Capital Market Outlook

Summary

• Rebounding oil prices amid Middle East tensions and heavy bond issuance have maintained upward pressure on longer-term interest rates.
• A soft July employment report and favorable inflation data have reduced the odds of a Federal Reserve rate hike in September to approximately 31%.
• Non-farm payroll employment shrank by 23,000 in July, with private-sector job gains falling short of expectations.
• The unemployment rate declined to 4.1% due to labor force contraction from reduced immigration and retiring baby boomers, leaving the labor force 2.4 million smaller than in December.
• Average hourly earnings rose 3.15% year-over-year, while the quits rate stabilized at a level last seen in 2016.
• Core CPI inflation slowed to 2.47% year-over-year in July, with core CPI excluding housing remaining near 2%.
• Equity benchmarks reached fresh highs driven by surging profits, narrow credit spreads, and low market volatility.
• AI-related investment, government incentives, high productivity, and resilient consumer spending created a strong corporate earnings environment.
• S&P 500 earnings per share grew 28.9% in Q1 and 50.7% in Q2 year-over-year, with 2027 consensus estimates raised to approximately $408.
• U.S. munitions stockpiles are depleted following global conflicts, prompting the Trump Administration to invoke the Defense Production Act.
• The U.S. may have expended roughly two-thirds of its Patriot interceptors, leaving approximately 759 units, while THAAD inventories have shrunk by more than a third.
• The FY 2027 defense budget includes a $76 billion munitions request plus $21 billion in supplemental war funds.
• Global military expenditure reached a record $2.89 trillion last year, marking an 11th consecutive year of increased spending.
• U.S. defense spending currently represents 3.1% of GDP, well below the historical average of over 5%.
• The global aircraft backlog reached a record 17,000 aircraft, compounding supply chain pressures and maintenance costs.
• U.S. defense primes reported record order backlogs totaling $850 billion in Q2 2026.
• Replenishing Patriot interceptor inventories may require at least two to three years from contract signing to delivery.
• Rising bond yields that become unanchored are identified as the largest risk to markets, though currently considered a low-probability tail risk.
• Portfolio considerations favor diversified equity exposure, strategic durations, and high-quality bonds, particularly longer-dated municipal bonds.
• Investment opportunities are identified across industrial metals, energy, real assets, hedge funds, private markets, and themes including AI, reindustrialization, and infrastructure growth.
• The S&P 500 total return year-to-date was 14.5% as of mid-August 2026.
• The 10-year Treasury yield stood at 4.69% as of mid-August 2026.
• WTI Crude oil prices were $82.40 per barrel, up 43.5% year-to-date.
• Real U.S. GDP growth is forecast at 2.1% for 2026 and 2.2% for 2027.
• CPI inflation is projected at 3.2% for 2026 and 2.0% for 2027.
• The Fed funds rate is forecast to end 2026 at 4.38%.