Halftime Report 2026: Staying the Course

In this episode of Built to Last, Wade Lopez and Gary Aiken discuss the mid-year market review, covering GDP, inflation, Federal Reserve policy, market resilience, bonds, energy, valuations, and key risks for the second half of 2026. They emphasize staying disciplined and trusting the long-term plan amidst macroeconomic complexities.

Transcript

Announcer 0:00

Views expressed are solely those of the speakers and do not represent this show or its team.

SPEAKER_02 0:05

We've seen geopolitical disruptions, we've seen tariff uncertainty, we've seen mixed economic signals from the Fed. You know, the market did not hand anything to anybody this year. It has not been easy.

SPEAKER_01 0:20

Welcome to Built Alast. This episode will be what we call our halftime report. I'm Wade Lopez, and I have with us our Chief Investment Officer, Gary Aiden. Gary, how are you today? Doing great, Wade. Great to be here, and we've got a lot to cover. Yes, we do. You know, we're midway through what has been a complicated and noisy and quite frankly, fascinated here in the market. We want to slow it down, make sense for everyone, and talk about what it means for their financial plan. So, Gary, I guess the question for me is you know, when we look at GDP, inflation, the Fed, what's happening in markets, and what we think it all means is we head into the second half of the year. We're going to walk through our halftime record slide deck. That's going to include GDP, inflation, the Fed, what's happening in markets, and what we think it all means as we head into the second half of the year. So let's get into it. GDP inflation forecast. Gary, six months in, give me your honest read. Where does the economy actually stand?

SPEAKER_02 1:39

You know, there were a lot of concerns uh on Wall Street about what 2026 was going to look like. And uh we said that we thought that 2026 would look a lot like 2025, uh, and that GDP uh would be about two to two and a half percent, and inflation would be about two and a half to three percent. And uh when we look at this chart, which is uh the GDP and inflation forecast from the Atlanta Fed, uh, you can see that right now we're right around those numbers. And so we've had a good first half of the year with solid growth in the United States and uh rising inflation, uh, mostly due to the uh to the rise in oil prices uh relating to the to the war in Iran. But uh, you know, generally within a decent range. Uh, and so the U.S. economy is in is in good shape.

SPEAKER_01 2:33

So the growth number is positive, inflation is trending in the right direction. That's a better headline than a lot of people were writing at the start of this year.

SPEAKER_02 2:42

Yeah, I think so. And uh that's the way we're framing it for our clients, right? The economy is not in crisis. Um, and uh, and we should expect that uh that with the economy not in crisis, that you know, that should be a good environment for stocks and bonds.

SPEAKER_01 3:01

So let's let's talk about incomes. And when we do that, let's go to a level that's a little deeper because I think this is where clients live. Coolant inflation is good news, but it doesn't erase the cumulative pain people have already felt. We talked about the K-shaped economy on this show before. What does that data actually tell us about working families right now?

SPEAKER_02 3:26

Yeah, working families are struggling with higher prices, that's for sure. And we've talked about that. That the that the accumulation of inflation is the real problem, not the rate of inflation today, although that that has become more of a problem with 4.2% inflation in the most recent uh print. Um, but uh but what we're seeing is that if we look at a long-term perspective like this chart that shows uh, you know, uh US personal income excluding transfer payments. That is, if we exclude people on Social Security, Medicare, getting uh benefits from the federal government, you know, W-2 income employees, their incomes have not kept up with inflation for at least the better part of two years. And uh that is starting to bite when they make financial decisions and when they make decisions even at the grocery store. Um, you know, for individuals who have stocks and bonds and large investment portfolios, they've done great because the markets have been up. Uh, but for but for those who are working families who are dependent upon their W-2 income and maybe not as dependent on credit, um uh, you know, it's been a tough situation. And so uh it's not all a rosy picture. Uh and so we we need to we need to keep that in mind when we're looking at sectors. Absolutely.

SPEAKER_01 4:54

You know, I see this firsthand with clients. There's a gap between what the poor the portfolio is doing and how the client feels. So, Gary, how does that emotional tension show up in investor behavior?

