A Strong Historical Setup Heading Into the Second Half of 2026
As markets round the halfway point of 2026, the tone is one of cautious optimism, with many observers convinced the trajectory remains higher even if pullbacks occur along the way. The first half delivered impressive double-digit gains — not only in stock prices but in corporate earnings, which have now posted seven consecutive quarters of double-digit growth.
A key distinction sets this rally apart from previous big market runs: on risk-off days, rather than broad selling, there has been a rotation out of concentrated parts of the market and into other areas. This rotation makes fundamental sense. Earnings growth in the most recent quarter was double what had been expected. Economic data, when normalized for whether it is beating expectations, is also strong — the Citi Economic Surprise Index sits essentially at its year-to-date and one-year highs. In short, the market has been absorbing good news after good news.
Seasonality and Cyclical Signals
The historical backdrop reinforces the bullish case. July has been positive for eleven straight years. The first half of 2026 produced a gain just shy of 10% for the S&P 500. Historically, when the first and second quarters collectively produce gains of five to ten percent in that opening six-month period, it has been a bullish setup: the full year has averaged a total gain of almost 14%, with full-year performance ending higher 94% of the time. This is a guide drawn from historical data, not a guarantee.
The presidential-cycle data adds a striking twist. Within the four-year presidential cycle, the second quarter of midterm years — the quarter just completed — is by far the worst-performing quarter historically. Yet the market just delivered not only the best second-quarter midterm performance ever on record, but the fifth-best second quarter ever on record for the S&P 500. Following a second quarter with gains above 10%, the fourth quarter has never been negative, and the third quarter is typically positive as well. Combining this seasonal data with better-than-expected economic figures and earnings that keep raising the bar, many factors are favoring the bulls right now.
One cautionary seasonal note: while July seasonality looks favorable, the period afterward may bring choppiness in August and September, with new highs potentially not returning until October.
Rotation Within Technology and the Memory Comeback
Although investors were focused on the mega-cap "Magnificent Seven" names, the biggest surges came elsewhere. Memory chips came roaring back. SanDisk was up over 4,000% in a year and up 858% in the first half alone, joined by Micron, Intel, and Western Digital among the leaders. So there was meaningful rotation within technology itself: it wasn't the Magnificent Seven that were the best performers, but technology as a broad sector still performed well, alongside industrials, energy, and materials.
The Breakdown in AI Correlations
Arguably the most impressive feature of this rally is that the Magnificent Seven have not been much of the story for roughly the last two months. If you index and normalize the hyperscaler names and plot the AI chip names next to them, their correlation breaks down at the end of April. That breakdown conveniently coincided with earnings from Alphabet, Meta, and Microsoft — all three hyperscalers announced dramatic capital-expenditure spending plans at the same time that they had all drawn down and even exceeded their free cash flow through their spending.
In the weeks that followed, chatter emerged around equity offerings and debt raises as these companies sought ways to finance their projects. The implication: the spending is clearly benefiting those collecting the checks. Memory chip stocks in particular are raising prices and watching margins skyrocket, because their supply is so depleted relative to demand that they can essentially name their own prices.
What is far less clear is the payoff for the spenders. The market is no longer really celebrating these spending plans, because there is not yet much to show for the outlays. Moreover, now that these companies are no longer funding the spending from their own free cash flow but are instead raising money by potentially diluting shares or tapping the debt markets, the conversation changes. Whether this is a short-term trend or something with more staying power remains to be seen. A broader point from many market observers is that geopolitical noise matters less for the market over both the near and long term; it is the fundamentals that are shining and driving the market.
The Jobs Picture
Attention turned to labor-market data. The prior day's JOLTS report came in roughly in line, with a prior revision, but quits and layoffs held steady. The ADP private-payrolls print showed 98,000 jobs added, down from 122,000 the prior month. Overall, there seems to be less worry about jobs at this point, though inflation remains a watch item.
