Highlights From LPL Research’s Midyear Outlook 2026

Jeffrey Buchbinder (00:00):

<Silence> Hello everyone, and welcome to a Special Market Signals podcast. It is the Midyear Outlook Market Signals because the Outlook is out, or at least it will be by the time you see this. We're recording on Monday, July 6th, 2026. But the publication, by the time you hear this, we'll be out on the seventh. So really excited to bring you some of the highlights from that publication. Please to be joined by Jeffrey Roach and Lawrence Gillum to help me do that. So I am an experienced LPL Outlook author. I think this is right around my 40th <laugh> that I have contributed to, although early on I did not write much. So that certainly has picked up a little bit, but just thrilled. It's one of my favorite times of the year to be with LPL. I know you guys agree. It's just a tremendous effort and the advisors we know appreciate it.

Jeffrey Buchbinder (01:01):

So, what we're going to do today is, well, all of you listening will appreciate it. We think advisors and clients as well. So what we're going to do here is just go around the horn and give just quick maybe three key things that we're all watching for the second half. And then at the end, maybe talk a little bit about how we think investors should be positioned and wrap it up there. So try to be tight with this. So why don't we start with you, Jeff three key themes that that you highlighted in the Outlook?

Jeffrey Roach (01:37):

Yeah, sure. So this'll be quick and hopefully a little bit of a teaser so we can get a little bit deeper when you read the actual publication. But a couple things here is, one is, you know, we still think growth is going to be above trend nominal growth, which is a great factor as we predict earnings growth will be above 5%. That's nominal. When you discount for inflation, you know, you're seeing above 2% growth above trend. You could see 2.3, 2.1%, and the, the Q2 and Q3 data, Q4 might be a little bit softer, but one of the things we're looking at in terms of growth is some of the shipments of non-defense capital goods. That's all that stuff that's AI related, infrastructure related. That's one of the things that we look at kind of behind the scenes that gives us support for that forecast.

Jeffrey Roach (02:27):

So growth looks pretty good in the next several quarters, so we unpack that in the Outlook. We also talk about in the Outlook, our inflation expectations. You know, we're still going to be hovering significantly above the fed's target of 2%. But what I think is really, really helpful, again, unpacked in the Outlook, is that by the time we get to December, unfortunately, we may have to wait till January to see some of those monthly figures of core inflation get closer to 2.5%. But when you aggregate that up on the quarter basis, Q2, even Q3 is probably still going to look pretty difficult. But I do think some of the improvements we're seeing geopolitically, some of the improvements we're seeing as tariff impacts are starting to fade a bit, will get us a little bit closer, at least in the right direction on the inflation front.

Jeffrey Roach (03:29):

And then third and final is job creation. How is the job market handling all of these shocks, and surprisingly so, it's doing well. So we had June data just a couple of days before this recording as we're recording on Monday the sixth. We think that services, jobs, particularly in the healthcare services, are going to support job growth, keep the labor market stable enough so the consumer doesn't feel the pinch as much as they could have otherwise. And in addition, when you see a stable labor market, you give the fed a little bit more leeway for them to focus on the other side of that dual mandate, which is the price stability component. So expect a pretty decent but low hire, low fire job market latter half of this year. So that's growth inflation jobs. I'll leave it at that. Then leave some time for followups if we have the opportunity to do that. So now to you, Lawrence.

Lawrence Gillum (04:40):

All right. Thank you, Jeffrey. Yeah, so obviously Jeffrey's input or outputs go into the inputs of my models and, and how we think about the rates market as well as the Federal Reserve. Given our expectation of still resilient economic growth, still sticky inflation the Fed and the cut or not to cut discussion is likely tabled for now. We do think that the Fed, the Federal Reserve under the new leadership of Kevin Walsh is probably going to be in a prolonged pause versus any sort of rate cutting campaign coming into the year. We were expecting around three rate cuts to take place this year. That's obviously not going to happen given the situation with the stronger than expected economic growth. Still relatively high oil prices, although they have come down a lot.

