MICHAEL J. HALLORAN, CFA | Equity Strategist of Janney Montgomery Scott
Wyncote Wealth Management Group
Highlights for this week include:
• The May manufacturing business surveys continue to signal healthy activity for the manufacturing sector, with easing of elevated inflationary pressures due to lower oil prices.
• The Personal Income and Outlays report was consistent with a resilient consumer with income outpacing inflation. However, the report showed stubbornly high inflation that should keep the Federal Reserve on hold for the foreseeable future.
• The second quarter of 2026 saw a major turnaround for U.S. stocks, shifting from the Iranian conflict fears of March to the strongest quarter in 6 years for the S&P 500. Stock gains are being driven by the massive AI buildout and healthy profit growth.
• Lower oil prices are a major development for the economy and stocks, and we remain encouraged by underlying market dynamics. While acknowledging the risks posed by the fluid Iranian conflict, we continue to expect stocks to be supported by further economic growth and robust profits.
Manufacturing Conditions Remain Solid
At the beginning of a given month, the Institute for Supply Management (ISM) and S&P Global provide business surveys for the manufacturing sector with readings taken during the previous month. Historically, it has been a good sign for the overall economy when this cyclical (economically sensitive) sector is performing well. Encouragingly, both surveys were consistent with healthy growth in manufacturing activity in June.
The ISM Manufacturing Index signaled expansion for the sixth consecutive month, a positive development after manufacturing had been sluggish for several years after the post-pandemic boom. New orders and production continue to signal expansion. All but one (Petroleum & Coal Products) of the six largest manufacturing industries expanded in June. Importantly, inflationary pressures continue to fall from elevated levels after the U.S.-Iran peace agreement sent energy prices lower. However, supply chain bottlenecks related to the AI buildout are causing inflation pressures for electrical and electronic components, computer memory, and semiconductors.
S&P Global noted that US manufacturers reported a further marked improvement in growth of output and order books in June. Manufacturing is benefiting from the AI buildout, the reshoring of production, and favorable business tax incentives such as bonus depreciation for domestic corporate investment under the One Big Beautiful Bill that was signed into law last summer.
Personal Income Report Consistent with a Resilient Consumer but Elevated Inflation
The Bureau of Economic Analysis (BEA) Personal Income and Outlays report showed both income and consumption jumped in May, more than keeping pace with inflation, which remains elevated. Disposable personal income (DPI) —personal income less personal current taxes—increased 0.7 percent, and personal consumption expenditures (PCE) also increased 0.7 percent. Both were above consensus expectations.
Personal income is up 3.8% in the past year, while spending has increased 6.3%. The saving rate held steady at 3.0% – unchanged from April’s upwardly revised reading, and a 4-year low. Consumers continue to benefit from a solid labor market and the wealth effect of high stock and home prices.
The BEA report also showed that the Federal Reserve’s (Fed’s) preferred inflation measure, the PCE deflator (a measure of consumer price inflation), rose 0.4% in May and is up 4.1% versus a year ago. The core PCE deflator, which excludes food and energy, increased 0.3% in May and is up 3.4% in the past year. Inflation continues to run significantly above the Fed’s 2.0% target, which suggests the Fed won’t be lowering interest rates anytime soon, with the market now signaling a rate hike by year-end.
Second Quarter Posts Strong Market Returns Across All Size and Style Categories
The second quarter of 2026 saw a major turnaround for U.S. stocks, shifting from the Iranian conflict fears of March to the strongest quarter in 6 years for the S&P 500. There were new highs across the board, regardless of size or style categories, with small-cap growth showing the best returns. The rebound was driven by two main things: the massive, ongoing push into AI infrastructure and an earnings season where companies continue to post strong earnings that beat expectations. These supports look sustainable for the back half of 2026, given the ongoing massive AI buildout and healthy economic readings.
Remaining Positive on the Market with Lower Oil Prices Now a Tailwind
A major development for the economy and stocks is the decline in oil prices as fears of supply disruptions from the Middle East continue to ease. Lower energy prices reduce inflation concerns and help ease pressure on consumers and businesses. Longer-term interest rates are also easing lower in sympathy with reduced inflation concerns. This provides a positive backdrop for stocks, which continue to benefit from the massive AI buildout.
We remain encouraged by the underlying market dynamics. Economically sensitive sectors like Financials and Industrials continue to perform well. In addition, small-cap stocks, another economically sensitive group, have broken out to new all-time highs. While acknowledging the Iranian conflict continues to pose a risk for the economy and stocks, oil prices are signaling that we could be past the worst of this fluid situation. We continue to expect stocks to be supported by further economic growth and robust profits.
Disclaimer
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