Market Snapshot | June 2026

Hi, everyone. I'm Liz Ann Sonders, and this is the June Market Snapshot.

As we approach midyear, the message has become nuanced. The bull market is still alive, earnings are strong, and the economy has held up better than many expected. But beneath those positives are some fault lines that investors should not ignore. Now, growth looks solid on the surface. You've got second quarter GDP tracking near 3%, and that's supported by consumer spending and business investment. Still, the outlook is less comfortable maybe than the headline suggests. Of course, we have higher energy prices tied to the war in Iran and the Strait of Hormuz disruption, and those are acting like a supply shock, while many households are already stretched by weak real wage growth and a low savings rate. The labor market remains resilient, but the consumer is maybe not as strong as aggregate data alone might imply. And of course, inflation remains a challenge. Energy has become a larger contributor to both CPI and PCE, and even beyond energy and tariffs, core services inflation is still running above the Fed's comfort zone. On top of that, AI is beginning to add to price pressures through rising costs for software, computing equipment, and related services. That leaves the Fed facing an inflation backdrop that is still stubborn and more complicated than many had hoped.

[High/low chart for "GDP breadth improving" for Percentage point contribution of subcomponents to Atlanta Fed's GDPNow for real GDP growth is displayed]

Now, the Atlanta Fed's GDP Now model has second quarter real GDP tracking around 3% annualized. Now, that sounds great, but do take that number with a grain of salt right now, as a lot of the underlying data is still incomplete, and consumer spending, which is driving much of that estimate, could soften considerably if energy prices remain elevated.

Now, as of the first quarter, consumer spending was quite healthy, as was non-residential fixed investment, which is business capital spending. The problem looking ahead, as I touched on, is that the Strait of Hormuz remains effectively closed. That is not a minor geopolitical footnote. It is a structural energy supply shock that's hitting consumers already in a weaker position than many people realize. In fact, real wage growth, meaning wages adjusted for inflation, is actually negative right now. The savings rate is also historically low. Today's consumer, particularly those in the lower half of what we call the K-shaped economy, has gotten more stretched.

Now, a positive is that the labor market has been quite resilient. There has, however, been a decline in real wage growth, as I mentioned, and that's courtesy of the ongoing thorn of inflation.

[High/low charts for Energy/AI boosting inflation" for Percentage point contribution of gasoline/motor fuels and software/accessories to y/y % change is displayed]

Now, as shown in the top chart here, energy's contribution to both CPI and PCE has surged dramatically. That's the Iran war effect plain and simple. But even stripping out energy and the direct effects of tariffs, core services inflation has settled into a new, somewhat uncomfortable range above 3%, which makes the Fed's 2% target still feel quite distant.

And here's a wrinkle that I don't think gets enough attention. AI is becoming an inflation driver in its own right. Prices for computer equipment, software, related services are rising as the AI capital expenditure cycle roars forward. As shown in the bottom chart here, software, in particular, has a much larger weight in the PCE Price Index than in CPI. As such, its inflationary impact is notably visible in the PCE, which is the gauge the Fed watches most. AI is simultaneously a demand shock, and to many consumers a source of economic anxiety. That is becoming a complicated combination.

[High/low chart for "Economic concerns not fading" for Misery Index and "Expected" Misery Index is displayed]

Now, AI's growing role in the inflation story is a little tricky, since it represents that demand shock, but it's also happening alongside a major supply shock courtesy of the Iran war. This is an interesting look at the so- called Misery Index in blue. That's a metric that was popularized in the 1970s, and it's calculated as the sum of CPI inflation and the unemployment rate. What we're comparing it to is what might be thought of as an expected Misery Index, which combines inflation expectations and unemployment expectations. Now, we do not expect the actual index to catch up to the expectations index, but given the growing pushback against data center construction, frustration with high gas prices, fear of AI consuming job opportunities, consumer sentiment is unlikely to improve meaningfully from here.

[High/low chart for "2026 earnings estimates have surged" for S&P 500 y/y earnings growth for 1Q26E, 2Q26E, 3Q26E, 4Q26E and 2026E is displayed]

Now, here's where I want to give economic and stock market optimists their due. The earnings story this year has been remarkable. Wall Street now projects S&P 500 earnings growth of 25% for the full calendar year. That's up from less than 16% at the start of this year, with the surge driven by much stronger than expected first quarter growth shown in the darker-blue line here.