Lawrence Gillum (05:29):

So it is a scenario or a situation where the Fed is likely going to be on pause throughout the rest of 2026 versus any sort of rate cuts. Markets have priced in a pretty aggressive rate hike schedule for 2026. We're fading that a little bit. We think the bar for a rate hike is still a lot higher than it is for a rate a fed on hold throughout 2026. But the bottom line is, despite the fact that Kevin Marsh is, is coming in with the expectation of bringing rates lower we think that the fed's going to keep rates at current levels throughout 2026, which means treasury yields are likely going to be in a range bound scenario throughout the 2026 period as well. We don't expect the backend of treasury curves to fall much from current levels.

Lawrence Gillum (06:17):

We think a trading range is still a realistic expectation for this year until the economic data either starts to disappoint on the growth side or if the inflation data improves more than what we think. Neither of those are our base case. So again, trading range is, is our expectation. The other thing to pay attention to within the fixed income markets is the AI story has morphed into a fixed income story as well, that normally the AI story has been an equity story, and it will continue to be an equity story. But the amount of issuance coming to the fixed income markets from these so-called hyperscalers is set to increase dramatically in 2026. We've penciled in about $300 billion of supply coming to market from these hyperscalers on top of a lot of the other supply that's coming to the market.

Lawrence Gillum (07:05):

So there's a lot of bonds being issued in 2026. We're at very tight spread levels. So we do think that because of the amount of supply that's coming to market, we could see an increase in, in spreads a little bit. Our expectation is that we're likely in, again, a range bound environment for corporate credit spreads as well still resilient economic conditions give us, you know, a pretty good probability or chance that we, that we keep spreads at current levels versus any widening that that could take place if there is a widening event based upon these supply demand dynamics. We would look to potentially add to positions in the corporate credit market. But we think that there's going to be a pretty low spread volatility environment in, in 2026.

Lawrence Gillum (07:55):

And then the final thing that I would point out is that we mentioned the geopolitical events earlier, the Iran conflict the following in oil prices, and this relates to our expectation for the 10-year treasury yield inflation expectations market implied inflation expectations are now lower than they were before the Iran conflict started. So the market is really looking through these inflation, these inflationary dynamics that Jeffrey was just talking about. So to get a significant fall in treasury yields, you are really, are going to need to see a big decline in economic growth. We don't see that. Again we don't have that as our base case this year. But the fall in inflation expectations means that treasury inflation protected securities are a pretty attractive option or alternative to nominal treasury securities. When you see break even expectations fall, like they have the bar to invest in those markets becomes lower. So tips versus nominals is an area that we think is a pretty attractive option given what's been priced out of markets so far this year.

Jeffrey Buchbinder (09:04):

Alright, I'm up next. Thank you for that, Lawrence. Let's talk a little more AI. That is the first theme that I'll discuss here. And we all know that the spending is massive, but we are transitioning from a period of infrastructure investment to one of returns. And what does that mean? That means that there's going to be more scrutiny on whether these investments are actually going to deliver on the promise of AI. We're going to see more adoption, of course, but we also need to see more profitability to help cover this spending related to Lawrence, the point you just made about the borrowing there, the cost of borrowing is up and there's a lot of equity issuance that's going to need to happen. There's a lot more spending that's going to need to happen. That all creates a risk for this AI build out, because we don't know for sure if the trillion dollars is coming next year.

Jeffrey Buchbinder (10:02):

That's what the hyperscalers have guided to, pretty close to a trillion dollars in CapEx. That would be up north of 20% from what's expected in 2025. It may come, but you could also see pushback on that spending. We don't know just how profitable it's going to be. So that is a risk for the second half. It may drive continued rotation into other areas of the equity market but at the same time, it's also going to drive really strong earnings growth. That is not going to change anytime soon. In fact, we'll probably see north of 20% earnings growth in the S&P 500 for the balance of the year. So that is theme one. I'll also comment a little bit more on the earnings. What's interesting when you look at earnings is the catch up that's been happening in non MAG7 S&P 500 companies.

