A Market Report Card

Estimated reading time: 7 minutes

Straight A Student?

Lately, it seems like both the bulls and the bears are getting louder. July’s market washout in semiconductor stocks was a point for the bears’ version of events, while bulls are being emboldened by more impressive tech earnings and market strength from other sectors.

It’s a compelling tug of war between the two camps, and in situations like these it can be useful to take a step back and evaluate things more broadly. Ignoring the constant barrage of headlines can help us decide if we can remain optimistic or if we should be more cautious.

So let’s parse through current economic and market conditions with that lens to assign some grades.  

Macro Messages

A pulse check on the economy should include three main components: growth, inflation, and jobs.

This year GDP growth has been solid, but not incredibly impressive. The latest data, for the second quarter, showed 1.5% growth quarter-over-quarter, lower than it was in the first quarter and three of the last four. This year’s growth was undoubtedly affected by rising oil prices, a force that should abate with a resolution to the conflict in Iran … as long as that happens at some point in the near future.

Importantly, GDP growth for the third and fourth quarter of this year is expected to be stronger, and as we know, the market cares more about expectations than current conditions (more on that later), so despite a lukewarm reading in the second quarter, things are looking up for the rest of 2026. 

Things are also moving up for inflation, but that’s not what we want. Again, rising oil prices are having an outsized effect here, but inflation was above the Federal Reserve’s 2% target before the war began, and Chairman Kevin Warsh has clearly communicated his intolerance for inflation that’s above target. Inflation is a problem and a headwind for the economy. Pressure on the Fed to hike rates is growing, but any higher interest rates would also act as a dampener on the economy. 

The last piece of the economic report card is jobs, which remain quite stable despite lots of fearmongering about a weakening labor market. Monthly job growth has been a little jumpy over the past two years, but 2026 data has been mostly positive. The 3-month average is 111,000, which we view as healthy. Add this to an unemployment rate of 4.2% and it’s difficult to find signs of weakness. 

Using these three metrics – GDP growth, inflation, and jobs – we give the economy a grade of A-. There are some concerns, but things are mostly strong and stable despite the many headwinds over the course of 2026. I’ve been impressed with the resilience of our economy.

Markets Know First

That said, there are many market participants who will tell you that the market sniffs things out long before the economic data will show it — and they’re right. So let’s take a look at what the market is telling us from an earnings and trading perspective.

Over long-term periods, markets follow earnings. If a company is not producing solid earnings growth or cash flow, or not managing its margins properly, markets will adjust accordingly. Short-term, post-earnings movements in stocks are informative, but as a long-term investor, they aren’t the real message. The real message is in earnings strength, and right now, earnings are stronger than they’ve ever been. 

However, you can see from the chart above that when earnings do turn down, the market (light blue line) tends to turn down beforehand. So the question is: are we in a period when the market is consolidating ahead of more downside to come?

Of course, no one knows for sure what the future holds. But the market looks broadly positive right now. There was a rather dramatic washout in momentum during July that took semiconductor stocks down almost 30%, but that pullback was relatively contained to tech stocks and appears to have run its course. 

It’s important to note that even when tech stocks were in a volatile stretch, the broad S&P 500 did just fine. Other sectors performed well, which is an important indication of positive sentiment from investors. 

Current market conditions don’t suggest a bigger pullback coming, in my opinion. Cyclical sectors such as Energy, Financials, and Materials are among the leaders quarter-to-date, and the S&P is up almost 4% this quarter. 

Valuations remain stretched according to many metrics, but the technical setup (measures of market strength, momentum, and overbought/oversold conditions) looks healthy. In fact, many would suggest that the current move upward in the S&P could send it to 8,000 soon. 

Though there is much to be excited about, there are also things to be watchful of and surprises that could change the course of events. The best we can do is work with the information we have and add a sprinkle of intuition. At present, these are both telling us the likely direction for stocks is upward. Market grade: A. 

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