Three economic trends to monitor as we head into the second half of 2026

Key Takeaways:

• The U.S. economy has faced its share of challenges this year, including geopolitical uncertainty and a sharp rise in oil prices. However, despite the volatility, the economy has remained resilient, with GDP growth on pace to grow at or above trends levels of around 2.0%.
• As we head into the second half of the year, we are watching three trends that we think will likely drive the direction of the economy: The strength of the labor market, the path of oil prices and gas prices at the pump, and what path the Fed decides to take on interest rates.
• In this backdrop, we believe that stock markets can continue to outpace bond markets as we head into the final months of the year. While we may experience some volatility and market rotation, we continue to favor U.S. large-cap and mid-cap stocks, alongside emerging-market equities.

The U.S. economy has certainly navigated a fair share of challenges in 2026, including geopolitical uncertainty, fluctuations in energy markets, and ongoing questions surrounding the path of monetary policy. Despite these headwinds, economic activity has remained resilient, with growth continuing at or modestly above its long-term trend.

As we enter the second half of the year, we are watching three key trends that we think are likely to shape the economic and market outlook: the health of the labor market, the path of oil prices and gas prices at the pump, and the direction of interest rates set by the Federal Reserve. Read below for our views on each of these three key variables and what this means for investors overall.

1. The labor market is trending better:
   Overall, in our view, the U.S. labor market in 2026 can be characterized as one that has been bumpy but generally has surprised to the upside and has remained relatively steady. Some might even call this a "Goldilocks" jobs market, one that appears not too hot and not too cold.
   
   The June jobs report released last week was further evidence of this Goldilocks trend. While job gains came in at 57,000, below expectations of 113,000, we also saw the unemployment rate tick lower to 4.2%. In addition, wage gains of 3.5% year-over-year were in line with expectations and have not moved meaningfully higher this year, helping keep core inflation relatively contained.
   
   More broadly, we have seen job gains in 2026 thus far outpace job growth from last year. On average, monthly jobs gains in the U.S. this year have been about 92,000, versus an average of about 9,700 last year. The steady labor market and pick-up in job gains is supportive of household consumption, although some of this has been offset by higher prices and inflation broadly. Nonetheless, a solid U.S. labor economy supports our view that economic growth is likely to remain at or above trend levels of 1.5% to 2.0% this year.

2. Oil prices are falling – will gas prices follow?
   The second notable trend to watch as we head into the second half of 2026 is the path of oil prices and gas prices at the pump. The U.S. and Iran continue to make some progress toward negotiations, albeit no definitive peace agreement has been achieved. Nonetheless, traffic through the Strait of Hormuz has picked up, and markets continue to appear cautiously optimistic on the path of oil prices, especially as global economies focus on increasing supply and strengthening supply chains.
   
   As a result, we have seen WTI oil prices fall substantially in recent weeks. In fact, WTI oil has fallen back below $70, near levels prior to the start of the Iran war. However, gas prices at the pump have not fallen nearly as fast as crude oil prices and typically operate with a lag. This is largely because gas stations need time to work through older, higher-priced inventory. If history is a guide, we could see gas prices at the pump follow suit in four to eight weeks. This would bring some relief to consumers as they head toward the final months of the year.

3. The Fed remains split on which direction interest rates should go from here:
   The third trend to monitor is what direction the Fed takes interest rates as we head toward the back half of the year. At the June FOMC meeting, new Fed Chair Kevin Warsh indicated that bringing inflation down was a key priority for the Fed. 
   
   In addition, while there was a unanimous vote to keep interest rates steady at the June meeting, the committee seemed split on the direction of rates for the rest of 2026. In fact, about nine members indicated it was appropriate to raise rates one or two times for the rest of the year, while nine members felt it was right to keep rates steady or even cut one time this year.

In our view, the Fed is likely to keep rates on hold for the remainder of 2026. While inflation remains elevated, we know oil commodity prices have come down, and breakeven inflation rates remain well anchored. We think the Fed is likely to watch how the data plays out in the months ahead, in both inflation and the labor market, before committing to a path forward.

What does this mean for investors?

As we head into the second half of the year, we believe the three trends highlighted above set the stage for a sound economic backdrop: A labor market that is steadying, inflation and gas prices that have perhaps peaked and should start to ease, and a Fed that is likely to keep rates on hold.

In this backdrop, we believe that equities can continue to outperform bonds. Within stocks, we prefer U.S. large-cap stocks, which offer exposure to the ongoing AI and technology growth theme, and U.S. mid-cap stocks, which we think have scope for further catch-up. From a sector perspective, we favor the industrials and communication services sectors, which offer exposure to both the economic cycle and AI themes.

And finally, from a regional perspective, we continue to remain overweight emerging-market stocks, alongside U.S. equities. We believe that emerging-market equities can offer an alternative to U.S. technology exposure and also will benefit from robust 50%+ earnings growth this year.

As always, your financial advisor can help establish your investment allocations so that they are in line with your personal risk preferences and financial goals, and help ensure you are on track to achieve those goals, regardless of what the back half of 2026 may bring.

Mona Mahajan
Investment Strategist

^{Source for all data in commentary: Bloomberg}