Halfway through 2026, the US stock market has lived two distinct lives. The first half opened with a winter correction driven by tighter funding markets, an oil shock tied to the Iran conflict, and renewed worry about whether AI capital spending is actually generating returns. The second half has begun on firmer footing. The S&P 500 set a record close above 7,600 on June 2 before easing to 7,553.68 on June 3, and the VIX has retreated from above 30 in late March back into the mid teens.
This piece lays out where the US economy and equity market sit at midyear, what the sector internals look like, and how earnings and multiples are shaping the path ahead.
Executive Summary
The S&P 500 closed at 7,553.68 on June 3, with the cap-weighted SPY ETF returning roughly 11.7% year-to-date including dividends. The forward price-to-earnings ratio sits near 21.0x, above the 5-year average of 19.9x and the 10-year average of 18.9x, but supported by an exceptional Q1 earnings season in which 84% of companies beat estimates and blended revenue growth firmed to roughly 11.8% year-over-year.
Real GDP grew 1.6% annualized in Q1 2026 per the BEA's May 28 second estimate, revised down from the 2.0% advance reading. Government spending and exports were notable contributors. April CPI rose to 3.8% on Iran-related energy pressure. New Fed Chair Kevin Warsh, sworn in May 22, inherits a policy stance held at 3.50% to 3.75%, with the 10-year Treasury at 4.49% on June 3 and Brent crude at $97.81.
The Macro Setup
The cycle is moving, although unevenly. The BEA's May 28 second estimate put real GDP growth at 1.6% annualized in Q1 2026, revised down from the 2.0% advance reading on softer consumer spending and a larger drag from inventories. That is still a meaningful acceleration from the 0.5% rate that closed 2025, but the composition matters: government spending and exports were the cleanest contributors, partly reflecting a snapback from the late-2025 federal shutdown and elevated defense outlays tied to the Iran conflict. Business fixed investment held up but underlying private demand was less impressive than the headline suggested. The long-run trend in real GDP growth runs closer to 2.5%, so the current pace remains below historical norms.
Inflation has accelerated. Headline CPI rose to 3.8% year-over-year in April, the highest reading in nearly three years and well above the Federal Reserve's 2% target. Energy prices climbed 17.9% over the past year, the main driver behind the headline reacceleration. Core inflation ticked up to 2.8%, still meaningfully below the 2022 peak above 6%. Real wages slipped during the month, reinforcing the affordability strain that consumer surveys keep flagging.
The labor market continues to cool gradually rather than break. The April employment report showed nonfarm payrolls rising by 115,000 and the unemployment rate holding at 4.3%, well below the 5.8% long-run average since 1948. The labor force participation rate fell to 61.8%, the lowest since October 2021 and below the post-war average closer to 63%. The drop in participation has helped keep the headline jobless rate contained even as monthly hiring slows. The May employment report is due June 5 and will be a key gauge of whether that cooling is stabilizing or accelerating.
Fed leadership has changed during this stretch. Jerome Powell's term as Chair expired May 15. Kevin Warsh, viewed by markets as more hawkish, was confirmed May 13 and sworn in May 22. The Federal Open Market Committee held the funds rate at 3.50% to 3.75% at its last meeting on April 29, Powell's final, and has not met under Warsh yet. The June 16-17 FOMC meeting will be his first in the chair. CME futures markets now assign roughly a 40% probability to at least one quarter-point rate hike by year-end and roughly 22% to two hikes, while the probability of any cut by year-end has fallen to single digits. The 10-year Treasury traded at 4.49% on June 3, near the upper end of its recent 4.45% to 4.70% band. By comparison, the 10-year averaged roughly 2.5% in the decade after the financial crisis and closer to 6% in the four decades before it.
The macro picture at midyear: growth has reaccelerated off a weak Q4 2025 although the composition was less private-sector-led than the headline suggests, inflation is uncomfortably warm but not running away, and the Fed has shifted from a wait-and-see posture toward a hawkish tilt under new leadership. In that environment, the burden of any further rally falls on earnings, with policy increasingly capable of working against the multiple rather than for it.
