4M: Monthly Macro & Market Musings: Vibe Shift

July 6, 2026

The second quarter of 2026 closed with impressive strength. The S&P 500 rallied 14.87% and the Nasdaq surged 21.41%. Yet, June itself brought a different, more varied tone. The headline indices took a breather with the S&P 500 down 1.06% and the Nasdaq down 2.81% for the month. Yet, there was what we consider a healthy broadening out underneath the surface.

The S&P 500 equal-weight index outpaced its cap-weighted counterpart by roughly three percentage points. Small caps, as measured by the Russell 2000, also gained, rising 3.60%. Back in March, the market was propelled higher by the “near miss” of a recession. Today, the data is telling a story of economic resilience, possibly helping the national mood to start emerging from a persistent “vibecession.”

Macro: What Mattered In June

Growth: The Vibe Shift Is Real

Economic reality continues to defy the skeptics. Small business hiring is showing signs of improvement. The June Employment Situation report confirmed that hiring is transitioning from a sprint to a jog: employers added a modest, but decent, 57,000 jobs. That was below expectations and the April and May numbers were revised down a cumulative 74,000. The unemployment rate ticked down to 4.2%, and the broader labor market remains healthy enough to support consumers. Critically, wages are growing at a sustainable level where it’s not too high to worry the Fed, but not too low either. This combination should support healthy consumer spending.

High energy prices are pushing total spending higher and eating into other parts of household budgets, but we are well off the highs of gas prices. Real (inflation-adjusted) spending should continue to hold up, if not experience a little relief-at-the-pump-rally this summer. News sentiment is noticeably improving as well. The idea that we could have good growth while everyone feels bad has been known as a “vibecession.” But the vibes may be changing for the better.

Figure 1: News sentiment has improved as gasoline prices have fallen.

Inflation & The Fed: A Hawkish Warsh

Inflation expectations are finally coming off the boil, which should theoretically give the Federal Reserve some breathing room. However, in his first meeting as Fed Chair, Kevin Warsh struck a decidedly hawkish tone, stressing price stability above all else. The “dot plot” from the Summary of Economic Projections—the chart showing where each Fed official thinks rates are headed—now shows half of the officials who submitted projections (nine of eighteen) expecting at least one hike this year with the other half expecting a hold or a cut. Notably, Chair Warsh declined to submit a projection of his own.

Chair Warsh said the dots are drawn in pencil, which is true since earlier in the year, most were looking for at least one cut. The shift was driven by high oil prices, but the economic resilience despite those high prices. By the time we get to the Fed’s meeting on July 28-29, a lot can change. In fact, a lot already has changed. The relatively soft June jobs report and oil prices falling back toward pre-conflict levels have already taken some of the steam out of rate-hike expectations. The Fed will not release an updated dot plot at the July meeting, but it wouldn’t be surprising if there are hints that their pessimistic view of inflation has changed.

Figure 2: From January through March, as inflation expectations rose, the expected end of 2026 federal funds rate also rose. Now they are diverging. It wouldn’t be surprising to see expectations of Fed hikes fall along with inflation expectations.

Fiscal Realities: Greenspan’s True Legacy

Interest rates remain volatile, supported by a necessary risk premium over the future trajectory of government debt. Net interest expense as a share of government spending is rising at an uncomfortable clip. When you combine this with compounding Medicare and health expenditures, there is no real structural relief in sight for the fiscal deficit. This past month, the passing of Alan Greenspan prompted much debate over his monetary policy legacy. But perhaps his most important, yet overlooked, contribution was his chairmanship of the National Commission on Social Security Reform—the “Greenspan Commission,” formed in late 1981—whose recommendations became the 1983 amendments that made the program sustainable for another generation. We are fast approaching the need for another such commission.

Figure 3: Net interest expense is a larger share of government expenditures than defense spending. Entitlements, like Social Security and Medicare are a growing share of federal expenditures.

Markets: Prove It or Lose It

The Q1 earnings season was a blowout with S&P 500 earnings growing 28.6% year-over-year according to FactSet. That was more than double the pace of growth expected. The artificial intelligence narrative continued to drive massive capital expenditures, pushing the Philadelphia Semiconductor Index (SOX) up an astonishing 87.8% for the quarter, its best quarter since the index began in 1994. But as Q2 earnings season kicks off in mid-July, it looks like it is “prove it or lose it” time. High valuations in the mega-cap tech space are creating vulnerabilities to any signs of weaker margins or slower capex spending growth. We saw these vulnerabilities flash in June when the “Magnificent 7”—which some now call the “Lag 7” instead of the “Mag 7”—shed roughly $2.3 trillion in market value amid concerns about AI return on investment and token commoditization (falling prices for AI computing output).

Figure 4: Large Language Model (LLM) providers are fighting fiercely for market share, leading the price per “token” to fall. This has raised questions about whether we are close to a situation where there has been “overinvestment” in data centers and the chips and memory that goes in them.

Leadership: Broadening the Base

If the AI giants take a breather, what leads? June showed us that the rest of the market is ready to pick up the slack. Outperformers for the month included Industrials, Healthcare, and Financials. From a very high level, it’s hard to say anything is screamingly cheap right now, but there are still plenty of opportunities to uncover by digging into the details.

Figure 5: While the overall S&P 500 was slightly negative in June, the oft overlooked areas like financials, health care, industrials, real estate, and utilities posted positive total returns.

What This Means for Positioning:

• Stick with what works, but widen the net: The rotation out of the Mag 7 into other sectors in June shows that breadth is returning. A little more breadth, a little less mega-cap concentration, and a little more focus on value seems prudent.
• Focus on the real-economy capex ecosystem: Industrial capacity, energy, and materials likely remain structural winners as businesses adapt to domestic rebuilding and supply chain resilience. But good companies aren’t always good investments since you have to consider the price you pay for those fundamentals.
• Earnings over narrative: With valuations stretched in areas of the market, companies must deliver on the bottom line. Vulnerabilities are high for businesses that miss margin expectations.
• Watch the July FOMC: We need to see if Warsh’s Fed softens its hawkish stance as inflation expectations cool. Until then, expect yield volatility to persist.

This commentary is provided for informational and educational purposes only and does not constitute investment, legal, or tax advice, or a recommendation to buy or sell any security. Index performance figures are cited from third-party sources believed to be reliable but are not guaranteed; indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. All forecasts and opinions are as of the date of publication and subject to change.