So something real is happening. That said, the growth is heavily concentrated. In technology and communication services, a handful of companies, Alphabet, Broadcom, Micron, Sandisk, and Intel are doing most of the heavy lifting. AI infrastructure stocks have seen 2026 earnings estimate revised higher, in fact, by a massive amount, more than 50% since late 2024. Sadly though, the rest of the S&P 500, basically the ex-AI infrastructure subset, has seen estimates nudge slightly lower over that same period of time.

This is part of what is generally referred to as the AI circular financing problem. So you've got the hyperscalers. Those are Amazon, Microsoft, Alphabet, Meta. They're on track to spend nearly $800 billion on capital expenditures this year alone. That's more than 80% above last year's spend. And their capex is approaching 75% of their own cash flows, and that is a ratio that is starting to rhyme with the late 1990s tech spending patterns. Now, the companies spending the most on AI infrastructure are the same companies whose earnings growth is underpinning the index. That is that circular dependency worth watching carefully.

[High/low chart for "Hyper Hyperscalers' capex" for Hyperscalers' capex as % of total S&P 500 capex and Hyperscalers' net income as % of total S&P 500 net income is displayed]

Now, one of the striking features of the current AI investment cycle is the widening spread between hyperscaler's share of S&P 500 capex and their share of S&P 500 net income. So that spread raises questions about the return on invested capital, the durability of free cash flow, and whether the market's valuation of these companies already prices in a monetization trajectory that has yet to fully materialize.

[High/low chart for "Chip demand bodes well for manufacturing" for ISM Manufacturing Index and y/y change in Philadelphia Stock Exchange Semiconductor Index is displayed]

For now, there are positive ripple effects of the AI spending boom. Semiconductor chips go in virtually everything manufacturing, including automobiles, appliances, industrial equipment, and mobile phones. And when manufacturers plan to ramp up production, they order chips first due to long lead times. So as shown here, chip demand, in this case proxied by the Philly Stock Exchange Semiconductor Index, that chip demand typically anticipates broader manufacturing demand. So that's a positive.

[High/low chart for "Looking for breadth rebound" for Percentage of S&P 500 members outperforming S&P 500 Index over the past month is displayed]

Now, also thanks in part due to the strong earnings, as we mentioned, at least at the index level, the S&P 500 has continued to grind higher. That said, only about 17% of stocks within the index have outperformed the index itself over the past month. As you can see, that's one of the lowest breadth readings in a decade. In addition, although the S&P 500 at the index level pulled back by about 9% in February and March, just shy of correction territory, the fuller story continues to get told under the surface of that cap-weighted index. In fact, the average S&P 500 member has experienced a maximum drawdown of 21% year-to-date. It's just that that serious correction actually into bear market territory has happened via a process of rotation versus a traditional bear market where the indexes fall all at once.

[High/low chart for "Households' lofty equity position" for Stocks as % of household financial assets is displayed]

Now, the lack of meaningful index level downside has been to the benefit of households' equity exposure. This has the potential to be a vulnerability at some point because equities now represent more than 47% of household financial assets. That's nearly triple the share at the 2008 financial crisis low. That just means that if stocks do have a more meaningful correction, particularly at the index level, that could flow through to consumption. The wealth effect, which has been a tailwind for the economy for years, could at some point become a transmission risk, just something to be mindful of.

[High/low chart for "Risk appetites in lofty territory" for Goldman Sachs Risk Appetite Indicator is displayed]

In the meantime, it's full steam ahead in the minds of investors. Goldman Sachs' Risk Appetite Indicator is sitting in the 99^th percentile of all readings since 1991. Now, historical analogs to that level show below average S&P returns over the subsequent 12 months. It's just worth expressing a note of caution that markets are priced for continuation, not disappointment.

[High/low chart for "Sharp inverse yields/stocks correlation" for Rolling 30-day correlation between S&P 500 and 10-year Treasury yield is displayed]

Now, finally, and this matters, inflation drives bond yields, and they matter to the stock market. You can see here that the one-month correlation has turned decidedly negative, meaning that bond yields and stock prices are moving in the opposite direction. The remainder of the year, if we were to see more bond yield volatility, there could be more equity market volatility than what we've become accustomed to so far this year.

[List of "Takeaways" is displayed]

Here's the bottom line. The bull case has real substance. Earnings are not a mirage. The economy and labor market have shown genuine resilience. There are some buts. Inflation is not settling down. And although stocks have performed exceptionally well, the index level of the story is obscuring what I would argue is a more complicated picture under the surface. You've got concentrated growth, record household equity exposure, and a bond market that could represent a volatility test for the stock market. At this stage, our message is actually fairly simple. We think the bull case and the bull market is worth respecting, but we also think this is a moment that rewards careful risk management, not complacency. Thanks for tuning in.

[Disclosures and Definitions are displayed]