Despite all these fears, we have had only two mildly negative quarters of real GDP growth since 2020, one each in 2022 and 2025. Overall, the four quarters of 2025 averaged just over 2.0% growth per quarter. For 2024, it was 2.4%, and before that 3.4%, 1.3%, and 5.8% for years 2023, 2022, and 2021, respectively. Put simply, despite a myriad of potential pitfalls, the U.S. economy has produced healthy and steady growth over the last five years.

And we just got the final estimate for the Q1 measure a few days ago, which generally continued the trend. However, like most economic data points, this one requires a bit of nuanced interpretation. Headline growth was 2.1% quarter-over-quarter (QoQ) annualized, but personal consumption was only 0.5%. This brings up a deeper point about the state of the economy. Personal consumption is roughly two-thirds of our economy. And while 0.5% growth for Q1 remains positive, this represents the lowest value since Q1 2022.

Concerns over the consumer are certainly still present, particularly given the extended period of higher-than-desired pricing pressures. The state of the consumer is something that is always very difficult to get a handle on. Much has been made about the current “K-shaped” economy, where the upper leg of the K, comprised of high net worth and high-earning consumers, continues to do extremely well while the lower leg of lower-income consumers struggles. While this is certainly something at the forefront of the news (it is an election year after all) and shapes the actions of everyday Americans, the reality is that all economies are always “k-shaped” to some degree. And aggregate economic data upon which the state of the overall economy is measured rarely has the ability to thoughtfully distinguish between the two.

From what we can determine, the aggregate consumer continues to spend money. Personal spending has averaged 0.6% MoM growth since 2021, with recent numbers maintaining a similar range (2025 averaged 0.4%, and the first five months of 2026 have averaged 0.6%.) Retail sales, a noisy measure of gross spending, have also generally indicated strong spending behavior.

To continue spending, we have all had to pay increasingly higher prices. Inflation has been the most important character in the economic storyline since the war in Iran broke out. On the first day of March, the average price of a gallon of gasoline in the U.S. was just below $3. It peaked at $4.56 in late May, representing a 50+% increase, before retreating somewhat as hopes for a ceasefire grew in June. The stunning increases in energy prices drove headline consumer price index (CPI) from a recent low of 2.39% YoY in January to 4.25% for the month of May. The Fed’s preferred measure of Core Personal Consumer Expenditures (PCE) recently printed 3.4% for May, well above the stated objective of 2%.

For those keeping track, it has now been over four years since the Fed’s COVID-inspired hiking cycle began, and inflation has yet to come particularly close to the 2% stated target. This has put consistent pressure on American consumers as they continue to spend to maintain their lifestyles. Part of the gap fill has been accomplished by consumers eating into their savings, as the savings rate has decreased from an average of over 6% (of disposable income) for the 2015-2019 pre-COVID period to a current level of only 3.0%.

It is also undoubtedly true that a large part of the resiliency in consumption has been driven by the labor market. As of last quarter’s commentary to end Q1, there were considerable reasons to be nervous. Nonfarm payroll figures were negative in both December and February and we were just starting to get worried about the AI effect on job losses. However, since that time, the last four months of payroll figures have been strong, averaging 145,000 new jobs per month. When you consider scarce labor supply that has helped maintain a historically low 4.2% unemployment rate and weekly jobless claims that have averaged less than 220,000 thus far in 2026, the labor market is again proving to be a positive surprise and source of economic resilience.

To circle back to that lede that refused to be buried, there are two things that seem comfortably true. There is little aggregate data to support any claims of the U.S. economy being exceptionally poor. And to claim the U.S. economy is booming is ignoring meaningful signs of caution prevalent both in data points and anecdotal observation. Thus, when you cut off the edges of the distribution, you are left with an unexciting, but entirely true, conclusion. The U.S. Economy is indeed still approximately…okay.

The key to the immediate future lies in how quickly prices can return to a slower pace of growth. Should this occur and the labor market remain steady, the growth engine of the economy can likely continue to chug along. However, should risks to the labor market re-emerge while prices remain elevated and the Fed is forced to tighten financial conditions, there is always the potential for a derailment along the way.

However, the equity market only needed to hear the all-clear once, and it barely looked back. Still, the quarter felt like the action in the movie, with Ferris and friends’ narrow escapes from a variety of incidents during his (well-deserved) day off from high school. In the end, just like Ferris, everything worked out as the stock market finished the quarter near all-time highs. However, the details are a little more nuanced. Let’s examine what happened and whether there will be a sequel (unlike the movie).

You may recall that the recovery in stocks actually started on the last day of the first quarter. A week later, the Strait of Hormuz was declared open (even though it wasn’t), and the FOMO (fear of missing out) race was on. Add to the mix better-than-expected earnings coming out of first quarter and semiconductor stocks that partied like it was 1999, and we ended up with the best quarterly performance in the S&P 500 since the 2nd quarter of 2003, up +15.2% for the period and 10.2% YTD. And while the performance was driven by Technology and AI related stocks, there was solid participation from other indices as well. Small-caps (as measured by the S&P 600) again beat their large-cap brethren, rising +19.7% and +24.0% for the first six-months. Performance outside the US continued to be strong but relinquished some of its lead over the US in the 2nd quarter. Developed International Markets jumped a solid +11.1% for the quarter (as measured by the EAFE Index) while Emerging Markets (EM), led by the semiconductor exposure in South Korea and Taiwan, posted +24.2% gain for the period (measured by the MSCI Emerging Market Index). For the YTD period, these two indices are up +9.9% and +24.0%, respectively.

