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A Strong First Half Despite Investor Concerns
The first five months of 2026 were characterized by a remarkable disconnect between investor concerns and market performance. While investors contended with persistent uncertainty around interest rates, geopolitical tensions in the Middle East, inflation pressures, shifting trade policy, and elevated stock valuations, markets continued to advance. The takeaway is that while headlines drive short-term volatility, earnings growth, innovation, and economic resilience remain the primary drivers of long-term returns.
Despite the challenging headlines, equity markets performed well through May, with many indexes continuing to trade near record highs. The S&P 500 Index rose 11.3%, the Russell 2000 Index returned 18.2%, and developed international markets (MSCI EAFE) gained 9.7%.1
Source: YCharts
Earnings Remain the Primary Driver of Market Returns
While headlines fluctuate daily, healthy corporate earnings continue to drive long-term equity returns. First-quarter 2026 earnings growth was exceptionally strong, and earnings expectations remain constructive for the balance of the year.2 Beneath the surface, profit growth has expanded beyond a handful of mega-cap companies to include financials, industrials, and materials, helping support broader market participation.
Source: FactSet Earnings Insight
AI Is Expanding From a Technology to an Economic Story
Artificial intelligence has moved beyond a short-term technology trend to become a powerful force shaping markets and the broader economy. Capital expenditures among major technology companies continue to rise, supporting investment in data centers, semiconductors, networking equipment, and the power infrastructure required to run them.
As infrastructure investment continues, the list of beneficiaries is widening beyond technology companies to include utilities, electrical equipment providers, cooling and data center construction firms, and select industrial companies.
Higher Rates Have Become Part of the Investment Landscape
Investors have largely adapted to a world in which interest rates remain higher than once expected. While inflation has moderated from its peak, it remains above the Federal Reserve’s target, keeping policymakers cautious.3 Even so, credit markets remain healthy, corporate balance sheets are generally solid, and the economy has continued to demonstrate resilience.
Source: U.S. Bureau of Economic Analysis, MarketDesk
Looking Under the Surface of Market Returns
Beneath the index-level returns, there are encouraging signs that market participation is broadening. Small-cap performance has improved relative to recent years, and a wider range of sectors has contributed to returns. While AI-related and technology companies remain important drivers of market performance, market leadership appears healthier than it did just a year ago.
What We’re Watching as We Approach the Second Half
Several variables are shaping our outlook for the remainder of 2026.
While inflation has moderated from its peak, we’re continuing to monitor energy prices, wage growth, and shelter costs, as these remain among the most important drivers of future inflation trends.
On monetary policy, the focus remains on the timing and magnitude of any future Federal Reserve actions, as well as whether market expectations remain aligned with the Fed’s own guidance. With investors continuing to recalibrate expectations for interest rates, policy communication will remain an important market driver.
Geopolitics also remains an area of focus. Developments in the Middle East, the trajectory of global trade negotiations, and the resilience of global supply chains all have the potential to influence growth, inflation, and investor sentiment.
Finally, valuations warrant attention. While elevated valuations alone are rarely a catalyst for market declines, they do place a greater premium on continued earnings growth. As long as corporate fundamentals remain healthy and earnings continue to expand, valuations can remain supported. Despite the risks that remain, we believe the underlying economic and corporate backdrop continue to provide a foundation for markets.
What This Means for Investors
Short-term headlines can capture attention and temporarily impact markets, introducing volatility into portfolios. Maintaining perspective and staying focused on long-term goals rather than the news cycle continues to be critical. While uncertainty around inflation, interest rates, geopolitics, and policy remains, markets have continued to reward patience, discipline, and diversification.
As we enter the second half of the year, we remain focused on the factors that have historically mattered most: earnings growth, innovation, economic resilience, and maintaining well-diversified portfolios aligned with long-term objectives.
1 YCharts. S&P 500 Total Return, Russell 2000 Total Return, MSCI EAFE Total Return. As of May 31, 2026.
2 FactSet Research Systems. Earnings Insight. May 29, 2026.
3 U.S. Bureau of Economic Analysis. Personal Income and Outlays, April 2026. Released May 28, 2026. bea.gov.
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Any opinions expressed here are those of the authors, and such statements or opinions do not necessarily represent the opinions of Cary Street Partners. These are statements of judgment as of a certain date and are subject to future change without notice. Future predictions are subject to certain risks and uncertainties, which could cause actual results to differ from those currently anticipated or projected.
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International and foreign securities are subject to additional risks such as currency fluctuations, political instability, differing financial standards, and the potential for illiquid markets.
Comparative Index Descriptions: Historical performance results for investment indices have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings do or will correspond directly to any comparative indices. An investor cannot invest directly in the indices shown, and accurate mirroring of the indices is not possible.
The Standard & Poor’s (S&P) 500 Index is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market.
The Russell 2000® Index is a capitalization-weighted index designed to measure the performance of a market consisting of the 2,000 smallest publicly traded U.S. companies (in terms of market capitalization) that are included in the Russell 3000® Index.
The MSCI EAFE Index is a stock market index that measures the performance of large- and mid-cap companies across 21 developed markets countries around the world. Canada and the USA are not included. EAFE is an acronym that stands for Europe, Australasia, and the Far East. CSP2026166
