate impact of tariffs
was going to be.
They didn’t
necessarily want to lay people off,
but they didn’t
want to beef up the workforce.
And they kind of held Pat.
Well, as you transitioned into 2026,
it felt like a lot of the same
for a different reason.
And it was trying to gauge the impact
of artificial intelligence.
Do we need to right size the workforce
because of productivity gains?
Do we want to shift the spending
that we would on headcount to technology?
And so you were in this low, hyper low
fire environment for basically a year.
Not to mention
we had bad labor market data
from a government shutdown in the back
half of 2025.
So the reason I say all this
is because my whole tagline for the back
half of this year,
as it pertains to the labor market is
we have a much cleaner story now.
If you
look at the number of jobs
added month to month from the jobs
report,
it’s been super volatile, month to month.
If you look basically all of 20, 25
and then,
kind of heading into 2026, but since then
the clearer picture has developed of
we are steadily adding jobs.
The unemployment rate is actually
falling now.
Part of that’s due to lower labor force
participation
because we have an aging population.
But my whole bottom line here
is that the labor market
does appear on much more solid footing now
than I would have been confident saying
even just three months ago.
The second kind of leg of this is it’s
not just job additions.
It’s not just the unemployment rate.
You still have a low level of layoffs
that are happening,
despite all the fears that were broadcast
around artificial intelligence.
And any white collar job is essentially
going to disappear in the next 12 months.
That’s not happening.
Layoffs are steady.
They will always exist, but
they’re not blowing out in any capacity.
And even more importantly to me
is that you’re seeing hiring start
to pick back up.
So when you look at something
like job openings start to tick up
like they have over the last
4 to 5 months, that’s intentional.
That’s data from corporations,
that’s signaling to investors
that we are willing to expand
because we have confidence
in the underlying economic situation.
So all of that
put together, you’re emerging
from this low hire, low fire environment.
And while I don’t necessarily
think we’re going to have some some banner
year from a labor market perspective,
I don’t think we have to.
But the unemployment rate is low.
Jobs, things are fair.
I think when you look at low hiring,
more fired, that’s okay.
Right. Yeah, it’s certainly okay.
Yeah.
And I mean, I guess more important for me
is that you’re seeing the trends
inflect positively, right?
Yeah. So it’s all good. Okay, great.
Anything else on the economy?
Yeah, just I mean, the other component of
this is inflation.
And certainly that
that has been a hot topic with regards
to what happened in the Middle East.
So when this conflict started to emerge,
the immediate reaction in markets
was to send the price
per barrel of oil skyrocketing higher.
I mean, this is just simple supply
and demand.
When you stop a major shipping lane
for oil vessels from being able to flow,
that’s a pretty big imbalance
in supply and demand, right?
Well, oil as a component
of the consumer price index,
even though it’s only 6%,
it’s accounted for 35% of the year
over year increase in consumer prices.
So it’s skewing the CPI
figure higher by way of 4.2%
as of the end of May, which I think
is important to talk through.
But it’s also just as important to talk
about why I don’t think
that’s worth paying attention to.
And I guess without sugarcoating it.
I mean, Kevin Warsh, the new fed chair,
even came out and said at the end of June,
he’s seeing a lot more favorable
price action in recent weeks.
And that’s all the information
I need to know.
I can confirm that by looking
at some more real time data as opposed
to just waiting, you know, a month lag on
something like the consumer price Index.
What I’m showing on the screen, right now
is actually something I showed,
last time we were in this forum.
And it’s the red line
being the traditional consumer price
index year over year.
And the gray line
being something called true flash.
And True flashing is a private third party
that prides themselves
on having a more real time
read on consumer prices.
And while I don’t necessarily agree
that the actual figure
that comes out of this is
is always super accurate, it’s telling you
that year over year
inflation’s at 1.78% right now.
I don’t like it
because I want an absolute number.
I want it because it can inform
more quickly the direction of travel.
So if you look at this chart
you see CPI continuing
to climb whereas true flashing
the more real time up to date measure.
It started tapering off as early
as early April.
So again,
like I’m just trying to gain confidence
in the narrative
that yes, energy is only 6% of CPI.
It’s accounting for 35% of the increase
depending on who you talk to.
I think there’s a higher likelihood of us
being in a oil supply glut over
the next year
than there is a shortfall, so prices
just recently have really dropped.
Yeah.
Hopefully we see that at the gas pump
sometime soon.
