As we move into the second half of the year, the economy continues to demonstrate resilience. Employment remains strong, consumers continue to spend, and corporate earnings have generally exceeded expectations. At the same time, inflation has reaccelerated, interest rate expectations have shifted higher, and investors continue to navigate an investment landscape increasingly dominated by artificial intelligence and a small handful of very large technology companies.
Below are several of the most important economic and market developments from the second quarter and what they may mean for long-term investors.
The U.S. economy continued to expand during the second quarter, although at a more moderate pace than earlier this year. The Atlanta Federal Reserve's GDPNow model currently estimates second-quarter economic growth at approximately 1.2%, compared with an estimated 2.1% growth rate during the first quarter.
Housing also showed encouraging signs of strength. Existing home sales posted their largest monthly increase of the year in May, rising 3.2% to an annualized pace of 4.17 million homes, significantly outperforming economists' expectations. Despite elevated mortgage rates, demand has remained resilient.
The labor market continues to be one of the economy's greatest strengths. Employers added more than 500,000 jobs between March and May, marking the strongest three-month stretch of hiring in more than two years. After reaching 4.5% last November, the unemployment rate has gradually declined to 4.2%, reflecting continued demand for workers across many industries.
The primary challenge remains inflation. Consumer prices increased 4.2% year-over-year in May, the highest reading in three years. Much of the recent increase has been driven by higher energy prices following supply chain disruptions and geopolitical tensions involving the United States and Iran.
Taken together, these developments present a mixed picture. Strong employment, healthy consumer spending, and continued economic growth are all positive indicators. However, persistent inflation has increased the likelihood that the Federal Reserve may raise interest rates later this year. Interest rate markets are currently pricing in better than an 80% probability of at least one additional rate increase before year-end.
There are, however, reasons for optimism. Oil prices have retreated meaningfully from recent highs, with crude oil futures recently trading near $71.62 per barrel—approximately 37% below their peak. Should energy prices continue to moderate, inflation pressures may ease in the months ahead.
Corporate earnings remained one of the brightest spots during the quarter. By mid-June, analysts expected S&P 500 companies to deliver earnings growth exceeding 20% for a second consecutive quarter. Much of that strength continues to come from large technology and energy companies, with similar earnings trends also emerging across many international markets, particularly in emerging economies.
Artificial intelligence remains one of the dominant investment themes. Technology companies continue investing unprecedented amounts of capital into AI infrastructure, semiconductor capacity, data centers, and related technologies. These investments reflect management teams' belief that AI will become a foundational technology across nearly every industry over the coming decade.
One of the quarter's most closely watched events was the public debut of SpaceX. Shares opened around $150, quickly climbed above $225, and have since settled near their initial offering price.
While early trading attracted considerable attention, the pattern is not at all unusual. Historically, initial public offerings in the U.S. have averaged approximately a 19% first-day gain, yet investors purchasing after the first day have generally underperformed the broader market over the following three years. The early trading activity surrounding SpaceX serves as another reminder that initial excitement does not always translate into superior investment returns.
Although earnings have remained exceptionally strong, another financial metric tells a more nuanced story.
Just four of the big technology companies this year are expected to invest more than $670 billion in AI infrastructure. To put this in perspective, this is a larger investment as a share of the economy than the railroad expansion in the 1850s. The result? Five of the largest AI infrastructure investors—Alphabet, Amazon, Meta, Microsoft, and Oracle—are expected to see their combined free cash flow decline by roughly 91% during 2026.
How can earnings remain strong while cash flow declines so significantly?
The answer lies in accounting. Large investments such as data centers and computing infrastructure are generally depreciated over many years rather than expensed immediately. As a result, reported earnings may remain relatively healthy even while enormous amounts of cash are being reinvested back into the business.
This does not necessarily indicate a problem. Instead, it highlights the magnitude of the investment these companies are making today in hopes of generating substantially higher profits tomorrow. Investors are effectively betting that today's record spending will ultimately produce returns that justify the enormous capital commitment.
Whether those investments generate exceptional shareholder returns remains one of the defining questions for markets over the next several years.
Another trend worth continuing to monitor is concentration within the U.S. stock market.
Today, the ten largest U.S. companies represent approximately 40% of the total value of the S&P 500, approaching levels last seen during the mid-1960s.
The difference between today and the 1960s is that today's market leaders are overwhelmingly concentrated in technology and artificial intelligence. In contrast, market leadership in the 1960s was spread across industries including automobiles, retail, energy, chemicals, telecommunications, and consumer products.
For investors who own only an S&P 500 index fund, this means portfolios may be far less diversified than they appear. While the index contains 500 companies, a relatively small number of technology firms increasingly drive overall performance.
While much of the media attention has remained focused on artificial intelligence and U.S. technology companies, international markets have quietly continued their strong performance.
Emerging market stocks have produced returns exceeding 20% this year, while the broader U.S. market has returned approximately 10% over the same period (Source: J.P. Morgan).
This serves as an important reminder that attractive investment opportunities often exist well beyond the headlines. Maintaining exposure across global markets can help investors participate in growth wherever it occurs while reducing dependence on any single country or sector.
Periods like today's often reinforce timeless investment principles.
First, owning only a fund that tracks the 500 largest US companies (the S&P 500) may expose investors to more concentration risk than many realize. Diversification remains one of the most effective ways to reduce risk without necessarily sacrificing long-term return potential.
Second, it is important to remain disciplined when evaluating exciting new investment themes. Artificial intelligence has enormous potential, but history reminds us that rapid technological innovation does not always produce equally impressive investment returns.
Yes, rapid expansion and significant spending for growth may produce sizeable returns for investors. However, it is also possible that increased competition may ultimately drive down profits and margins, or the hype for immediate returns from artificial intelligence has arrived too early.
Finally, diversification should extend beyond simply owning many stocks. A well-constructed portfolio should diversify across company size, industries, investment styles, and geographic regions. While the technology sector continues to create exciting opportunities, compelling investments can also be found among smaller companies, international markets, and industries receiving far less public attention.
Successful investing has never been about predicting the next headline. It has always been about building a thoughtful, diversified portfolio capable of participating in long-term economic growth while remaining resilient through changing market environments.
If you'd like to discuss how today's market environment relates to your long-term financial goals, our team is here to help.
Schedule a call with one of our Certified Financial Planner™ (CFP®) professionals today!