An Earnings-Led Bull Market

Outlook: June 2026

Executive Summary
Corporate earnings increased approximately 20 percent in the first quarter, and the strength was broadly based. In recent years, earnings growth has been driven almost solely by the large technology stocks, but we are beginning to see broadly based strength with high earnings growth across many market segments. A sustained economic expansion, fueled by an investment super-cycle in artificial intelligence infrastructure, consumer net worth at an all-time high, persistent consumer spending, an improving labor market, and government stimulus, has helped to sustain the bull market.   

We are closely monitoring the conflict with Iran, and our view is that the economic impact is significant but manageable. Given the strength of the fundamentals, the S&P 500 Index reached a record high in May, and we maintain our positive outlook. 

We wish you all the best and encourage you to reach out if you want to discuss our outlook in more detail.

Economy

Economic data continues to paint a mixed picture of the outlook, but we maintain our positive view. Despite high oil prices and the resulting increase in headline inflation, consumer spending is being supported by rising net worth among U.S. households. In addition, investment in artificial intelligence continues to rise, and forward estimates have increased yet again in recent months. On a long-term basis, we continue to expect these investments and the proliferation of artificial intelligence to boost productivity in our economy, paving the way for faster growth without excessive inflationary pressure. 

We are closely monitoring labor market conditions as job creation data has been volatile month to month. A review of the six-month average shows that the trend of modest job creation remains intact, but the recent data shows steady improvement. At the same time, the number of people filing for unemployment benefits remains at a historically low level. Collectively, the data indicate that the labor market is slowly improving. While the number of jobs being created is lower than we typically see during an economic expansion, most people who want a job can find one.  

The conflict with Iran is also having an impact. High oil and other commodity prices have boosted inflation and are acting as a headwind to growth. We believe these forces will diminish, but that will take time, and they will be in play for the foreseeable future. In aggregate, the impact is significant but manageable, and we expect the economy to grow at a moderate pace this year.

Inflation

The latest Consumer Price Index (CPI) report showed inflation is rising and is well above the Federal Reserve’s target. As expected, oil and other energy-related commodity prices have increased significantly due to the supply chain constraints. However, food and housing prices are also increasing at a relatively fast pace, and we are closely monitoring developments on this front. 

In the coming months, we expect headline inflation readings to remain skewed upward, given today’s high energy prices. As we are seeing, high energy prices also lead to rising inflation in other products and services such as food, shipping, and travel. However, the inflationary pressure should subside over time. Our view for this year calls for headline inflation to be in a range of 3.25 to 3.50 percent.

U.S. dollar

Last year, the U.S. dollar declined relative to many other currencies. The weakness was driven by expectations for a moderation in U.S. growth, improvements in the economic outlook for many foreign economies, uncertainty surrounding U.S. trade policies, and the sustained increase in U.S. debt levels. In contrast, the dollar has been volatile, but range-bound thus far in 2026.

Looking ahead to the summer months, we expect our currency to remain somewhat volatile but within its recent trading range. Expectations of sustained inflationary pressures and the corresponding reduction in the odds of a Federal Reserve rate cut, coupled with an improving outlook for foreign economies, are likely to keep the U.S. dollar range-bound. However, we are closely monitoring the conflict with Iran, as a peaceful resolution is likely to push the dollar lower and possibly to a new low for this year. On a long-term basis, the dollar is at risk of further depreciation if our government debt levels continue to increase at their current pace. 

Asset class

Cash/Money Market Instruments

We expect money market yields to remain attractive over the next three to six months, given sustained inflationary pressure. In an environment of rising prices, short-term interest rates may even move slightly higher than current levels, or remain at today’s levels longer than initially anticipated. Even so, cash should mainly be used for short-term needs, safety, and flexibility. It should not be treated as a long-term investment, as rates can change quickly if the economy weakens.

Intermediate Government/Credit Bonds

We continue to have a favorable, but balanced, view of high-quality intermediate-term government and investment-grade corporate bonds. Current yields remain attractive, and the Federal Reserve’s cautious, data-dependent stance and a resilient economy suggest that short- and intermediate-term rates may remain elevated in the near term. Credit fundamentals remain healthy, but corporate bond spreads are tight by historical standards, underscoring the importance of quality and issuer selection. At the same time, concerns about government debt may also keep Treasury yields higher, which supports our preference for a diversified mix of U.S. government bonds and high-quality corporate debt.

