Market Commentary

August 10, 2026

Upward earnings revisions continue to underpin stock market returns. Almost 85 percent of S&P 500 constituents that have reported June-quarter earnings thus far have beaten the consensus estimate, well above the prior 10-year average of 70 percent. Bottom-up projections for the S&P 500 Index over the next 12 months now imply year-over-year earnings growth of 23.7 percent, up from 18.9 percent at the end of June. The S&P 500’s year-to-date return of 10.1 percent breaks down to a 24.4 percentage point contribution from earnings and dividends, with a drag of 14.3 percentage points from price-to-earnings multiple contraction.

On average, the S&P 500 Index has traded sideways in the months leading up to the midterm elections. Prediction markets currently imply a near-90 percent probability that the Democrats will win the House of Representatives, while Republicans have a modest edge (54 percent) in the Senate. Either way, the S&P 500 Index has historically delivered its strongest gains in the third year of the presidential election cycle (i.e., the 12 months following the midterms), producing a median postwar return of 18.1 percent. We suspect the fear of missing out will keep the underlying bid for stocks firm in the quarters ahead.

As for portfolio strategy, we remain positive on the prospects for technology stocks. Nonetheless, AI momentum is being challenged on several fronts (e.g., “not-in-my-backyard” pushback on data centers, Chinese AI models, elevated memory prices), likely leaving the space vulnerable to bouts of extreme volatility. Financials remain a favored sector, driven by solid loan growth, a stable credit environment, and strong capital markets activity. Favorable PMI data also supports our positive view of industrials as activity broadens beyond data centers. We remain cautious on consumer discretionary stocks due to slow job growth and sticky underlying inflation.

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