Yeah. And I think it’ll take some time.
But at the end of the day,
if I zoom out and think about
from a holistic economic perspective,
you have the labor market picture
that is much cleaner than it was
three and six months ago.
You have an inflation story
that has been challenging,
but shouldn’t derail anything from here.
So I like the odds of continued
slow and steady growth in the US economy.
As we look to the back half of this year.
That’s good news.
All right. Let’s shift to stocks.
So the second quarter was,
extraordinarily
positive from the headline levels,
so called the S&P 500.
The Dow Jones,
both have broken out to all time highs.
So do you want to talk about
what happened in the stock market
as the second quarter?
Yeah. And it really was an earnings story.
So yes.
You got some relief rally from reprieve
and ceasefire between the US and Iran.
But I think the real star of the show
was corporate earnings.
which Price I talked about that
all the time.
Earnings drive price. Right.
And so when you look at us,
a US equity market that has I mean, it’s
kind of short changing it to say it’s done
well over the last few years.
But, you have a US market that’s done
very well over the last few years
and has all of a sudden come out
and printed first quarter earnings
that grew 25% plus at the S&P level.
And it’s certainly
I would say there’s heavy participation
from the tech sector,
but there’s other sectors
that are growing quite well as well.
So, you see the, the, the earnings
part of the equation continue
to be much stronger than and I think
even some of the most astute sell side
analysts would have expected.
On top of that, as we look towards the
the set of Q2 earnings,
which will really kick off
in the next week or two.
Very rarely
do you see sell side analysts in
between quarters
bump company level expectations.
Traditionally,
if you look back over the last five years,
sell side price targets and earnings
expectations for individual companies,
for S&P companies,
that is have declined 2%.
And part of that is explainable
because, you know,
you want to put forth a price target
that’s beatable, right.
When you see sell side
analysts bump S&P 500 companies
earnings targets by by over 7% I mean
that’s putting themselves out there.
And they have no reason to do so
unless they do vehemently believe
that that result is attainable.
They’d rather under-promise
and overdeliver.
In this case, they’re they’re really
raising their promise quite a bit.
Right.
So they’re going to have to really,
really deliver, I guess, in order
to exceed those expectations.
Yeah.
And I, you know,
I think there’s a high bar to clear,
but given the backdrop that we talked
about from an economic perspective,
I do think that it’s it’s achievable.
It’s achievable.
And, you know, the other
kind of portion of this is well after,
you know, a really good run,
do you think that valuations start
to look a little bit stretched?
And my answer to that is it depends what
you’re using in terms of valuation metric.
And it also depends on what you mean.
I mean are you talking about
the broad market.
What index are you using.
Are you talking about certain sectors.
And to make it very simple,
there are certain sectors like tech.
If you looked at a trailing price
to earnings ratio that are trading above
their five year average, but even in
the tech sector, it’s not extreme.
And if you were going to use
forward earnings instead of the last
12 months of earnings, all of a sudden
the tech sector can look like
it’s actually at a discount.
Meanwhile, on an
equal weighted basis in industrials
and consumer discretionary,
you have outright discounts to,
where these sectors have historically
traded over the last five years.
Yeah.
So we’re we’re still in line
on an equal weighted basis, meaning
when you’re not looking at the influence
that these large companies have
or the overweight to tech, for example.
But when you look at the average stock
across the S&P 500,
valuations are slightly above
slightly above five year historical right.
Yeah.
And I think that’s the punch line
because I’m not going to sit here
and make it all sunshine and daisies
because there’s obviously
going to be bumps in the road.
I mean I can call out,
you know how inflation develops,
something like equity supply.
I think most people listening to
this will be aware of the SpaceX IPO.
There is one other large one, potentially
two large equity offerings coming,
not to mention alphabet deploying
$80 billion in at the market equity
offerings this quarter.
So there will be bumps in the road
from some of the nuts and bolts stuff
before you even start to think
about the fed, that’s
going to be likely less accommodative.
And don’t forget midterm elections.
So there certainly is potential
for volatility.
And I think that the way the market
is behaving right now, you are seeing
some of that come to fruition.
But again I’ll take it back to earnings.
If earnings are coming and developing
the way that they’re expected to, I
don’t want to say that solves any problem,
but it certainly goes a long way.
I love it I love it.
All right. Last but not least bonds.
We’ll we’ll save the most exciting portion
of this for the end.