Figure 1. US macro snapshot with long-term averages for context. Q1 GDP shown at the advance estimate; the May 28 second estimate revised to 1.6%. CPI sits above the Fed's 2% target; unemployment remains well below its 5.8% post-war average.
The Market: A Correction Inside a Bull Market
The S&P 500 closed Tuesday June 3 at 7,553.68, a touch below the all-time high of 7,600+ set on June 2. The cap-weighted SPY ETF has returned about 11.7% year-to-date including dividends. The Invesco Equal Weight S&P 500 ETF (RSP) is up roughly 9.7% over the same period. SPY now leads RSP by roughly 2 percentage points, a reversal from earlier in the spring when the equal-weighted index was meaningfully ahead. The shift reflects how sharply the largest technology names rallied through late May.
The bigger story is what happened beneath the surface. From the autumn highs through the March lows, the index drew down roughly 9% on price, but the forward multiple compressed materially and breadth was punished much harder. Roughly half the names in the broad Russell 3000 fell more than 20% from their trailing one-year highs at the trough. The VIX touched the low 30s during the March selloff and has since returned to the mid teens, consistent with a market that has digested the early-year risks rather than ignored them.
Earnings broke the slide.
Forward EPS estimates kept ratcheting higher even as prices fell, so the de-rating did the work on its own. The Magnificent Seven took the harder hit during the correction, with valuation drawdowns on the order of 30% as the AI-disruption and capex-discipline narratives flared. Forward earnings for those names did not roll over. The asymmetry between price action and earnings durability helps explain why the post-March bounce has been led by the same hyperscalers that led the selloff.
Figure 2. Forward P/E compressed from a 22.3x peak to ~18.7x at the March trough, then rebounded to roughly 21x as earnings revisions accelerated.
Sector Performance
Year-to-date sector returns through May 29 have been highly uneven, with the gap between leaders and laggards running north of 32 percentage points.
Figure 3. YTD 2026 sector returns alongside the cap-weighted S&P 500 (SPY) and the equal-weighted S&P 500 (RSP).
Energy has led the tape, up 26.8% on the back of Brent crude trading in the $95 to $115 range as the Iran conflict elevated supply risk. Brent has since pulled back to $97.81 as of June 3, taking some of the gain off the table from the earlier highs above $115. Technology has rebounded sharply, up 24.6% year-to-date as AI-disruption fears eased and forward earnings continued to track higher. Industrials at 12.8% and Materials at 12.4% have also moved into the leadership group, helped by reshoring beneficiaries and the AI-related capital spending cycle.
The laggards are equally informative. Utilities have fallen 5.4%, weighed by slow rate-base growth and dividend yields that look modest against a 4.5% 10-year Treasury. Financials are down 4.7%, hurt by a flatter curve than bulls expected and by credit spreads that widened during the private-credit scare last winter. Consumer Staples are down 3.1% as investors rotate out of defensives.
One nuance worth flagging: the cap-weighted SPY now leads the equal-weight RSP by about 2 percentage points year-to-date, a reversal from earlier in the spring when RSP was meaningfully ahead. The flip is largely a function of the sharp technology rally through late May, which pulled the largest names up faster than the rest of the index. Whether that mega-cap leadership holds or the broader rotation resumes is one of the key tactical questions into the second half.
Earnings: The Engine of This Rally
The Q1 2026 reporting season has been the strongest in years. According to FactSet, 84% of S&P 500 companies beat EPS estimates, the highest rate since Q2 2021 and well above the 5-year average of 78%. 81% beat on revenue, against a 5-year average of 70%. The average earnings surprise magnitude was 18.2%, more than double the 7.3% historical average. Blended revenue growth firmed to roughly 11.8% year-over-year as more companies reported, the fastest pace since Q2 2022.
Figure 4. Q1 2026 beat rates, surprise magnitude, and revenue growth all materially exceeded the 5-year average.
That kind of quarter has dragged consensus estimates higher in a way that is atypical for spring. Bottom-up CY 2026 EPS estimates were revised up by roughly 3.4% in April alone, lifting the consensus full-year EPS estimate to around $331 from $320. Full-year 2026 growth is now tracking near 21% to 22%. Quarter-by-quarter, FactSet has analysts looking for roughly 20%, 23%, and 21% year-over-year EPS growth in Q2, Q3, and Q4.
