RFA H2 2026. Outlook Report
Executive Summary
The first half of 2026 was two markets in one. A supply-side war shock in the Persian Gulf drove a stagflationary scare through the firstquarter; the ceasefire, an oil price collapse and an extraordinary earnings season drove one of the strongest quarterly rallies on record inthe second. The S&P 500 fell 4.63% in Q1, rose 14.87% in Q2; its best quarter since 2020 and the best second quarter of any midterm yearon record; and finished the half up 9.55% at 7,499.36.
Key drivers of H1 2026
● Geopolitical supply shock: The U.S.–Israel campaign against Iran began 28 February. The Strait of Hormuz was effectively closedfor much of March–May, taking Brent above $120/bbl (dated Brent briefly near $140, the highest since 2008). A conditional truceon 8 April and a signed U.S.–Iran memorandum on 17–18 June, including a 60-day ceasefire and reopening of Hormuz, unwoundthe risk premium: Brent ended June near
$73, only about 7% above its pre-war level.
● Inflation re-accelerated, but narrowly: Headline CPI reached 4.2% y/y in May, a three-year high, with energy contributing more than60% of the monthly increase and gasoline up 40.5% y/y. Core CPI rose only to 2.9% and monthly core momentum decelerated to 0.2%.This divergence is the single most important structural feature of the current inflation picture.
● A hawkish pivot under a new Fed Chair: The FOMC held at 3.50–3.75% at all four H1 meetings. At Kevin Warsh's first meetingon 17 June the Committee voted 12–0 to hold, stripped the easing bias from its statement, and lifted the median 2026 dot to3.8% from 3.4%; converting a projected cut into an implied hike.
● Earnings did the heavy lifting: Q1 2026 S&P 500 earnings grew roughly 27–28% year-over-year; the fastest since Q4 2021; againsta 13.1% estimate at 31 March. Consensus CY2026 growth was marked up to about 24% from 17.4% in early April.
● Leadership broadened violently: The Russell 2000 gained 22.6% on a total-return basis, its best first half since 1991, while theRussell Top 50 mega-cap index added only 2.0%. Within large caps, Technology returned 43.5% in Q2 alone on the AI memory andsemiconductor cycle.
Core thesis for H2 2026
Our base case is a moderating but still-positive tape: constructive on U.S. equities with moderate conviction, driven entirely by earningsrather than multiple expansion. The energy base effect should pull headline CPI down toward 3–3.5% by December, allowing the Fed tohold without hiking. At 20.4x forward earnings; above both the five-year (19.9x) and ten-year (19.0x) averages; the index has novaluation cushion, so the burden of proof sits with the earnings revision cycle, which remains positive. We look for the S&P 500 to end2026 between 7,700 and 8,000, a 3–7% gain from the half-year close, with a wider-than-normal distribution around it.
Risks and opportunities
● Principal risks: a breakdown of the 60-day Iran truce and re-closure of Hormuz (a repeat supply shock would force the Fed's hand);a policy error if the FOMC hikes into a consumer already running negative real wage growth; digestion of the AI capital-expenditure cycle; concentration risk, with the ten largest constituents near 40% of the index; and the 24 July expiry of the Section122 tariff, which is also under legal challenge.
● Principal opportunities: Financials, the cheapest large-cap sector at 17.2x trailing earnings, into a record M&A cycle and apositively sloped curve; Industrials levered to grid, electrification and defence spending; Health Care re-rating from a depressedbase; and selective AI-infrastructure exposure beyond the mega-cap complex.