How should the jobs data be read ahead of the following day's important print? It looks like more of the same — 98,000 jobs created is not a scorching number, but not a worrisome one either. There is a wish for tighter correlation between ADP and the official figures, but that correlation is weak. The growth was driven largely by education and health services, which accounted for about half of the job gains. Notably, leisure and hospitality remained relatively weak, adding only about 2,000 jobs. Financial activities, professional and business services, and trade, transportation, and utilities all showed decent growth. Nearly all the growth came from service-providing jobs, with only about 2,000 goods-producing jobs added. Regionally, the spread was fairly evenly distributed.
A notable structural detail: small establishments dominated hiring. Companies with 1 to 19 employees and 20 to 49 employees — essentially firms under 50 workers — accounted for 53,000 of the 98,000 jobs. This suggests that the large companies that dominated hiring after the pandemic have passed the baton to small and medium-sized enterprises, which finally have access to some of the available labor supply.
Nike: A Mixed Quarter That Doesn't Yet Change the Narrative
Nike sits at 11-year lows, down 43% over one year. The company reported good quarterly numbers with a beat, but China still showed weakness, and the stock traded lower in the morning, down about 1%. Analyst price targets sat above the roughly $41 level where the stock was trading: Guggenheim maintained a buy with a $60 target, Stifel at $45, BTIG at $55, and Piper Sandler at $45.
The headline EPS was flattered by a one-time tariff-related benefit worth 52 cents. That produced a 72-cent EPS versus 14 cents a year earlier against a similar initial estimate — the one-time tariff refund made a huge difference to margins and EPS. Fourth-quarter revenue was $11 billion, down about 1.1%.
The core issue the bears are focused on is struggling sales, particularly in sportswear, Jordan, and China, where the recovery is taking longer than expected. Bulls, by contrast, highlight improving margins, inventory cleanup, and signs that core business trends are starting to stabilize. There have been a fair number of price-target cuts, but many analysts maintain neutral or bullish outlooks. The report simply wasn't enough to change the narrative. A useful comparison is Intel: it had been in recovery for a long time, but last year it managed to change its narrative and get the street to believe in the story. Nike hasn't done that yet. The CEO says the company is "fully committed to winning," with China remaining a make-or-break part of the story.
The Footwear and Athleisure Contrast
Nike's weakness is not a story about all of retail. Other footwear and athleisure names have also struggled — Under Armour was down 7% year-to-date, Nike close to 40%, and Lululemon down 46%. But Ralph Lauren was up 46%, and Macy's was up 107%. So the retail space as a whole was not made up of laggards; it is specifically the footwear, athletic, and athleisure segment that has been under pressure.
Meta Forms a Cloud Business
A significant piece of breaking news moved Meta shares, alongside separate reports of layoffs at Microsoft. Meta is reported to be exploring a new cloud infrastructure business that would sell AI computing power and AI models to external customers, placing it in more direct competition with AWS, Microsoft's Azure, and Google Cloud.
Potential offerings might include access to Meta-hosted AI models through APIs — similar in concept to AWS's Bedrock — as well as the rental of raw AI computing capacity. That capacity-rental element makes the move very similar to AI-focused cloud providers such as CoreWeave and Nebius. Both of those stocks fell something like 10% or more in the pre-market as the dominoes began to fall.
The initiative is reportedly known internally as "Metamputee." It represents an effort to generate returns on Meta's massive AI infrastructure investments — tying directly back to the earlier theme of hyperscalers searching for ways to rationalize their enormous spending. This is an important story, though how quickly it comes to reality, if it does, remains to be seen.
Summary
The second half of 2026 opens on an unusually strong historical footing: favorable seasonality, a broken pattern of typically weak midterm-year quarters, robust earnings, and better-than-expected economic data. Beneath the surface, the market's leadership has rotated away from the mega-cap hyperscalers toward the suppliers benefiting from AI spending — especially supply-constrained memory chipmakers — even as investors grow more skeptical of debt- and dilution-funded capex with little to show for it yet. The jobs market looks steady rather than hot, with hiring shifting toward smaller firms. Nike's beat, driven by a one-time tariff benefit, wasn't enough to change its bearish narrative, while footwear and athleisure remain a specific pocket of weakness within an otherwise resilient retail sector. And Meta's push into cloud infrastructure signals both a new competitive front for the major cloud providers and a fresh attempt by big tech to monetize its AI buildout.
