The Bluestone Edge - August 2026 Market Report

Introducing The Bluestone Edge - a new take on a conversation Adam Weingartner has been sharing with clients for years.

Now, for the first time, we’re bringing it to a bigger table.

The Bluestone Edge takes a thoughtful look at what’s happening in the markets, the trends shaping the economy and, most importantly, what may be coming next. Adam will also be joined by special guests to bring new perspectives and expertise into the conversation along the way.

It’s informed by more than 40 years of experience at Bluestone, but always focused on looking ahead - cutting through the noise to make sense of what’s actually worth paying attention to.

The Bluestone Edge is now available to watch on YouTube and listen to on Spotify, with additional insights and more detailed information available exclusively to Bluestone clients.

Follow along. There’s a lot worth talking about.

Transcript

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SPEAKER_01 0:00

Welcome to our podcast. I can't believe we're finally saying that. This has been in the works for a while. We're really excited about it because you don't have time to follow this stuff. You are busy with your careers, your jobs, your families, and you leave it to us. So our goal is to make sure we give you all the information you need to know about. There's so much information out there that it's really hard to even understand what's important and what's not, what to follow. We want to make this just the same experience as if you were in here talking to us in a review meeting. With that being said, let's dive in a little bit. So you might understand that we make decisions here at Bluestone as a committee. The investment committee meets quarterly. There are 10 of us. It's made up of all the advisors, all the sort of analytical people on the team. We take in information from all over the industry. So all the firms we work with have lots of data, have lots of resources that, of course, they want to put in front of us. And it's just an effort of bringing it all together, putting our own spin on it, and making sure that it meets what we're trying to do. Today I think it'd be a really cool idea to introduce kind of one of the rising leaders. He's really my counterpart in a lot of the decision making on the investment committee. So Atik has a very unique role on the team. He loves data, he loves diving into the analytical stuff. He is our deep diver. So when it comes to research, he can put really complex things together and create clarity and fit exactly what we're looking to do. We're gonna bring in Atik to say hello. So Atik, tell us a little bit about yourself.

SPEAKER_00 1:27

Hi, my name is Atiq. Uh my wife and I are from Bangladesh. I came to the States in 2021 for my MBA from the Ohio State University. I discovered Bluestone through my good friend Michelle, Adam's wife. Don't give her too much credit. I know. Adam, Adam then put me through like multiple rounds of interviews. He offered me the job. I found this team to be amazing. The role that I wanted to take on for myself and the industry I wanted to be for a long time, long term.

SPEAKER_01 1:58

You know, it's funny you mentioned that. It's actually funny the way we met because Michelle, you know, said, I've got the perfect guy. You have to hire this guy. He's the leader in the entire cohort. Everyone respects him when he talks, and he's exactly what you're looking for. So it was a blessing and just the right time, too. Oh, thanks for the good words. So the way these are gonna go, I want to start. I think we should touch a little bit on the economy, kind of some big picture things that are going on. Then we're gonna zoom in on the stock market a little bit and talk about how those things impact your portfolio, and then maybe some closing thoughts of what we can expect looking forward. But I'm gonna start today just a little bit of perspective. It is a midterm election year. The pattern we typically see, if you follow the news, you follow politics, party that's in control of the White House, generally loses seats in Congress. This year's probably gonna be no exception. The Senate is maybe a toss-up. Who could have control at the end? The House is looking extremely likely to flip from red to blue. That's gonna create gridlock. The reason we always see that pattern, by the way, is because the sitting presidential administration generally stirs up a lot of motivation for the opposing party to get in and vote at the midterm point. And that is exactly the same for both parties. No different today. What we generally see after that is gridlock in Washington, meaning you're not gonna see any major policy changes, you're not gonna see anything happening with the tax code, it's just gonna be pretty much a standstill. Company leaders really like that environment because they don't have to guess on where the goalposts are gonna be. They can just plan for their company to maximize profits. If we take a look at this chart, the typical election year returns are actually much higher than the other three years in the cycle. We're seeing the year following the midterm election on average see a 15.4% return versus all the other years only 7.8. So you aggregate all that together, it comes out to your average of about 9% or so in the market. We should be optimistic for where we're sitting just in the election cycle today.

