This Week in Review | US Inflation, Midterm Primaries, Q2 Earnings

Transcript

Hello and welcome to This Week in Review.

This weekly segment highlights a few important developments you may have missed this week, what they may mean for markets, and most importantly, the potential impact for investors. To stay up to date with our latest market insights, subscribe to our YouTube channel or visit FisherInvestments.com. Now, let's review what happened this week.

First up, July consumer prices.

On Wednesday, the US Bureau of Labor Statistics released July Consumer Price Index data. Headline CPI rose 3.4% year over year, in line with analyst expectations. This marked the second consecutive month of cooling prices after CPI peaked at 4.2% year over year in May. Core consumer prices, which exclude volatile categories like food and fuel, slowed to 2.5% year over year. The story behind these numbers is largely an energy story tied to the ongoing Middle East conflict. Gasoline prices rose 24.6% year over year in July, but were down from the month prior. Back in February, just before the conflict broke out, headline inflation was running at 2.4% year over year. But while 3.4% is above those pre-conflict levels, it is far from the massive, energy-driven spike many feared when the fighting began. As we have noted in past segments, inflation is ultimately a monetary phenomena. Sustained broad-based inflation usually comes from rapid money supply growth. Right now, global money supply growth remains moderate. That suggests these energy-related pressures should keep fading over time, rather than settling in as lasting inflation. For markets, what matters most is not the absolute level of inflation, it's how reality compares to expectations. Consumer inflation expectations are still elevated compared with pre-conflict levels. When expectations run high, but reality comes in cooler, that positive surprise can lift investor sentiment. Even if renewed tensions in the Middle East rattle energy markets again, global supply chains have proven remarkably adaptive, and as regional conflict becomes a known variable, its shock value tends to fade, which appears to be well underway. We see lingering inflation fears as simply another brick in the wall of worry this bull market has to climb. Long-term investors are best served by staying disciplined and keeping their focus on the broader underlying fundamentals.

Next, US primary elections.

Primaries are nearly finished and the media is busy trying to forecast November's midterms based on primary results. Investors, on the other hand, are wondering what all this political noise means for markets. To us, these jitters are typical for a midterm year and the setup for what we call the Midterm Miracle still looks encouraging. According to our research, a midterm year's fourth quarter, combined with the following first and second quarters, has delivered positive returns 92% of the time, averaging a 19.8% cumulative return. That's a trend we think many investors underappreciate. We believe this pattern comes down to gridlock. Midterms typically weaken the sitting president's party in Congress. In the modern era, the president's party has lost House seats 89.7% of the time, and Senate seats 72.4% of the time. Once gridlock sets in after the election, it lowers legislative risk. Fewer sweeping changes mean fewer surprises, and markets tend to reward that predictability. Here's where we would offer a word of caution: Keep your political views separate from your portfolio. Markets do not care about personalities or party lines. They care about policies that actually affect businesses, and drawing big conclusions from primary results this early is usually more guessing than genuine analysis. Don't let the noise of a contentious primary season drive short-term decisions. Political uncertainty is a normal feature of markets, not a reason to retreat. History shows us that staying invested through election cycles, rather than trying to time them, has typically rewarded investors. Stay disciplined, keep the long view and let the process play out.

Finally, Q2 earnings.

As Q2 earnings season wraps up, you may have seen headlines arguing that all the positive earnings news comes down to AI infrastructure buildout. Given the media attention AI has received, that story sounds plausible. And to be fair, there is some truth to it, but it is not the whole story. AI and tech spending, including the massive investments hyperscalers are making, are genuinely helping drive earnings higher. Markets have also seemingly priced in this narrative, with lofty expectations for tech and AI-related areas. We're not here to dismiss that. But here's the part that gets lost in the headlines. Earnings growth this quarter is far more broad-based than many appreciate. The strength is not just coming from a handful of US tech names. It is showing up in sectors like Industrials and Financials and developed countries around the world. As of last week, 88% of S&P 500 companies had reported Q2 earnings, with 86% beating earnings per share estimates. This blended earnings growth rate across all sectors has risen to over 50% year over year, well above the 23.1% analysts expected at the end of June. If that holds, it will mark the highest earnings growth rate since Q2 2021. Now, some skepticism around that headline number is fair. A large share of Q2 growth does tie back to two of the largest hyperscalers, Amazon and Alphabet. But even if you strip away those two companies, the earnings growth rate for Q2 is still above 20% year over year. That is the second straight quarter above 20% and the seventh consecutive quarter of double digit earnings growth. And the breadth goes further. Eight sectors are reporting double digit earnings growth for Q2. That's not a narrow top heavy story. That's strength showing up across the market. It is not just a US phenomena either. Developed markets around the world posted earnings for Q1 2026 and are expected to do the same in Q2. Notably, Japanese companies reported earnings growth of more than 35% year over year in Q1. Analyst estimates point to another quarter of comparable growth ahead. For investors, the picture emerging is not a fragile rally hinging on a few mega-cap names. It's a wide base of profitability supporting the broader market. Rather than fixate on which giant beat and by how much, we would focus on the breadth of the earnings picture and the forward profit outlook.

That's it for this week.

Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series Three Things You Need to Know This Week, released every Monday. You can also visit FisherInvestments.com any time for our latest thoughts on markets. Thanks again for joining us, and don't forget to hit Like and Subscribe.