Markets spent the second quarter rewarding strong fundamentals rather than reacting to headlines. US large-cap, US small-cap, and international equity markets all produced double-digit returns, with US small-cap stocks posting their strongest first half of the year in more than three decades.
Corporate earnings remained the primary driver of market returns. It is unusual for Wall Street to raise earnings expectations as the year progresses. This year, it has done exactly that. Expectations for S&P 500 earnings growth have increased from the mid-teens at the start of the year to approximately 25%, helping fuel another quarter of strong market returns. The second quarter served as another reminder that, over time, markets tend to follow earnings rather than headlines.
Investment Strategy
Today’s market presents a balanced set of opportunities that support maintaining our long-term strategic allocation. US equities continue to benefit from exceptional earnings growth, while international markets offer more attractive valuations and valuable diversification through different industry exposures. There are compelling reasons to own both US and international equities and we do not see sufficient evidence to justify a meaningful shift to overweight one over the other.
We remain constructive on bonds. Current yields continue to provide an attractive level of income and support favorable long-term return expectations. However, we would need greater confidence that interest rates are likely to decline meaningfully before overweighting bonds, as today’s environment of steady economic growth and inflation above the Federal Reserve’s target is unlikely to produce a significant drop in rates.
Within our US equity allocation, we continue to maintain a modest tilt toward value stocks in both our large and small cap holdings. This leaves our portfolios slightly underweight the largest technology companies relative to our benchmark. This positioning reflects our emphasis on improving risk-adjusted returns and reducing concentration risk within portfolios. While this approach could lag if a handful of large growth companies continue to dominate market returns, we believe the tradeoff is justified by the benefits of maintaining a more diversified portfolio over the long term.
Outlook
The key question for investors is whether today’s strong earnings environment can continue. Rather than trying to predict the next market correction, we believe it is more helpful to focus on the conditions that have historically brought bull markets to an end. Historically, those conditions have been an economic recession or an earnings recession. Today, we see little evidence that either is developing.
The US economy continues to grow at a healthy pace, with GDP expected to expand by roughly 3% in the second half of the year. Much of that strength is tied to continued investment in artificial intelligence (AI), which has become an increasingly important driver of business spending and economic activity. The labor market also remains supportive. Hiring has slowed from the rapid pace seen over the past few years, but layoffs remain limited, resulting in what we describe as a “low-hire, low-fire” environment.
Inflation remains the primary challenge. While easing energy prices should help reduce some recent inflation pressures, AI-related capital spending is creating new sources of demand, from higher electricity consumption to rising semiconductor and memory costs. As a result, inflation is likely to remain above the Federal Reserve’s 2% target for longer than many investors anticipated.
Our constructive outlook for stocks ultimately rests on one factor: corporate earnings. Earnings continue to exceed expectations, supported by broad-based business investment and continued demand for artificial intelligence (AI) technologies. While AI-related companies account for much of the market’s strongest growth, earnings momentum extends well beyond a handful of technology leaders. The median company in the S&P 500 is still expected to grow earnings by roughly 13% (7% is the long term average), suggesting that profitability remains healthy across a broad range of industries. Given the combination of solid economic growth and healthy corporate profits, we believe the risk of either an economic or earnings recession remains relatively low over the next 12 months.
Artificial intelligence is no longer simply reshaping the technology sector; it is increasingly influencing corporate earnings, business investment, inflation, and economic growth. In many respects, AI has become an important driver of today’s economic expansion, which is why its continued adoption remains central to our outlook for both the economy and financial markets.
One trend we are watching closely is the increasingly K-shaped nature of the US economy. The top 20% of income earners, defined as households earning more than $175,000 annually, now account for nearly 60% of all consumer spending. Rising stock prices have disproportionately benefited these households, helping support spending despite several years of above-average inflation. This “wealth effect” has become an important driver of economic growth, but it also creates a potential vulnerability. A meaningful decline in equity markets could reduce spending among higher-income households, creating a broader headwind for the economy. While this is not our base case, it is an important risk to monitor because today’s economic expansion is becoming increasingly dependent on both healthy financial markets and continued business investment.
Our outlook remains constructive. Elevated valuations merit reasonable expectations for future returns, but they are supported by an economy on stable footing and a corporate earnings environment that continues to exceed expectations. As long as those two pillars remain intact, we believe the backdrop for long-term investors remains favorable.
About Andrew
Andrew Comstock, CFA®, is Principal & Wealth Advisor at Beyond Wealth, a fiduciary financial advisory firm in Overland Park, Kansas, dedicated to empowering clients to make impactful financial decisions. Serving the Kansas City metro area, Beyond Wealth specializes in helping wealth-building professionals and business owners navigate life transitions. With a mission to provide comprehensive wealth management services, Andrew’s proficiency lies in leveraging his background in institutional investment management to create tailored investment strategies. He provides research-driven portfolio management, focusing on helping clients build wealth for key milestones, whether it’s buying their forever home, purchasing a business, or funding their children’s education. Alongside Brandy, Andrew combines comprehensive planning with a long-term investment approach, helping clients grow their wealth while enjoying life.
Andrew began his career in institutional investment management, managing portfolios for insurance companies, pension funds, and mutual funds. Inspired by a desire to make a more personal impact, he transitioned to advising individuals directly, bringing his passion for financial empowerment to Beyond Wealth. Known for his commitment to high standards and always seeking to grow and discover, Andrew is dedicated to delivering thoughtful, tailored strategies for his clients’ unique financial needs.
Andrew graduated from the University of Tulsa with a BSBA in Finance and obtained the Chartered Financial Analyst® designation. Active within his professional community, he’s a member of the CFA Institute, Kansas City CFA Society, and the Overland Park Rotary Club. Andrew is a past president of his Rotary club, served on the University of Tulsa’s Board of Trustees, and was the National Board President of the Alumni Association at TU. He is the Investment Chair for the Catholic Foundation of Northeast Kansas. Outside of work, Andrew is a devoted Chiefs, Royals, Sporting KC, and Everton fan who loves exploring KC’s vibrant restaurant scene, especially the BBQ hotspots. With dual citizenship in the U.S. and Ireland and experience living in Switzerland, he’s an avid traveler who’s visited 37 countries and counting. Andrew is also a proud cancer survivor, a perspective that reinforces his commitment to helping families feel confident about their financial futures while embracing the present. To learn more about Andrew, connect with him on LinkedIn.