SPEAKER_02 5:05

You know, it it shows up in investment behavior with uh with investors, especially uh, you know, when we look at things like the consumer sentiment index being negative, that um that you know, folks think that inflation will be high for longer. They think that the economy is maybe doing a little bit worse than it is, and then they want to portray, then they want to take that, you know, feeling and impute that on theirs their investment portfolios. And what we're saying is that the market is a lot different than the economy. And so when we take a look at how we want to be invested, uh maybe we can be a little bit more bullish than some of these income figures would make us want to be.

SPEAKER_01 5:49

And that's really the heart of what we do for our clients, our jobs to be that steady hand, right? To anchor them to their plan. You know, we seem to pull them in a direction, it's not their long-term interest. That's what built last means to us, right? So let's move into Federal Reserve policy now. And I know there's you know, we just had a previous show on that, but Gary, let's get into the Fed because this is the number one question I hear from clients rates, timing, what does it all mean? Walk us through where this thing stands.

SPEAKER_02 6:23

So inflation has been rising during the first half of 2026, and really it started rising sort of uh in the summer of last year. Um, and uh, and at the same time, the Fed was was cutting rates. They've kept rates on hold for the for this year, as we as we said that they would, right? Our our initial view in our forecast was that the Fed would cut rates, but it probably wouldn't be until the second half of 2026, and maybe even you know late in 2026. Um, I think that's still intact, but what we've seen is that inflation, the solid line here, and uh the Fed's primary inflation gauge, the core PCE uh inflation is going up and it's getting closer and closer to the Fed's current policy target. So inflation, core PCE inflation is three and a half percent. The Fed's uh target policy rate is 3.6. So the Fed is actually becoming less um uh the Fed is becoming less restrictive over time. They don't mean to be, but they are. They're becoming less restrictive. And so you would think that if they wanted to uh get inflation under control, one of their policy tools would be to increase rates so that they would become more restrictive. Um, so uh, you know, I think that's the uh that's the base case that we've got to think about when we think about next year, which is or or the rest of this year, which is that inflation is gonna be a primary component and interest rates may have to stay where they are for longer.

SPEAKER_01 8:08

So I just heard you say that rates staying higher for longer is still the base case. Is that correct?

SPEAKER_02 8:17

That is the base case. And what that means from a practical environment is that we want fixed income portfolios to pay out at a higher current yield. We want to be short duration, uh, like we have been, and we want to make sure that we're we're limiting the volatility while maximizing current yield.

SPEAKER_01 8:37

And for clients who've been patient, who stayed invested, who stayed the course, right? They are the ones positioned the benefit from where we go from here. So let's talk about markets and strategy. Let's shift to you know, what's going on in the first, you know, the first half of 2026 has been a story of resilience. It's been a straight line, right? Kind of and so set the scene for us.

SPEAKER_02 9:05

Yeah. I I would say it's been anything other than a straight line. Uh, you know, for for you know, this has been a year where you have had to earn your return. And uh, you know, we've seen geopolitical disruptions, we've seen tariff uncertainty, we've seen mixed economic signals from the Fed. Uh, you know, the market did not hand anything to anybody this year. It has not been easy, but investors who have been disciplined, who have not panicked, and who did not try to time things have captured uh gains that have accrued to investors this year.

SPEAKER_01 9:45

Right. And you you you constantly say it's going to be a grind, even named it the grind, but just because it feels difficult doesn't mean we should get out of the market, right?

SPEAKER_02 9:55

Yeah, that's exactly right. You know, this this means uh you know it's not going to be a scenario like 2021 where everything went up and it felt easy, or 2022 where everything went down and it felt difficult. Um, this is this has been a grinding higher market, and that's what the grind is. It's a it's we think that markets are going to grind higher. And what we've seen this year is that, you know, for the first half of 2026, uh, we've seen that global stocks have been up about 10%, the SP has been up about 8%, um, and uh small caps have been up 20%, and uh international stocks have done about 12% returns. So despite the geopolitical crises around the world, despite oil prices, despite all the headlines, you know, markets have done uh a fairly good job of digesting that and focused on uh the actual strength in the global economy.

SPEAKER_01 10:55

Our thesis has been consistent. Stick with it, stay invested, trust the plan. And I want our clients to hear that message clearly. The grind is real, but the grind rewards the patient.

