Market Report: June 2026

Alternative Reality

Several years ago, an alternate history television series aired called The Man in the High Castle. The series depicted a dystopian world set in 1962 after the Germans and Japanese supposedly won World War II.  Largely set in the U.S. and Germany, it portrayed a world in which the United States and its allies lost the war, and the world had been divided by the Germans and the Japanese – including the United States. Several of the characters can get a glimpse into other parallel realities (including the one we live in), due to finding a series of films that the infamous “Man in the High Castle” has produced. The show is a sobering view as to what might have been had the war turned out differently. For investors, one must wonder, based on current events, if we are living in an alternative economic reality – or perhaps, what if future events turn out differently than what we expect? Could the war with Iran (along with the war in Ukraine and other potential conflicts, such as Taiwan) escalate to a world war or a world where energy prices (and inflation) skyrocket, sending the economy into a tailspin? That would certainly be a different scenario than most of us expect, but what if? How do we prepare for the unexpected at that level? Should or shouldn’t we? While we are not going to answer all these questions here, it is worth noting the potential risks (as well as rewards) that investors could face in the coming months and years.

Financial Markets

So what world do we live in when long run returns average 8% to 12% for equities, 3% to 6% for bonds, and cash at 2% to 4%, and yet we have seen large-cap equities (S&P 500) average over 23% over the past three years, and over 14% over the past five, bonds (Bloomberg U.S. Agg.) at about 4% over the past three years, but just 0.2% over the past five, while cash has generally moved back closer to long run averages.  If just looking at the last three years, it really does not matter what equity index you look at, as they all have soared well beyond long-run averages. While the returns are real, this environment might be considered an alternative reality compared to the long-run data, and is largely the reason that many prognosticators noted earlier this year that returns over the next decade – especially for equities – are expected to be quite low, generally (see below for market valuation data that supports this argument). 

The good news, so far, is that 2026 is shaping up to be another remarkable year! While it is true that the largest stocks (think the Magnificent Seven and other AI related companies) continue to dominate, the broader market is performing well, too. For April, the NASDAQ soared 8.43%, the S&P 500 5.26%, and the EAFE 2.60%. The DJIA (up 2.94%), the S&P 400 (up 2.45%), and the S&P 600 (up 1.04%) all performed well, and are also enjoying a strong start to the year. The Bloomberg U.S. Aggregate Bond index was up 0.31% in April and is up 0.38% year-to-date, which is not bad considering the Fed has not cut rates, and inflation has persisted due to the war with Iran.

Let us hope the current reality (alternative from long run expectations where equity returns are expected to be minimal) holds in terms of market returns, and the negative expectations are lessened!

Here is the most recent data regarding several market valuation indicators. Note that the data is as of May 29th, 2026 (Buffet Indicator as of June 3^rd, 2026), and all have become more pronounced in how far overvalued they are. This is due to another strong month in the equity markets in May, even with strong earnings performance. Note that all statistical measures here indicate that the markets are strongly overvalued.

The Economy

The economy may seem to be somewhat disjointed, and that may skew an investor’s view of reality. Investors are encouraged by strong earnings growth that extends beyond just the Magnificent or AI stocks, a reasonable employment environment, and a still spending consumer. On the other hand, investors may be concerned about high inflation, whether due to the war and energy prices, housing prices, the threat of a further spike in energy prices due to a lack of supply, and nosediving consumer sentiment. Equity indexes continue to set new records, even as valuations remain strongly overvalued. We are living in an environment of two realities, and that might scare some investors, but the truth is that this sometimes is a reasonable time for investors. When everything is going great, one may want to be cautious in their investment approach, and vice versa, when everything seems lined up negatively investment-wise, you may want to take on more risk.   As Warren Buffet is fond of saying, “Be fearful when others are greedy, and greedy when others are fearful.”  Or as former Fed Chairman Powell put it recently, “…the economy has been resilient. It really has, not just this time, but it’s been remarkably resilient for some years now. The U.S. economy has just powered through shock after shock after shock, and consumers are still spending. And that’s what the banks will tell you, credit card companies will tell you, the retail sales numbers that we got most recently. People are still spending.” And for now, consumers are spending, but investors in AI might be a bit greedy right now, while investors in value-oriented equities might need to take on a bit more risk. In any event, with the economic and investment news split between good and bad, investors should take heart that staying in the game is a reasonable and appropriate thing to do – at least if you remain mindful of what risks are out there. That’s our reality right now, and it is not a bad place to be.