SPEAKER_00 3:51

Uh, now let's look into the macro. Let's dive a little bit into the numbers. The growth number has slowed down to 1.5%, the labor has cooled down to 4.1%. We lost some jobs last month, and the inflation number is around 3.5%, and it's becoming stable in that in that front.

SPEAKER_01 4:08

When you're looking at the economy, it's always important to understand what part of the business cycle we're in. The business cycle typically lasts 9 to 11 years. No two business cycles are the same, but the pattern we see is illustrated here. You can kind of see there's the US in blue. That's the most relevant one to focus on, going up the hill, then down the hill. When you're going down the hill, that doesn't mean the economy is shrinking. It just means it's growing at a slower pace. So maybe we hit our peak growth number and we're still growing, but at a slower rate. The red little valley down there at the bottom, that's when you hit that recession. If we look at GDP, that's how you measure economic growth. These returns or these percentages, this isn't the stock market return. This is is the economy growing, shrinking, how much is it growing? You'll notice that 1.5%, first of all, real GDP. When you see that word real, that means it's real in a sense that after inflation has been netted out. So we have 3% inflation and 1.5% growth. We're still getting 4% nominal growth in the economy, which is not bad at all. What did we do at the end of 2025? We're hovering around high threes, low fours. That was net of inflation too. Really strong numbers. I think it was artificially high at the end of 25 because of those net exports due to the tariffs. And now it might be artificially low as we're starting to see more activity there as those tariffs are no longer in effect. We still feel good to see positive numbers. Positive numbers when it comes to the economy are always good. Etiek, do you want to touch on consumer spending here?

SPEAKER_00 5:35

Yeah. So if we uh see the underlying numbers of the GDP highlight number, there are three or four items which are the major contributors of the GDP: business investment, consumer spending, and government spending. So we see business investment is still strong, still contributing uh by more than 1% to the GDP. Consumer spending is still strong, growing by more than 3% as of the end of the second quarter. The biggest drag to the GDP number was net export. We did more import in the second quarter than we exported, and that is a good thing because we imported a lot of cheap manufacturing technologies, we imported chips, we imported a lot of infrastructure that needed to set up the industries. That's good for the economy, but because those will create more jobs, more employment opportunities for our labors.

SPEAKER_01 6:18

So we often see headlines. Oh my gosh, Oracle laid off 21,000 people earlier this year, UPS, 30,000 people, and that grabs your attention. Obviously, that's not good news, but they never tell the whole story. You're all often looking through the drinking straw. If you see one piece of data from one company and you're reacting to it, so let's just see where is the jobs market today? Those numbers I said are true. Those things did happen. The number from June, 45,000 job cuts, but that's actually 53% lower. And so far this year, layoffs are actually 40% lower than this point where they were last year. Overall, we feel good about that. When it comes to hiring, similar numbers. Hiring plans in July are 47% higher than they were in June. And believe it or not, 25% higher than they were year to date at this time last year. So layoffs are significantly lower than last year. Hirings are significantly higher than last year. Pretty good recipe for the labor market. Unemployment is down where we like it at about 4.2%.

SPEAKER_00 7:17

Now let's focus on the Fed because that's one of the biggest drivers of the market and the economy. So if we look into the chart, CME Fed Watch tool, we see that there is 72% chance of rate hike in September. There is another 60% chance of hike in October, 42% chance of another hike in December. Which means that the leading event is gonna be two hikes by end of the year, but that totally depends on the inflation trend because the labor number has somewhat stable around 4.1%, and that's probably good enough for the break-even growth rate of the economy. Now it all comes down to the inflation number. We know that the inflation number, we think that a major part of that number is kind of war-driven uh energy pressure. So if we see uh some good news, uh some kind of positive things happening in the war front, then we feel like that inflation number might might come down at a pace than what we expect.

SPEAKER_01 8:08

Worth noting, we've got a new chairman of the Fed in place, Kevin Warsh. He's getting his feet wet. We'll see how he does. His MO coming in to this role, his reputation before this was not very dovish, not so much of a rate cutter, which is surprising considering he was appointed by President Trump who wanted to cut rates. If you missed that. Don't forget, Jerome Powell, former chair of the Fed, is still on the board. He has a big voice. He has his followers that are on the board that are going to listen to him. It's not like there's an entirely new regime in play that can, it's gonna be a complete wild card. I think Jerome Powell did a pretty good job of bringing inflation down from nine to three without throwing us into a recession, hardly ever been done before. That soft landing, we pretty much got it. So happy he's still there. Hopefully, the Fed continues to do a good job, I guess.