SPEAKER_02 11:07

Yeah, that's exactly right. The the returns on this uh slide uh look look terrific, and they they are, um, but uh, but it has not been easy. And uh and so and I don't think that it necessarily needs to be easy uh for it to be worthwhile and to stick with it.

SPEAKER_01 11:26

Let's move on, you know, to the bonds and the yield, and let's talk about you know my my favorite discussion, bonds, which you know I'm I'm passionate about not talking about them most of the time, but we have to, and the yield curve is one of those things clients hear us talk about, but don't always fully understand it. Not that I ever do either, but bring it down for us. What shifted and why should people care?

SPEAKER_02 11:54

You know, Wade, I know you secretly love bonds and uh love them. That can that can only be the reason why you say you you dislike it. Um, but you know, what what this chart is showing is the yield curve at the beginning of the year, and the yield curve is the rate of return on various treasury bonds from three months out to 30 years. And so we look at that and we we see that you know, we thought that potentially at the beginning of the year that that the curve would steepen uh further as short-term interest rates uh went lower. Well, inflation surprised on the upside, and so what happened was a little bit different. Interest rates on the high end of the curve, on the long end of the curve did go up, right? 10-year yields went up, 20 year yields went up, and 30-year yields went up. But the two-year, the five-year, the three year all went up as well because inflation expectations uh got baked in a little bit higher. And so, um, so it, you know, it's been a tough year for bond investors. The bond indexes are are basically flat to maybe up one percent on the year uh so far. And so it's been a tough year for bond investors.

SPEAKER_01 13:14

Well, who didn't turn or clients can feel what what does a higher flatter yield curve actually mean for someone's financial plan? You know, it it means a couple of things.

SPEAKER_02 13:26

First is if you are uh depending upon current income, you know, you don't have to take a whole lot of risk. You can go out to two years and you can get four percent um or or more on your money. Um, and uh that means that you don't have to take a ton of ton of risk to earn some current income uh to support your lifestyle. Um that's a positive. Second is the borrowing costs uh for business loans, for consumer credit, you know, they do remain elevated. And that's somewhat of a headwind for future economic growth. Um and the and the third is it's a reminder that the interest rate environment that we build portfolios in is one where we are thinking about this idea of building to last. Uh and and you know, fundamentally the bond market has has changed. Uh, you know, and so we're making sure that we're positioning accordingly.

SPEAKER_01 14:22

Yeah, and you've done a great job doing that, especially on keeping us in a, I would call it a conservative holding pattern. So uh, you know, and to me, this is where having a comprehensive plan mattered because how you hold fixed income, how you think about duration, how you balance your portfolio, all that had to be calibrated where rates actually are, but not where they were, right? So let's shift over a little bit and let's talk about energy. You know, you and I talked a lot about the geopolitical picture this year. It seemed like every day. Energy is special, right? Oil has been all over the place. What are we watching? And what does it mean for the second half of this year?

SPEAKER_02 15:06

Yeah, the price of oil is very important to global trade and inflation. And the main question is you know, is this war in Iran really over? Uh, is the Strait of Hormuz really going to open? Have we found enough workarounds, whether it's pipelines or demand destruction or shifting supplies from the Middle East to the US and other places? Um, you know, are we done drawing down our our uh strategic petroleum reserves around the world? And what we can see is that during the first half of the year, uh, you know, oil spiked higher. It didn't get to the point it was during the peak of the Ukraine war. And you can see that that's the the dark blue line is the price of oil in West Texas intermediate. And um, and what we can also see is that, you know, once the ceasefire was announced, oil has dropped uh precipitously. And now with this MOU in place, uh, oil has come all the way back down to about $70 a barrel. Um, and so uh, you know, the price of oil, the price of gasoline, the price of jet fuel imputed into inflation is backward looking. And so, to the extent that, you know, oil stays here around 70 or maybe even drifts a little bit lower, um, that will mean that future inflation will also be lower. And uh, and that can be a tailwind for markets, uh, despite, you know, as opposed to being a headwind for markets in the first half of the year.

SPEAKER_01 16:44

Yeah, and the trade piece is connected. Global supply change, energy policy, tariff policy, they all interact, right? This is not background noise, real input into where inflation goes in the second half, which feeds back in the Fed policy, which feeds back in the markets.