Jeffrey Buchbinder (11:02):

So we all know that MAG7 companies are growing earnings very quickly, but what people may not realize is that the rest of the market is actually seeing earnings growth of around 20% right now. That is certainly supportive of a rotation and a broader equity market advance in the second half. So it's not just about strong earnings, it's about a broader set of earnings that we think could help push this market higher. Now, that doesn't mean that I, I alluded to risks, right? It doesn't mean that there aren't going to be bouts of volatility. Certainly potential AI disappointments could drive bouts of volatility. Certainly the midterm elections could drive volatility. That's the historical pattern that we see. And then certainly the Mideast has the potential to drive market volatility as well. There are other risks, but those we think are the big ones to watch. And then the last thing I'll mention before we get to more of a discussion about positioning and portfolios the valuation discussion. So most people think that this stock market is overvalued. We would argue it's closer to fair value than overvalued. And I mean, the reason is, again, the earnings strength.

Jeffrey Buchbinder (12:25):

If earnings are growing 20%, then over time stocks can grow into these elevated valuations. And if you forecast that, eventually the CapEx will come down and drive free cash flow back up for hyperscalers that can be supportive of valuations. Right now, free cash flows are depressed. So on that basis, stocks are very expensive. But on earnings, we would argue they are reasonable at around 20 times forward earnings. So we think in the second half we could get a little bit of multiple expansion, maybe not much. The macro environment will have to cooperate. We need oil to stay down or go lower. We need interest rates to stay where they are or go lower and we need inflation to cooperate. So that's a lot of ifs. But if the macro environment cooperates, we think a combination of this strong earnings and the promise of AI will be enough to push stocks higher, could be a bumpy road. But we're still constructive on equities at at this point for the second half. So let's transition now I'll go back to you Lawrence, for a little more on bond positioning. How should investors be positioned for the second half?

Lawrence Gillum (13:49):

Yeah, I think it really comes down to your time horizon. So if you're thinking about tactical positioning, we're not very optimistic about the outlook for tactical positions within the fixed income markets, because spreads are pretty tight across the corporate credit or the spread markets. So, you know, we're still underweight corporate credit, investment grade, corporate credit. We've recently reduced our allocation of mortgage back securities. We had been overweight for quite some time in terms of mortgage backed securities. We've gone underweight in that part of the fixed income markets, again, because of valuations, because spreads are as tight as they are. And we're pretty much neutral everywhere else. There's just not a lot of potential spread tightening in a lot of these fixed income markets.

Lawrence Gillum (14:41):

Now that said, if you think about the income opportunities within the fixed income markets, if you have a time horizon that's measured in, you know, a few years or so, you can still cultivate a lot of high quality income by investing in the core sectors like treasuries and corporates and mortgage backed securities as well. So you can still create a portfolio yielding about 5 to 6% of high quality fixed income securities that that would allow you just to be boring. Clip coupons keep calm and, and carry on as the title of my section. And that's really the, the point is that with the income opportunities available in markets right now, income oriented investors still have a lot of opportunities out there to cultivate a pretty decent return from your income oriented positions.

Lawrence Gillum (15:30):

As it relates to our expectation for the 10-year treasury yield mentioned trading range throughout the rest of 2026, given our view on economic conditions as Jeffrey is outlined as well as our expectation for the Fed, we think a 4 to 4.5% 10-year trading range is probably a realistic expectation throughout the course of this year. We're around 4.48 as we record this now, so we could see yields come down a little bit but it would probably take a, a pretty big economic deterioration to see something with a three handle on it, not our base case. So four to four and a half is probably the, a realistic expectation for the 10 year treasury yield.

Jeffrey Buchbinder (16:10):

In turn to equities here, the overweights that we have right now are industrials and energy. The, as I mentioned before, we downgraded tech to neutral in early June just on positioning and valuations getting a little bit stretched there. The underweight is consumer discretionary. We think this sticky inflation will put a little bit more pressure on consumers, although certainly in the very short term, you would expect a little bit of a bump from the drop in oil prices. In terms of cap and style, yeah, we're being kind of boring there at this point. We are, I guess you could argue slightly overweight large caps because we have an overweight to equities in the defensive areas of the market, the low volatility equities that are certainly large cap and then neutral on small and mid on style neutral growth value for now.

