MICHAEL J. HALLORAN, CFA | Equity Strategist of Janney Montgomery Scott
Wyncote Wealth Management Group
Highlights for this week include:
• Small business optimism posted its best monthly gain of the year in June, as expectations for business conditions and sales improved sharply, despite ongoing inflation concerns.
• The June inflation readings are encouraging, but inflation remains well above the Federal Reserve’s 2.0% target, and ongoing hostilities in the Middle East suggest energy prices could remain volatile. The market is still assigning the highest probability to one 0.25% interest rate hike by year end.
• The major banks kicked off the second quarter earnings season with stellar results. Bank executives cited healthy consumers. Given the ongoing massive AI buildout and healthy economic readings, we expect another positive earnings season.
• While acknowledging the risks posed by the fluid and uncertain Iranian conflict, we continue to expect stocks to be supported by further economic growth and robust profits.
Small Business Optimism Shows Improvement
Small business optimism posted its best monthly gain of the year in June, as expectations for business conditions and sales improved sharply, despite profit trends slipping, and price pressures staying sticky. While June marks the fourth consecutive month that the index is below its historical average, it is now near the 52-year average. Of the 10 Optimism Index components, seven increased, and three decreased, representing a broadening of positive indicators. Uncertainty eased, with fewer owners citing doubts about capital spending plans, which rose to the highest reading this year.
When asked to evaluate the overall health of their business, 10% rated it as excellent (down 1 point), 57% as good (up 2 points), 28% as fair (unchanged), and 5% as poor (unchanged). Reports of inflation as the single most important problem rose for the fourth consecutive month in June and ranks as the top problem.
Inflation Eases in June, Driven by Lower Energy Prices
The Consumer Price Index (CPI) report showed consumer prices declining in June as energy prices moved sharply lower following a temporary peace agreement between the U.S. and Iran and a reopening of the Strait of Hormuz. The 0.4% monthly decline was much larger than expected and marked the biggest drop since the onset of COVID. Energy prices were the largest contributor to the decline, falling 5.7% for the month, driven by a 9.7% drop in gasoline prices.
Importantly, lower inflation pressure was not confined to the energy sector. Core CPI, which excludes food and energy, was unchanged in June, below the consensus expectation of a 0.2% increase. Overall consumer prices are up 3.5% over the past year compared with 4.2% for the twelve months ending in May. Core prices have increased 2.6% over the past year, down from 2.9% for the twelve months ending in May.
Lower energy prices also led to lower producer prices in June. The Producer Price Index (PPI) declined 0.3%, well below the consensus expectation of no change. These June inflation readings are encouraging, but
inflation remains well above the Federal Reserve’s 2.0% target, and ongoing hostilities in the Middle East suggest energy prices will remain volatile. The market is still assigning the highest probability to one 0.25% interest rate hike by year end.
Steller Bank Earnings Mark a Positive Start to Second Quarter Earnings Season.
The second quarter (Q2) of the 2026 earnings season kicked off this week with reports from the major banks, and the news was very encouraging. Five of Wall Street’s largest banks reported on Tuesday and collectively showed a 39% jump in profits on revenues that rose by more than a fifth. The results were strong across consumer businesses, showing the U.S. economy continues to benefit from resilient households. Bank executives said households remained healthy despite big swings in energy prices in recent months. Banks are also benefiting from corporate activity with strong investment banking fees.
Given the ongoing massive AI buildout and healthy economic readings, we expect another positive earnings season. The consensus forecast is for 24% growth year/year in Q2. The dispersion of growth expectations across sectors and stocks is wide. AI infrastructure stocks, led by semiconductors, are expected to contribute nearly 60% of S&P 500 earnings growth this quarter. Consensus expects the median S&P 500 stock to grow earnings by 9%.
Remaining Positive on the Market
While acknowledging the Iranian conflict continues to pose a risk for the economy and stocks, we remain encouraged by the underlying market dynamics. Economically sensitive sectors like Financials and Industrials continue to perform well. In addition, small-cap stocks, another economically sensitive group, have broken out to new all-time highs. We continue to expect stocks to be supported by further economic growth and robust profits.
Disclaimer
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