SPEAKER_00 8:55

All right, so if you summarize about what's going on in the economy, the GDP number has slowed down to 1.5%. We are not overly concerned about it. Unemployment number has come down to 4.1%, which is good. Inflation number has become somewhat stable around 3.5%, but we believe a major part of that is war-driven energy pressure. So we feel like that'll also come down the pace more than we expect if the war ends.

SPEAKER_01 9:16

Worth noting that there is an inflation reading coming out tomorrow. Today's August 11th, and we're filming this, so we'll see what that looks like. It is lower, the expectation is much lower than where it is previously, though. So hopefully we get good news there. All right. Thanks, Atik. Thank you. Okay, so economy pretty good shape. We're gonna shift now, move over to phase two, and talk about the market. Who better to bring in than our founding partner, Rick Martin? It's his favorite topic. Can't wait to hear what he has to say. Okay, so now we're ready to talk about the market, ready to dive in. I've brought Rick in, of course. And the number one thing we're always gonna look at, you've heard us say it a million times in meetings. If you told us there's only one piece of data we can look at to forecast the market, it is earnings. Because yeah, the market's at all-time highs or it's near all-time highs. If companies are making more money than they've ever made before, it should be at all-time highs. So, where are we with earnings?

SPEAKER_02 10:03

We're midway through the earnings season, and I think we're about 86% of the companies have reported better earnings than what their estimates were.

SPEAKER_01 10:12

So 86, 87% have outperformed their number. Obviously, it's a great result to this point. What's leading the way, believe it or not, healthcare, 96% of companies have outperformed energy at 95%, with rising oil prices. That's certainly been a tailwind for them. Technology still, I mean, 93.3% of companies out technology has been driving the market, not only, you know, the last two years, probably the last 10 years. We've been looking for that rotation from growth over to value for some time. Even though these companies are still making so much money, we are starting to see a rotation, and we'll get to that in a minute here. Earnings growth in the entire market is about 30% between what we've already seen first and second quarter and what we're on track for for the rest of the year. Not a number we see very often. And clearly you're gonna see the market climb because of it.

SPEAKER_02 11:00

Unfortunately, the dichotomy in that whole discussion is the Mag 7. What has carried us for the last two to three years? It's now coined the lag 7 for the month of June. The Magnet 7 was actually down 13% for the month, actually, not for the year.

SPEAKER_01 11:15

Believe it or not, if you look at what segments of the market have delivered the most returns this year, large growth, that's where you're gonna find all these big tech names, those Mag 7 companies, has attributed zero return. The SP at the time this is being shot is up about 10 or 11% for the year. Zero has been attributed to that Magnificent 7. Large value, on the other hand, that's where you're gonna find your banks, your utilities, financials. That sector is up over 20% year to date. It's something that, I mean, we should talk about. We've been talking about seeing this broadening coming. It's it's been all Mag 7 for the last, you know, several years. Now it finally looks like it's starting to happen. Fortunately, we were positioned to cover that. Overweight in growth last year, overweighting value this year. We're not gonna keep getting it right just like that every year, but can enjoy what we've been doing so far this year.

SPEAKER_02 12:02

Just for your information, the large growth will be your technology stocks. We've always talked about those. The large value would be your big banks, your utility companies.

SPEAKER_01 12:11

A little historical perspective on earnings. This slide goes all the way back to 2001. Those diamonds that you see, that's the earnings growth number for a given year in the SP 500 in aggregate. We're coming off of five consecutive years of new all-time highs in earnings. Naturally, the market's gonna follow suit. But what are we seeing specifically in 2026? We've already had the first quarter report most of the way through the second quarter, and then we're taking consensus forecasts in for the third and fourth quarter to show us that we're looking at a 30% growth on top of last year's all-time highs. If you look backwards, we only saw that much growth through other years, and those two years were coming out of recessions. This is kind of a rare thing we're seeing right now. It's also worth noting that the next two years are also double-digit numbers. So if earnings continue to grow, we should expect stocks to grow as well.