SPEAKER_02 17:01

Yeah, that's exactly why we manage portfolios with a comprehensive macro view. Um, you know, we're not just looking at stock charts, but we're trying to understand the fundamental picture from a global macro perspective down to uh countries and sectors and individual securities.

SPEAKER_01 17:21

Yeah, let's uh let's segue that right into valuations, right? I like this topic because this is where I get a lot of questions from my clients about hey, wait, is the market too expensive right now?

SPEAKER_02 17:36

Uh the honest answer is that the market has gotten a little expensive again. Um, and but we have been here before. Um and uh and the you know, valuations do matter, right? We should see uh we should see a response to high prices being, you know, high prices. Uh, you know, the in in the oil market, for instance, there's this old adage, the the uh the cure for high prices is high prices. And so uh markets will tend to uh tend to you know find these high levels and then find a reason to sell off a little bit, some profit taking or something that's uh uh something else in the in the short term. But over the long term, what we see uh you know, this the solid blue line is the forward earnings expectations. What we see is that forward earnings expectations are actually uh pretty well well contained. Um, that uh the the S P 500 is trading at about 20 times forward earnings, and uh the you know the rest of the world market is trading at about 14 times earnings. So uh, and we think that earnings growth uh is is real and and believable here. Um, and uh, you know, the the global economy is in good shape, oil prices are coming down, uh, that should lead to more trade, that should lead to and the uh the global AI boom is still in place, and a number of other you know, infrastructure items are gonna lead to to higher growth. And so, you know, if those earnings materialize, you know, we think that we can continue to grind higher, despite uh, you know, the SP being close to, you know, its uh, you know, top of its valuation range.

SPEAKER_01 19:20

Yeah, but the market being expensive for good reason doesn't mean there's no risk, right? So as our chief investment officer, what's keeping you up at night?

SPEAKER_02 19:28

Yeah, I see three big risks uh to the outlook. Uh one risk is that earnings uh disappoint. Right. Um, you know, if companies can't deliver on what the market is expecting, you know, we could see a correction. That's always a risk in a high multiple environment, which is why we're not chasing momentum right now. We're focused on quality, we're focused on companies with durable earnings power and on portfolios that can absorb uh that volatility. Um, another risk is that inflation gets out of control. Maybe this, maybe this reprieve in oil prices uh, you know, is is very short, short term and oil prices spike again. Maybe the underlying inflation in the economy from the AI boom uh continues to make core inflation sticky. Um, and so uh interest rates maybe have to continue to go up, both in the short term and long term. Um, those kinds of things uh will will definitely impact uh discounted cash flows and valuations. And so that, you know, inflation and interest rates are always an important risk. And then and then finally, uh geopolitics is the other elephant in the room. Um, you know, we're we're ending June 2026 with a fragile ceasefire and negotiations in Iran, uh, low global uh oil reserves, uh, Ukraine on the edge of having the upper hand against Russia, uh, and important elections coming up for the US, UK, Israel, among others. And the second half of 2026 is going to be anything but boring. Uh, so geopolitics is always an important risk uh for market fluctuations.

SPEAKER_01 21:15

The right limbs for the second half of 2026 is built to last, right? It's uh that's what we're doing here. And so let's let's land the plane as we head into the second half of 2026. What is the message you want clients to carry with them?

SPEAKER_02 21:32

You know, I think the the message we want to stay with clients in is uh stay the course, trust the process. The economy is growing, inflation is going to start moving in the right direction. Uh, earnings are continuing to rise. So this is not a time to abandon discipline or give in to uh your uh fears, especially as we get into the silly season of elections. Uh, it's a time to be rewarded for taking prudent risk.

SPEAKER_01 22:02

Yeah, I couldn't say it any better. Halftime report for 2026 is this. We grinded higher even while the macro was complicated, investor center was fragile, but clients who stayed anchored to a comprehensive plan, who tuned out the noise, who partnered with the fiduciary team, those are the investors who win in the long run. Did this episode raise questions about your own clan? We want to hear from you. Reach out to your advisor, Concord Well Partners. We'd love to have that conversation. Thank you for listening to Built to Last. Gary, pleasure as always. Looking forward to a great end of 2026, Wade. That's fantastic. And we'll see you next time on Built to Last.

Announcer 22:48

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