Jeffrey Buchbinder (17:09):

We recently took our growth overweight off consistent with that tech downgrade. We certainly don't want to pre-commit to any moves, but at this point based on the way this rotation is going, I wouldn't be surprised if we had a little bit of a bias toward value at some point in the second half, but too early to make that call. The in terms of regions, we are slightly overweight in the U.S. by virtue of that. Overweight to low volatility equities, which are domestic, we are neutral developed international equities and neutral EM, although those have very different profiles EM certainly as long as the AI trade is working, EM should work. And that certainly is a negative, which really doesn't have much exposure to the AI trade from an economic perspective, which certainly Jeff can speak to Europe's economy is just not as dynamic, a little bit sluggish relative to the U.S.

Jeffrey Buchbinder (18:14):

So you're getting more growth out of the U.S. and the emerging world right now. And Japan certainly has a challenge with the yen. So neutral, EAFE neutral EM overweight U.S., slight bias toward EM over EAFE though at this point. So I think that covers all the positioning in terms of forecasts. The S&P 500, our fair value is 7650 to 7750. That's up from 7,300 to 7,400. So we do think there's an upside in the second half, not a ton, but some upside in the second half. And our earnings forecast has gone up a lot from where we were last November, and we are now at $320 in S&P 500 earnings for this year, 350 in 2027. And so at 22 times, PE on that three 50 number gets you to the 70, roughly 7,700 fair value. So again, those risks that I mentioned up front just make us a little bit uncomfortable forecasting much more than that at this point, but certainly wouldn't be surprised if we did a little bit better and if before the end of the year, we end up lifting that target. Alright, so Jeff, let's end with you. Big finish your high level forecast for the second half in terms of GDP and inflation and unemployment and all that good stuff.

Jeffrey Roach (19:39):

Yeah, well, we, right off the bat, you know, we're starting to see a continuation there of the unemployment rate staying low. One thing to look for in the next really couple of months is focus on labor force participation. We've seen a downtick recently to 4.3% unemployment, but that's because people are dropping out of labor force. We think when that reverses, we're going to hit a closer to four point half to 4.6% by end of year in unemployment. In terms of growth, I think we'll have still, again, 2.5 in the second quarter, 2.1% growth in the third quarter. One of the things I'm looking at specifically is the activity in auto sales. Auto sales took a big hit, of course, even in 2023 where things were very, very expensive, started to see a little bit of recovery. It wasn't until 2025 where we started to see, you know, higher than your 15 million annualized units.

Jeffrey Roach (20:40):

So as of Q1 and Q2, we expect the vehicle sales numbers to be a good barometer to support that above trend growth in Q3 and then Q4 in terms of inflation. Big thing here is track the, the tariff fading effects. We are starting to see already as we're recording again here early July. We do expect by the time we hit December, January to see core PCE on an annual basis hit below 3%. Now granted, that's going to be by the time you hit December we're going to have to grit our teeth a little bit in the near term we do see inflation hovering above 3% until the very end of the year. Something to look forward to. And I think that's one of the reasons why markets, as Lawrence highlighted have really looked past some of the near term pressures on core inflation.

Jeffrey Buchbinder (21:41):

Very good. I like the finish, Jeff Strong finish pretty good economic outlook. Not necessarily a great outlook for fixed income, but not bad, stable and you know, constructive on equities. Not you know, it's, it's tough to make a commitment to a really strong second half inequities after we're already up close to 10% year to date. But we think we'll add at least a few points to what we've done so far. So there's a little teaser on the Midyear Outlook. Hopefully all of you enjoy it. You've can have it or find it on lpl.com. And certainly we'll be actively promoting that on social media. So with that, we'll wrap. Thanks Jeff, thanks Lawrence for helping me preview the Outlook. And that's more than a preview launch, the Outlook. Thanks everybody for listening to LPL Market Signals. We'll be back with you next week. Take care and see you then.