Putting the US and International Markets together, the MSCI All-Country World Index (ACWI) finished higher by +15.1% for the quarter and +11.5% YTD. The equal-weight ACWI lagged but finished up 9.4% and 8.5% for the quarter and YTD periods, respectively. This spread between ACWI and equal-weight ACWI highlights the outsized contribution to performance of large semi-exposed names like Taiwan Semi and Samsung in the Taiwan and South Korean markets.

From a sector perspective, 9 of 11 economic sectors of the market were positive for the period but only 1 of 11 (Technology) outperformed the broader market (S&P 500). The Technology sector was up an astounding 31.8% for the 3-month period. Industrials (+14.9%) were also up double digits and the AI buildout fueled demand. Consumer Discretionary (+9.3%), Financials (+9.0%) and Healthcare (+8.8%) rounded out the top five. The top performers from the prior quarter dropped to the bottom with Energy (-13.5%) and Utilities (-0.5%) the only negative spaces, while Consumer Staples and Materials (+2.0%) were also muted. Year-to-date, the return backdrop is more diversified with still 9 of 11 sectors positive, but 5 of 11 outperforming the market. Industrials, Technology and Energy are at the top while Financials, Consumer Discretionary and Communications Services make up the bottom. Materials and Real Estate are also worth mentioning on the positive side as the other sectors up over 10% YTD.

Breaking down the factor performance during the most recent quarter, it was on balance “risk-on” in nature. No surprise given the overall performance during the period. However, there was extreme variability week to week and even day to day among various factors. In the end, the Volatility and Momentum factors carried the day. I would highlight, however, a notable shift in June back toward smaller Size, higher Value and Dividends. So far, that dynamic is holding on the first day of the third quarter as I write this commentary (but that could change by the end of the day). For our strategies, the factor backdrop was mixed. The Large-cap strategy had a strong absolute return for the period, but more defensive positioning detracted from relative returns. The Dividend & Income strategy performed well absolutely and relatively, with Dividends and Value both in favor late in the quarter. While our strongest absolute performer for the quarter and YTD, the Small/Mid-cap portfolios trailed relatively, mainly due to an underweight to the largest benchmark holding. Finally, our International ETF portfolios trailed for the quarter but remain ahead of benchmarks YTD.

Last quarter, we ended this equity market commentary using a NASCAR racing reference of remaining under a caution flag. In hindsight, the “accident” in the market was cleaned up much more quickly than we anticipated. Clearly equity markets are not suffering from the Ferris character Cameron Frye’s anxiety problems. Nevertheless, while not to Cameron’s level of craziness, I do remain concerned about excesses in certain corners of the market. The valuation of SpaceX at IPO of $1.75 trillion is a prime example of froth. If the market starts to rationalize these valuation disparities, the broader market could see some giveback from its recent moves higher. “Bueller? Bueller? Bueller?” Ok, to end on a positive note, I’ll channel my inner Ferris and note that one- and two quarter returns following an S&P quarter over +10% are notably above average. Danke Schoen and good night.

Duration-sensitive bonds reversed the negative performance of the first quarter even though their rates were a little higher. The 10-Year Treasury Note finished the quarter with a yield of 4.47%, which is 15 bps higher for the quarter and 30 bps higher for the year. Again, with coupon income being the dominant component of total return, these moves equate to returns of 0.13% for the quarter and 0.02% for the year. This difference between the 2-Year and 10-Year yields is at the narrowest level in a year. This flattening of the yield curve is usually not seen as a positive sign though I think, for now, it is helpful that longer-term inflation expectations are not increasing.

Corporate bonds outperformed their Treasury counterparts thanks to the spreads at which they trade over Treasuries returning near all-time lows from the spike created by the Iran conflict. The yield-spread over Treasuries of the Bloomberg Intermediate Corporate Index finished the quarter at 65 bps. The overall yield of this index is 4.91%. That is about 10 bps higher than at the start of the quarter and 50 bps higher than at the beginning of the year. This produced returns of 0.98% and 0.75% for the quarter and year periods, respectively. It was another robust quarter of corporate issuance. So far in 2026, over $1 trillion has been issued, which is the fastest pace since 2020. Fresh off its equity IPO, SpaceX issued $25 billion in debt. Most of the other large issuers this quarter were AI-related, including Nvidia. There was ample demand for the supply as most of the deals were well oversubscribed. Corporate earnings have been strong, but we expect bond spreads to drift higher in the face of lingering geopolitical events.

The municipal market was one of the best performers in the fixed income sector this quarter. The Bloomberg 5-Year Municipal Index rose 1.07%. The yield ratio to Treasuries is 70%, which has been stable this year and represents good relative value. Demand remains strong as the Bloomberg reports that municipal bond funds had near-record inflows through May, including a single week that totaled over $2.3 billion – the most in a week since 1992. There was plenty of issuance for investors to buy with several billion-dollar issues in the municipal infrastructure space. Moody’s warned that the surge in data center construction is introducing credit risks for state and local governments, given the heavy power and water infrastructure demands that may fall on public entities.

We were a little early in adding duration to our portfolios, but we continue to like rates at these levels. For the most part, we are in-line with the benchmark duration. We have added exposure through government bonds and continue to be amazed by the resiliency of corporate bond spreads. We see a path to stable or lower rates from here. Either the conflict continues to cool, and commodities lead overall inflation lower, or prices remain high and growth slows. The Federal Reserve can most likely use the cover of the newly formed task forces that are studying all aspects of its operations to not have to raise rates.

The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.  The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.