The Economy and the Federal Reserve
The economy moderated in the second quarter, but the underlying picture was healthier than the headline growth rate might suggest. Real GDP increased at a 1.5% annualized rate, down from 2.1% in the first quarter. Much of that deceleration reflected lower government spending and a surge in imports rather than a meaningful deterioration in private-sector activity.
Indeed, several measures of private demand remained encouraging. Consumer spending accelerated to a 3.4% annualized pace, while business investment increased 8.5%, led by a 13.6% rise in equipment spending. Perhaps the clearest measure of underlying private demand—real final sales to private domestic purchasers, which excludes the effects of government spending, trade, and inventories—rose 4.2%. Corporate profits also increased by approximately $400 billion during the quarter.
Business investment continues to be an important source of economic momentum. Spending on equipment and software is running roughly 9% above year-ago levels, its strongest pace since 2021. More than half of this year’s increase has been associated with the continued buildout of artificial intelligence infrastructure, underscoring the scale of capital being deployed toward this emerging technology.
The Federal Reserve remains a key variable for both the economy and financial markets. In his first Jackson Hole address as Fed Chair, Kevin Warsh struck a somewhat hawkish tone, but his emphasis on the role of money and bank credit in the inflation process was encouraging. These factors had received relatively little attention in the Fed’s framework in recent years. He also reiterated that short-term interest rates remain the Fed’s principal policy instrument, rather than bond purchases or forward guidance, and he stopped short of characterizing current financial conditions as restrictive.
With the federal funds rate at 3.50%–3.75%, markets adjusted their expectations following the speech, moving from roughly a one-in-three probability of a September rate increase to approximately 58%. Uncertainty surrounding the Fed’s next move remains an important source of volatility and a potential headwind for equities as we enter the second half of the year.
Inflation has continued to moderate, although it remains above the Fed’s long-term objective. Core PCE inflation, the measure the Fed watches most closely, held at 3.3% in July, unchanged from June and below its May peak. The fading impact of the energy shock associated with the Iran conflict has also provided some relief.
The labor market is the softer component of the economic picture. Employers reduced payrolls by 23,000 in July, while revisions to May and June employment removed another 103,000 jobs. Labor-force participation also declined modestly to 61.4%. At the same time, unemployment remained at 4.1%, initial jobless claims were near multi-decade lows, and household income increased 0.4% in July. Taken together, the data suggest a labor market that is cooling rather than collapsing.
Equity and Fixed Income Markets
August was a volatile month beneath the surface, but most major asset classes ultimately finished higher. Emerging markets led with a 4.2% gain, followed by large-cap U.S. equities at 2.7%, mid-cap stocks at 1.8%, developed international markets at 1.7%, and small-cap stocks at 1.0%.
The S&P 500 established three record closing highs during the month and ended at 7,686. The final trading day was marked by renewed tensions in the Middle East, a reminder that geopolitical developments remain an important source of uncertainty for investors.
Large-cap stocks continued to outperform smaller companies, marking the second consecutive month in which mid- and small-cap equities trailed. Higher interest rates remain an important factor. Smaller companies tend to have greater exposure to floating-rate and shorter-term debt, making them more sensitive to changes in financing costs.
Corporate earnings continue to provide an important foundation for the equity market. Nvidia reported record quarterly revenue of $96.2 billion, with data-center sales approaching $89 billion. The company also projected substantial revenue growth through fiscal 2028, while noting that supply constraints remain a limiting factor. The continued investment in artificial intelligence infrastructure is increasingly influencing both corporate capital spending and equity-market leadership.
At the sector level, energy was the strongest performer in August, gaining 7.0% as crude oil prices increased. Information technology followed with a 6.3% return. Despite the month’s geopolitical and interest-rate uncertainty, market volatility remained remarkably subdued, with the VIX ending August at 14.92.
Fixed income markets also posted modest gains. Long-term Treasury yields rose during the month, with the 30-year Treasury reaching 5.31%, its highest level since 2007. The move occurred against the backdrop of a U.S. national debt exceeding $40 trillion and renewed debate surrounding fiscal sustainability and the longer-term outlook for the dollar.
The Treasury responded by increasing its purchases of longer-dated securities, with planned buybacks rising from $2 billion to $4 billion through November. Against this backdrop, long Treasuries gained 0.8%, the broad investment-grade bond market rose 0.4%, high-yield bonds gained 1.0%, and short-term Treasuries increased 0.2%. Municipal bonds were the exception, declining 0.2%.
Interestingly, August’s market leaders were not necessarily the leaders for the year as a whole. Small-cap stocks, which were the weakest major equity category during the month, remain the strongest-performing equity segment year-to-date, up 19.9%. Meanwhile, the broad bond market remains modestly negative for 2026, while long-term Treasuries are down 2.9%.
As we look toward the remainder of the year, we expect the pace of earnings growth to moderate from exceptionally strong levels. Importantly, decelerating growth is not the same as deteriorating growth. The distinction matters. Within this environment, we remain constructive on large-cap U.S. equities and emerging markets, while maintaining a disciplined approach to diversification and risk management.
Making the Most of Wealth Transfer Opportunities in 2026 – Using Wealth Intentionally
For many families, thoughtful wealth planning is about more than preserving assets—it is about using wealth intentionally to support the people and causes that matter most. Lifetime gifting can be an important component of that strategy, allowing you to transfer assets to the next generation while potentially reducing the size of your future taxable estate.
In 2026, an individual may gift up to $19,000 per recipient ($38,000 for married couples) each year without using any of the donor’s lifetime federal gift and estate tax exemption. This annual exclusion applies separately to each recipient, creating an opportunity to make meaningful gifts to children, grandchildren, or other family members each year.
Because the annual exclusion is based on the calendar year, gifts must generally be completed by December 31, 2026, to take advantage of this year’s exclusion.
Supporting Education and Health Care
There is also a valuable opportunity to provide significant support for loved ones outside the annual gifting limits. Payments made directly to a qualifying educational institution for tuition or directly to a medical provider for qualifying medical expenses are generally not subject to the annual gift tax exclusion.
This can be particularly meaningful for grandparents and other family members who wish to help with significant life expenses. For example, you may pay a grandchild’s qualifying tuition directly to a primary/secondary private school or pay qualifying medical expenses directly to a health care provider without using your $19,000 annual exclusion for that individual.
The direct-payment requirement is important: the payment must be made directly to the educational institution or medical provider rather than to the family member receiving the benefit.
Integrating Gifting Into Your Overall Wealth Strategy
For families with substantial wealth, annual gifting and direct payments for education and medical expenses can be most effective when viewed as part of a comprehensive wealth-transfer strategy rather than as stand-alone tax techniques.
The 2026 federal basic exclusion amount is $15 million per individual ($30 million for a married couple, providing substantial lifetime federal gift and estate tax planning flexibility.
Beyond the tax considerations, lifetime gifting provides an opportunity to see the benefits of your wealth during your lifetime. Gifts can help fund education, support a new business venture, contribute to a child or grandchild’s financial foundation, or provide resources for other important family milestones.
Ultimately, effective wealth transfer is about aligning your financial resources with your family’s long-term goals and values. By combining annual gifts, direct payments for qualifying expenses, and broader estate-planning strategies, you can create a thoughtful framework for transferring wealth while maintaining appropriate flexibility and control.
We would welcome the opportunity to discuss how these strategies may fit within your broader wealth plan and whether there are opportunities to make additional gifts before year-end.