So we have a relatively stable
rate environment, relatively stable.
So bond pricing up ever so slightly.
What?
Talk us, talk to us about, you know,
what happened in the second quarter.
Yeah. It’s,
I mean, you can joke about bonds
and being exciting, which I often do,
but the, the
the dramatic change
that has happened in fixed
income markets
this year, it can’t go unnoticed because
all of the economic developments
that I talked about, us and Iran, labor
market coming in stronger than expected
and inflation running hotter,
that has a massive impact in
what the Federal Reserve
is likely going to do and how investors
are going to anticipate their actions.
So if you look at the chart
I’m showing on the screen right now,
the blue dashed line is showing you
what fed funds rate
expectations were at the end of last year.
And what it would tell you
is that in 2026, we expect two rate cuts,
in somewhat linear fashion. Fast
forward six months to the end of June,
which is where we’re at now.
We didn’t get any cuts.
We’re not expected to get any cuts
this year.
We’re actually expected
to get between one and a half
and two hikes over the next year.
Matic reversal.
Yeah it is a short period of time.
It is.
And you know we have a new fed chair.
So Jerome Powell
after having been in the helm
or at the helm for eight years,
handing the torch over to Kevin Warsh,
who is going to be a lot less transparent,
I think, in the traditional sense,
as we’ve come to know, a fed chair,
at least in a post financial crisis world.
I think that’s okay.
He’s been very explicit in his goals,
and that is to manage towards
2% inflation target,
not 2 to 2, and a half, not three, 2%.
So he hasn’t outright telegraphed
what he’s going to do,
but it’s very clear
that he’s not necessarily worried
about the state of the labor market
right now.
He is adamantly focused on inflation.
So what is that spell
that probably spells rate hikes.
Trying to tamp down
some of that price action
that’s been bubbling up
over the last year, mostly due to energy.
But either way, that dramatic change,
by the way, it’s not super abnormal.
I mean, when you look back two years
like 2022 and 2023, the the so-called
smartest guys in the room being the bond
investors got it completely wrong.
I feel like there was a period of time
where we would joke about pull up the,
the interest rate forecast
function in Bloomberg and basically
just do the exact opposite of what,
what what that’s telling you to do.
So with all that said, yes, we are
probably looking at a higher for longer,
if not even higher interest
rate environment,
which can be troublesome for something
like the housing market
that’s remained very sluggish.
And buying power is continuously
getting more and more challenging.
But at the same time,
if we want to explicitly talk
about the bond market landscape,
we’ve talked about this time
and time again with regards to
how starting yield
has such a large correlation
with your total return
over a longer time period.
So as a bond investor,
you know, I
think life I don’t want to simplify this,
but life can get a lot easier
when rates are higher.
Now there are some intricacies.
You have corporate bond spreads,
both investment grade and high yield
that are incredibly tight.
At, at historic levels,
even so, you’ve had investors
get pretty creative with how they deploy
money to the fixed income market
using a lot more securitized assets
and kind of moving around
along the yield curve to try to create
this truly balanced portfolio.
And honestly,
I, I think is at this point in time,
when you do have the benefit of higher
starting yield, you keep it simple.
I mean, you focus on quality.
The bond portion of any investor
portfolio is meant to be a ballast.
Let’s treat it accordingly.
So I don’t think you need to get overly
creative here.
Stay up and quality.
And if you want to take some shots,
I think there are certain parts
of the market that look a little bit
more interesting than others.
I wouldn’t touch high yield bonds
with a ten foot pole.
They’re still trading at spreads that,
they haven’t traded at,
90 plus percent of the time
over the last 20 years.
So I just don’t think
you are being rewarded to pay up for risk.
So all in, I think that yes,
the dynamic has changed
pretty dramatically as we’ve progressed
through the first six months of this year.
But it doesn’t have to be a bad thing.
I mean, you see it in bond market returns.
The US AG is up about 8% this year.
So great.
Well thank you for the overview as always.
It was it was awesome
to get a recap of the economy,
the stock market, the bond market.
I’ll let you close us down.
If there’s anything else you want to add,
but appreciate your insight.
No. Always appreciate you joining.
It makes the conversation a lot more fun
and a little bit easier to
to walk through.
But that’s all we’ve got for this quarter.
Thanks, as always, for tuning in
to another edition of the blue
Chip Partners Quarterly Edge.
We look forward to speaking
with you all again soon.