What is driving the strength
The first force is operating leverage. Compensation expense decelerated meaningfully in 2023 and 2024 and has stayed cool. Revenue reacceleration into that cost base translates directly into margin expansion. According to FactSet, the S&P 500 net profit margin in Q1 was the highest in more than 15 years.
The second is AI-driven productivity. A growing share of companies are quoting specific AI-related cost or productivity wins on earnings calls. The mentions are no longer limited to obvious technology names. Financial services, professional services, and software lead the conversation, with industrials and healthcare catching up. The benefits are showing up in margins more than in revenue at this stage of the cycle.
The third is hyperscaler revenue acceleration. Cloud revenue at the three largest platforms reaccelerated in Q1, and capex commitments for 2026 came in well above earlier expectations. Combined 2026 capital expenditure at Microsoft, Alphabet, Amazon, and Meta is tracking near $725 billion, up roughly 77% from 2025. Microsoft and Alphabet are each near $190 billion, Amazon near $200 billion, and Meta in the $125 billion to $145 billion range. That spending bids for power, memory, and silicon, and the orders flow through to industrials, materials, and select utilities.
The Multiple Question
The S&P 500 trades at roughly 21.0x next-twelve-months earnings per FactSet's most recent update. That sits above the 5-year average of 19.9x and the 10-year average of 18.9x. The premium reflects an environment in which the Fed is on hold but with a hawkish tilt under new leadership, earnings growth is running in the double digits, AI is contributing measurably to productivity, and the index is more concentrated in technology than at any point in the post-war era.
Two historical anchors are worth keeping in mind.
First, multiples rarely expand when the Fed is on hold. Backtests covering periods of above-median EPS growth and roughly flat funds rates show forward P/E ratios tend to compress slightly. Price returns in those windows have nevertheless been solid, with median 12-month returns near 14%, because earnings carry the load.
Second, 4.5% on the 10-year Treasury has historically marked a sensitivity threshold. Multiples have generally held up below that level. Above it, discount-rate math and rising bond volatility tend to weigh on equity valuations. With the 10-year sitting at 4.49% on June 3, the market is operating right at that threshold. The Treasury's bond buyback program and the Fed's earlier-than-expected end to quantitative tightening have helped contain back-end yields. That dynamic is worth watching closely, particularly into Chair Warsh's first FOMC.
Run your own forward-P/E sensitivity in the Analyzer's Valuation tab on any name mentioned here. Change the WACC, the terminal multiple, and the growth path — the implied fair value moves with them in real time. The model is most useful when the inputs are yours rather than the defaults.
Risks Worth Naming
Oil shock to $130+ on Brent. A sustained move driven by a real closure of the Strait of Hormuz or a wider regional conflict would push core inflation back into 4-handle territory and likely force the Fed to lean further hawkish. Brent at $97.81 sits well below that threshold, but the recent exchange of missile fire between US and Iranian forces shows the underlying tail risk has not resolved.
A genuine AI-capex discipline event. If a hyperscaler materially cut its 2027 capex plan, the multiplier effects through industrials, semiconductors, and power-related names would be sharp. The current rally leans heavily on the assumption that the $725B 2026 commitment extends — and grows — into 2027.
Private credit stress resurfacing. The late-2025 funding-market wobble was largely contained, but the underlying vulnerabilities are still in the system. Tighter funding conditions have historically marked the end of cycles.
Policy missteps. Tariff escalation, a hawkish surprise from Chair Warsh's first meeting on June 16-17, and disruptions to Treasury issuance dynamics each carry the potential to upset the current setup.
Bottom Line
The cycle sits in an early, hot phase of recovery from the 2024 to 2025 industrial slowdown. Earnings are doing the work, multiples are stretched but not unhinged, and the Fed has shifted from a wait-and-see posture toward a hawkish tilt under new leadership. That combination has historically delivered solid but not spectacular index returns, with multiples doing more compressing than expanding. Leadership has been concentrated in technology and energy through the first five months of the year, with industrials and materials joining most recently. Whether the broadening seen earlier in the spring resumes will depend in part on the path of long rates, Warsh's first FOMC meeting on June 16-17, and the May employment report due June 5.