Tax-Exempt Municipal Bonds

We have a positive outlook for high-quality municipal bonds, as they continue to offer attractive tax-advantaged returns. Credit quality remains solid across most issuers, backed by healthy savings and the ability of cities and states to adjust their revenues, if needed.  As with corporate bonds, strong demand has pushed valuations to high levels, meaning lower-quality bonds aren't offering much extra return to justify the added risk — so being selective matters. Munis should also help cushion a portfolio during periods of equity market volatility, since they tend to move independently of equity markets. Overall, we think municipal bonds remain a smart holding for tax-sensitive investors looking for steady, reliable income through the rest of the year.

U.S. Equity

The equity market has generated solid returns this year, and returns across the equity styles have been strong. However, volatility has increased. In a reversal of the long-term trend, international equities, as well as those in the value and small/mid cap styles, have outperformed the growth segment year to date. While earnings continue to rise rapidly in the technology sector, stocks across other equity styles are now participating in this trend, with strong earnings growth and an improving outlook for profits in the coming quarters.

We see three catalysts supporting a continuation of the current bull market.

• Earnings growth has been exceptionally strong, with increases of at least ten percent in each of the last two years. That trend is poised to continue, with growth rates accelerating this year, generating a powerful tailwind for stocks.
• Investment in artificial intelligence is another driver of equity prices, with hyper scalers like Microsoft, Meta, and Amazon spending hundreds of billions of dollars per year on the infrastructure needed to deliver artificial intelligence services. This investment boom is driving strong demand for products and services ranging from construction and energy-generation equipment to semiconductors and network connectivity components.
• Government stimulus is also helping to boost stock prices. Late last year, the Federal Reserve reduced interest rates three times, and those rate cuts are still impacting the economy. Last year’s tax legislation is also helping to support this bull market, as it was, on balance, a tax cut for many people. Accordingly, the number of tax refunds is higher than normal, and we believe that is helping to boost consumer spending.

The drivers noted above are critically important as equity valuations are at historically high levels. As it stands, the S&P 500 Index is trading at 21x forward earnings, a level well above the long-term average. We maintain our positive outlook, but we expect the valuations to act as a headwind to the rise in equity prices. Given elevated valuations, we expect earnings growth to be the primary catalyst for markets, and for returns of the major benchmarks to be closer to their historical averages 

International Equity

Foreign stocks have generated strong returns, driven by improving earnings growth, targeted stimulus programs across many parts of the world, the ongoing economic expansion, and attractive valuations. Within this segment, stocks in emerging markets outperformed those in developed countries, driven by strong performance in the emerging Asia region. Asia is home to many technology companies in the artificial intelligence supply chain, and their stocks have performed well. 

The recent drivers of international equity returns are well anchored, and they remain supportive. The adoption of targeted stimulus measures is resulting in a more favorable economic backdrop for international equities, and valuations are also more attractive in foreign markets relative to the U.S. Accordingly, we expect a combination of earnings growth and rising valuations to support foreign markets. We also expect greater symmetry in returns between U.S. and foreign stocks.

Commodity

Commodity prices have increased this year, led by oil prices. The conflict with Iran and the subsequent reduction in oil supply have significantly increased energy prices this year. However, prices for industrial metals and agricultural products have also moved higher. After several years of large increases, gold has posted relatively modest year-to-date gains. 

We maintain our positive long-term view on commodities but anticipate volatility within the group. In the coming months, oil prices are likely to remain elevated as the supply chain will take time to normalize. We also expect upward pressure on prices for other commodities, as the disruption in energy markets affects the cost of food, transportation, and other items. In addition, the ongoing economic expansion suggests demand will remain high, helping to support the upward trajectory of prices for goods and services. In terms of precious metals, we anticipate sustained demand amid rising government debt across major economies and subsequent efforts to diversify away from fiat currencies.

Potential opportunities & risks

OPPORTUNITIES

The emergence of artificial intelligence and other innovative technologies—the convergence of cloud computing, significant increases in computing power, and the advent of the smartphone—has created a connected world in which new technologies are changing how we live. This convergence has created investment opportunities centered around long-term themes such as the growth of artificial intelligence, Big Data, and quantum technologies.