GDP (Gross Domestic Product) – Given that consumer sentiment is so low, it makes you wonder who is living in an alternative reality, consumers or the U.S. economy that continues to push ahead – largely on the back of that same consumer! First quarter GDP hit 1.6% according to the second estimate, and GDPNow shows second quarter GDP at 3.0% as of June 1^st. Given that the consumer makes up almost 70% of GDP, it is somewhat of a mystery that the consumer continues to spend even though they state that they feel terrible about the economy. And this is not just in the last month, but this state has persisted for several months now. As we have stated many times, long-term expectations are for the economy to fall back to an annualized rate of 2.0% or less over time. The fear is the impact of the war causing oil prices to spike dramatically, how long that situation might last, and how the consumer then reacts. Hopefully, reality does not take a turn for the worse and we face an economic recession. Expectations (based on the war/oil/inflation) are worsening, but few expect an outright recession in 2026, and most expect a resolution to the war that would likely cause an upward revision to those expectations. That would be a great reality!

Inflation – Unfortunately, many of the risks associated with our current world viewpoint is related to inflation largely due to the price of energy/oil. The risk is real that many countries could see their oil supplies and reserves become severely reduced later this summer if the situation in the Straits of Hormuz does not change soon. We, here in the U.S., will not face as severe of a shortage, but we certainly could face even higher prices at the pump as energy prices are set on a world-wide marketplace and not just domestically. It does seem that investors and economists are downplaying the potential for this economic disruption, although the current data does not yet show the potential damage. For example, the April CPI came in at 3.8%, after rising 0.6% during the month. Truflation, supposedly more current than the government’s data, showed an annualized rate of 1.92% on June 3^rd. These numbers hardly resemble the levels of inflation we could see should oil hit $150 or $200 a barrel that some feel could happen. But the data also does not show what would happen should the situation be resolved and oil declines back to the $70 a barrel price we have seen recently. Which reality will come true? No one knows, but being mindful of what the future could hold is worthwhile.

Employment – Over the past few years, employment data and its impact on the markets has been somewhat disconnected like two different realities.  One would think strong employment data would fuel strong market returns as it would seem the economy is expanding, wages growing, and consumers with more cash to spend.  Unfortunately, when the data is released the results seem to be different as the market falls in light of strong employment data and vice versa.  The reasoning, according to some, is that a strong jobs picture may mean a tighter Fed (higher interest rates) and weaker jobs picture a loose Fed (lower interest rates).  So, reality gets disjointed.  That seems to be the case this month as May saw the economy add 172,000 new jobs – well ahead of forecasts of less than 100,000 – and the unemployment rate remained unchanged at 4.3%.  Of course, on the news, the market fell.  From an economic perspective, the Sahm Rule sits at 0.10 for May, down from 0.2 in March and 0.13 in April, well below the recessionary indicator level of 0.50.  Wisconsin and Madison data represent preliminary numbers for April and stand at 3.5% and 2.7% respectively.  Both are improvements over recent months and among the lowest in the country.  Whether an alternative reality or not, the data both nationally and locally remains positive.

The Fed Watch

Finally! The Fed has a new Chairman – Kevin Warsh. Unfortunately, the new reality of a new “Fed” under the leadership of Mr. Warsh is something that may take some time. Why? Because the former Chairman, Jerome Powell has not stepped down from the Fed’s Board of Governors as is usually the case. It seems to be beyond just standard speculation that he has not stepped down for political reasons as it is no secret that Mr. Powell dislikes President Trump. In addition, it appears that there are a majority of the Governors that support Mr. Powell over Mr. Warsh and so the reality may be that there will be a power struggle for some time.  That will not be good for policy and by extension the economy. For now, based both on the internal issues described above and uncertain economic conditions (mainly inflationary effects from the war in Iran), the Fed is likely to sit tight and not raise or lower interest rates until there is a resolution to one or both of those issues.

Outlook/Summary

When it comes to investing, investors choose their version of reality and then act upon it. That does not mean it is the right one, but it is based on their view of the world around them. Some investors choose to believe in a somewhat false premise that certain stocks have a higher valuation than the market applies to those securities (think the meme stock craze like with GameStop a few years ago), while others have a false sense of security that nothing will ever go wrong until it is too late.  Unlike The Man in the High Castle, we cannot see into other realities and perhaps try and change ours to move to something we may like better. We have to deal with what is around us – no matter how bad or how good it appears to be (just be thankful we did win the second world war, as the reality pictured in that show is not one any of us would want to live in).  That is why we take the approach we take in managing portfolios: diversify and protect against the downside first and then seek upside. It is a slow and steady approach, but also allows us to deal more effectively, we believe, with the real world around us.

Should you like to discuss your portfolio or learn if our strategy can work for you, please call the Wealth Management division of Lake Ridge Bank at (608)826-3570. We look forward to speaking with you.

Market/Economic Data

As of May 31st, 2026…. Unemployment data is through April for national, April for Wisconsin (preliminary) and Madison (preliminary); inflation data is through April, Truflation as of 6/3/26:

Thank you for your business – we look forward to speaking with you soon. (Note – this commentary used various articles from JP Morgan, Morningstar, the Wall Street Journal, Investor’s Business Daily, Northern Trust, CNNMoney.com, msn.com, Kiplingers.com, nytimes.com, Fidelity Investments, American Funds, LPL Financial and other tools as sources of information.

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