SPEAKER_02 13:00

Everything we hear is that the second half of the year, while going to be more volatile given midterm elections, there are plenty of tailwinds that should give us more returns in the near future. And Adam, I just wanted to bring up the 30% growth in earnings. How do you attribute that to rate of return of the SP?

SPEAKER_01 13:20

Well, that's an interesting question. So historically, the earnings number grows about 7% per year, right? So getting 30% earnings growth, that's four times what it traditionally is. Obviously, that's good news. But how do I attribute that to the return of the SP? It's always a function of the multiple. So that leads us into the valuation. Where is the PE ratio, the price to earnings ratio of the market? You always have to be mindful of that. Coming into the year, I guess in February, the peak before the conflict with Iran started, 23 times earnings. The historical average is about 17. So the market's really expensive at that point. It pulled back a little bit, but then it's since charged on to all-time highs again, again, again. And guess what? That number dropped to 20 times earnings. So even expensive market, you can still make double-digit returns in the in the stock market because maybe earnings is gonna grow even faster. And that's exactly what we've seen. It's a nice, and maybe it's a cautionary tale of hey, don't live and die by that PE number because you never know, maybe things are trading at a premium for a reason. In addition, don't live and die by the earnings estimate.

SPEAKER_02 14:23

30% seems impressive. As we all know, things can happen along the way. It wasn't just two to three months ago the market was down nine percent. A year ago, the market was down 19%. So we talked about that before. The traditional or the historical drawdown each year is over 14%. Knock on wood that we haven't had that yet this year, but still got five months to go.

SPEAKER_01 14:46

So, one more big thing that we we came into the year talking about a lot was the concentration level in the market. And we touched a little bit on the Mag 7 and valuations. The top 10 companies in the S P 500 makes up almost 40% of the SP 500. That means there's 490 other companies that are sharing the other 60, has not been that high very often, almost never, in fact. So, what historically happens when we see a high concentration level like that? The other 490 tend to outperform the top 10. Our portfolio has been positioned to benefit from that. We love the broadening we've been seeing in the market. The SP was beating the Dow by 5% at one point this year. The Dow is caught up. The Dow is gonna be more of a broad look. It's not heavily weighted based on what companies are the biggest. Seeing that come to fruition has been kind of cool. It's still pretty heavily weighted, though, toward those top 10. So we expect that trend to continue.

SPEAKER_02 15:38

Well, as always, this is a little new for us. This little podcast, we'll call it. To our Blue Stone clients. Obviously, as we learn more, you'll certainly be the first to hear from us. And if you have any questions on this, certainly reach out. We'll be glad to explain in more detail.

SPEAKER_01 15:53

All right, get out of here. Okay, so we covered a lot, a lot of positives. We're also here to remind you that it doesn't always happen exactly the way that you think it might happen. So look at the last couple of recessions. They were completely out of nowhere. COVID happened, we shut the entire economy down. That's not something that could have been forecasted. The financial crisis back in 2008, that was a deeply rooted systemic problem that not a whole lot of people were aware of. It was a shock to the system. So if we're looking at, oh, war with Iran, inflation, these are the kind of things that are already baked into the cake. People already know about that stuff. The risks are built in. What could be the cause for the next recession? Could it be some sort of hack to the power grid that causes chaos? I mean, there's so much potential with maybe an AI disruption that accelerates things faster than expected and got challenges in the labor market. We really don't know what it's going to be. There will be something. So here's where I think the most important part of portfolio management is in clear communication and understanding what you own. If we do our job the right way, there shouldn't be any huge shocks just when your portfolio reacts to whatever's going on in the world. Make sure even though we're saying, hey, the things we can forecast look really strong, that doesn't mean it's a guarantee. Anything can happen anytime. So we always tell people the best time to fix the roof is when the sun is shining. If you're in good shape, but maybe you're getting close to those vulnerable years, early retirement, it's a pretty good idea to maybe bring things down a notch while we're at all-time highs versus after we already see the market go down 15% and then you get uncomfortable. Stay grounded, keep that in mind. But we're also here for you if you have any thoughts, questions to our clients. We're always looking forward to sitting down with you. But let me know if there's anything we can do to clarify any of the stuff you you saw or heard today. If there's anything else you need at all. Thanks so much.