A productivity boom—The advancements in technology noted above, coupled with rising costs and a persistent shortage of skilled labor, are leading companies to invest in new technologies to automate processes and boost productivity. Higher productivity enables faster economic growth without a sustained rise in inflation.

Rising demand for power—Power demand is poised to expand for the first time in a generation. The proliferation of artificial intelligence and the increasing number of data centers are catalysts for this trend, along with industrial reshoring and the rising use of electricity as a substitute for fossil fuels. The increase in demand marks a pivotal shift for the electrical equipment and grid infrastructure industry, which provides the hardware, software, and services that enable modern power systems. The industry is poised to benefit from rising electricity demand and a second-order effect in the transformation of how energy is generated, transmitted, and managed.

The evolution of finance—Technological advancements are disrupting the financial services industry. We are experiencing a global shift from paper currency to electronic payments, driven by the growing popularity of credit cards, debit cards, stablecoins, and cryptocurrencies. Online payment systems facilitating money transfers, e-commerce, and electronic bill-paying services are also experiencing strong demand. This shift is still in its early stages and has a long runway as it is occurring across both developed and emerging economies. In the coming years, blockchain technology may become a significant disruptor in the finance industry, creating opportunities for new entrants and risks for the firms currently dominating this space.

Expansion of robotics—5G communications, sensors, and artificial intelligence are facilitating technological innovations that are advancing robotics in healthcare, restaurants, construction, and other industries. Some estimates project that global robotics spending will jump from $40 billion in 2023 to $260 billion in 2030.

Personalized healthcare—Advancements in technology support tailoring treatments to each patient, streamlining the drug discovery process, providing continuous data analysis in real-time, and improving clinical trials through digitization. Investment opportunities across the healthcare spectrum will be enhanced as artificial intelligence and machine learning increasingly result in better healthcare experiences.

RISKS

Geopolitical risks—We are closely monitoring developments in the Iran conflict and the trajectory of energy prices. In addition, conflicts in many other parts of the world have escalated or have catalysts that may result in a change in dynamics, including the war in Ukraine. In international relations, we are also closely following developments in the relationship between the West and China.

A Pullback in Investments in Artificial Intelligence (AI)—Last year, the major hyper scalers (Alphabet, Amazon, Meta, Microsoft, and Oracle) spent more than $400 billion on AI. In 2026, they are expected to invest more than $675 billion. These investments have been a significant driver of corporate earnings growth in recent years, and that trend is expected to continue. 

Advancements in technology can also help boost the economy’s productivity. In fact, the last productivity report was stronger than expected, suggesting the economy can grow at a relatively fast pace without inflationary pressure. A pullback in AI investment, if that occurs, is likely to lead to disappointing results for corporate profits and economic growth. Accordingly, that is a metric we are closely monitoring.

Inflation—Given the near-term impact of the conflict with Iran, coupled with persistent federal budget deficits, a high level of government debt, reduced investment in production capacity for some commodities, the trend towards deglobalization, and a shortage of labor, there is a risk that inflation may return to a sustained upward trend and remain above the average of the last thirty years.

Deglobalization/protectionism—The trend toward globalization that has been in place since the fall of the Berlin Wall is now being reversed. A renewed priority to ensure independence by securing access to commodities, promoting domestic manufacturing, and a race to establish global dominance in certain technologies have led to a reversal of the free trade movement. We expect this development to be accompanied by sustained increases in geopolitical tensions, upward pressure on inflation, rising costs in some industries, and the potential for a moderation in economic growth.

Rising government debt—Sovereign debt levels were rising before the outbreak of COVID-19. However, in the wake of the virus, they increased significantly. In the U.S., government debt outstanding has increased 78 percent since the end of 2019. While the short-term implications of higher debt levels are manageable, the long-term impact may be substantial as rising interest costs burden taxpayers.

Originally posted on May 29, 2026.

Disclosure: This document contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. Past performance is not a guarantee of future results. All investments involve risk, including the loss of principal. All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable. However, Badgley Phelps cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Badgley Phelps does not provide tax, legal, or accounting advice, and nothing contained in these materials should be taken as such.