Well, that’s a wrap on the first half of 2026. After all the handwringing this spring over the Middle East, oil prices, and the Fed, the S&P 500 closed the first six months up 9.6% (excluding dividends), and it did it in style. The index’s second-quarter gain of 14.9% was the best Q2 in a midterm year we’ve ever seen and the fifth-best Q2 of any year since 1950. Not bad for a quarter everyone was supposed to hate.
So Much for the Worst Quarter of the Cycle
If you break the four-year presidential cycle into 16 quarters, Q2 of the midterm year has historically been the single worst of the bunch for the S&P 500, down 2.8% on average and higher less than half the time. This year? The index soared roughly 15%.
A Big Q2 Should Have Bulls Smiling
A monster quarter like this often begets more strength historically, not less. We found nine other times the S&P 500 gained double digits in Q2, and the forward numbers are about as good as it gets: Q3 was lower only once, and Q4 was never lower. Even better, the final six months of the year averaged a gain of 11.7%, more than double the 4.9% you get in an average year. Big up quarters aren’t something to fear. Historically, they’ve been a sign that the trend has legs.
July Is Here, and It’s Been on a Heater
Can you believe the year is already half over? More good news for the bulls: July has become one of the best months on the calendar. The S&P 500 has been higher in July an incredible 11 years in a row, and thanks to that streak, no month has a better average return over the past 20 years. Even the first trading day of July has historically been one of the better single sessions of the entire year. Pick your reason, but July has been especially kind under President Trump, higher all five times (five for five) for an average gain of 2.9%.
The Sweet Spot for the Rest of the Year?
We flagged this one last year, and it worked, so we’re running it back. When the S&P 500 is up between 5% and 10% year-to-date at the midpoint of the year (right about where we sit now), the second half tends to do quite well. It’s not the strongest setup in the world, but it’s far from weak: The worst full-year outcome from here was exactly flat (2011), so a large decline from these levels would be historically rare. Not too hot, not too cold. Just another reason we’re comfortable continuing to ride the wave in 2026, while staying diversified for whatever the second half decides to throw at us.
Focus on the Big Picture: The Labor Market Is OK & Households Are Spending
Every so often the data throws bit of a curveball at you, and that’s essentially what the June payroll report did. But that’s also a cue to take a step back and focus on the big picture. Right now, the big picture is that the labor market is in fine shape. That’s good for the economy, but it also sets the Fed up to focus on the inflation side of their mandate. Yet, despite the hawkish pivot in the Fed’s dot plot (the median official out of 19 now projects a rate hike in 2026), we don’t think the votes are there for a hike right now (only 12 of the 19 members vote at any given meeting). A bare majority of the voting members are likely in favor of looking through inflationary pressures. However, that also means that monetary policy is relatively dovish, since policy rates for now remain unchanged even as inflation stays elevated. That’s a tailwind for stocks.
June payroll growth disappointed, with the economy creating “only” 57,000 jobs last month. We use quotes there because in 2025, monthly payroll growth averaged just 10,000. Perspective is everything. Of course, these numbers can get revised, and even in this report we saw big revisions: April payrolls were revised down by 31,000, from +179,000 to +148,000, and May payrolls were revised down by 43,000, from +172,000 to +129,000. That’s why the three-month average is a better gauge of where things are, and right now it’s running at 111,000 (this would be for the second quarter). That’s a pickup from the first-quarter average of 73,000 and the fourth-quarter (2025) average of -39,000. Safe to say, things have gotten better.
The revised April-May numbers, combined with the reduced pace of payroll growth in June, make more sense. Given the labor supply issues amid the immigration slowdown, the unrevised average of 176,000 jobs in April-May seemed a little too good to be true. It implied much more labor market re-acceleration than is likely the case. Another way to see the labor market stabilization in the job growth is to look at the year-over-year pace: Payroll employment is 0.4% higher than a year ago. That is well off the pace from a couple of years ago and the 2018–19 pace of 1.4%, but the good news is that the line is no longer falling. Things seem to have stabilized, albeit at a relatively low pace, but that’s probably because there’s a lower supply (so fewer workers are available to hire).
Other parts of the payroll report also point to a healthy labor market. The unemployment rate—one of the best indicators for the labor market and the economy—eased to 4.2% in June. It’s the lowest level we’ve seen in a year, and as you can see from the chart below, the increase we saw in 2025 has been entirely reversed now. Keep in mind that an unemployment rate of 4.2% is near historical lows—it just looks elevated relative to recent history, when the unemployment rate plunged to 3.5% in mid-2023. What’s incredible is that that the unemployment rate rose in 2024 but then stabilized (after a brief hiccup in mid-2025). Historically, when the unemployment rate starts to rise, it keeps going until we hit a recession.
Another piece of good news is that AI doesn’t seem to be impacting job prospects of young workers just yet. The unemployment rate for 20-24-year-olds eased from 7.2% to 7.1% in June, well below the recent peak of 9.2% we saw last fall, and in line with what we saw back in 2023 when the labor market was running hot.
Wage Growth Not Keeping up With Inflation, but Consumers Still Spending
The wrinkle in the data is that wage growth (as measured by average hourly earnings) is running on the softer side. Wages are up 3.5% from a year ago and rose at an annualized pace of 3.1% over the last three months (Q2), more or less similar to the 2018–19 trend of 3.2%. The problem is that inflation is running hotter now. Headline inflation (using the personal consumption expenditure metric) is up more than 6% annualized over the recent three months through May. Easing gasoline prices may help, but even core inflation (excluding food and energy) is running near 3.5%. All this to say, households aren’t seeing any “real” (inflation-adjusted) wage growth.
What’s interesting is that despite inflation eating up wage gains, consumer spending is still strong. Personal consumption surged at an annualized pace of 6.9% over the recent two months for which we have data (April-May), above the 2023–24 trend of 6.4% and well above the 2018–19 pace of 4.0%. Of course, that’s in large part due to higher prices, but it gets to the fact that consumers are willing to pay up. Once you adjust for inflation, “real” consumption is still up 1.6% annualized over the past two months. That’s below the robust 3.0% pace we saw in 2023–24, but not far below the 2.2% trend we saw in 2018–19.
Real spending is what matters for real GDP growth, but we live in a nominal world, and nominal spending (along with nominal GDP) is what matters for company revenue and profit growth. In fact, higher prices are partly a result of companies expanding margins to boost profits. That’s not great for consumers, but it’s good for the stock market. The fact that consumers are willing to boost consumption, partly by saving less, tells you that households believe their personal balance sheets are in good shape. Of course, a rising stock market is a big part of that, and for now, it looks set to continue.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly traded companies from most sectors in the global economy, the major exception being financial services.
The views stated in this letter are not necessarily the opinion of Cetera Wealth Services LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete.
9007132.1-0726-C
