Wall Street capping off its best quarter in about six years, a massive rally adding more than $8 trillion to the S&P 500. Wall Tech did a lead the day yesterday with the Nasdaq climbing 1.7% and semi-stocks notching their best quarter on record as they continue to bounce back. But beneath the surface of this rally, a macro storm may be brewing. Fed Reserve Chair Kevin Walsh has signaled a distinctly hawkish shift. dropping traditional Ford guidance as well as zeroing in on an inflation problem that's topped the Fed's target for five years. Well, joining us this morning to discuss how to navigate this high-risk bull market is Bob Dahl, CEO and Chief Investment Officer at Crossmark Global Investments. Bob, good morning. Thank you so much for joining us. We know over in Portugal right now that ECB, Lagarde, as well as the Fed's Morrish will start talking and we'll be keeping a close eye throughout the hour for their commentary. But given the rally that we saw in cyclical sectors for the first half of this year, as well as some of those geopolitics, with so much good news already priced in, how vulnerable do you think this market is to a potential shot?
I think the problems could be, you cited the first one, that is, does the Fed fight the inflation by raising rates? That would not be good for stocks. The other, which you referred to also, is earnings. The earnings avalanche has been amazing. I mean, who would have thunk it? hundred dollar oil and stocks hit an all time high and have one of the best first halves on record. We need expectations to be beaten in terms of earnings and the Fed to behave itself for stocks to continue to go higher.
Yeah. And Bob, when we're talking about the central bank, there are a lot of factors to consider when it comes to the macro picture. We just got the release of ADP this morning and they did come in slightly lower than expected. But tomorrow morning, we do get that jobs report, nonfarm payrolls as well as unemployment. And we'll be looking at the wage figures as well. But given Given what we've seen so far and the fact that Chair Walsh has ushered in this new era of communication, how does all of this affect investors and what would actually move the needle for a change in rates this year?
I think the inflation issue is the one to be watched most carefully. Look, you know, coming into the year, the Fed fund futures curve, we're discounting two Fed fund cuts. Here we are six months later, and the Fed fund futures curve is dictating one to one and a half increases this year. What's the change? Inflation. The Fed wants inflation at 2%. It's running in the high threes, some of the indicators low fours. And so if the Fed is serious about trying to get inflation down to 2%, it will have to raise rates. It will buy as much time as it can before it does, but that's what we've got to watch carefully, the inflation numbers.
Yeah, we will definitely continue to monitor those inflation figures, especially as we're watching energy prices, in particular oil prices, come down. But I think this is a good point to take a step back and look at the market performance for the first half of this year as we head into the second half. Now, the second quarter was a tale of two tech markets. The MAG-7 gained only 11%. But when we look at the semis, especially the SOX, that index had its best quarter ever, surging an astounding 88%. Given earning estimates for 2026 have surged exponentially since January, what are your expectations in terms of corporate profits as we head into the second half? And do you think we can sustain what we've seen in terms of gains for the equity markets?
So I think that the profits number that you have mentioned has to continue for stocks to do well. The valuation level on stocks is high, meaning expectations are high and therefore they have to be met. If they are, stocks will be just fine, but it gets tougher and tougher to exceed estimates by the amount that happened in the first quarter and the second quarter. That needs to be watched carefully and productivity, top line growth, margin improvement, they're all ingredients of what we've witnessed so far. And it just gets harder to continue that, to sustain that, and to build on it. And, you know, we all complain about MAG 7 only up 11%, as it were. I don't know about you, but 11% in one quarter doesn't sound too bad to me.
Yeah, not too shabby for sure. But while we're navigating this high risk bull market, how are you adjusting some of your strategies, whether we're talking large cap or mid cap or small cap, to protect capital while still capturing upside in this environment right now?
Yeah, attempting to do all of that, in particular focusing on free cash flow and the increase in it in individual companies and watching return on equity, profitability. If I can get good free cash flow, cheap multiples of free cash flow and high return on equity, high profitability, I think that will weather any kind of storm reasonably well and should continue to build on the positive side should the market continue to go higher.
And finally, before I let you go, it is a holiday-shortened week here in the U.S., given that the Fourth of July does fall on Saturday. So, tomorrow morning is Jobs Thursday, and we get a clearer picture of the U.S. labor market tomorrow morning. Now, I think on paper, the U.S. economy looks strong with 2.1 percent GDP growth for Q1, as well as steady unemployment. consumer sentiment not so much. So given this disconnect that we're seeing across some of these backward looking data points as well as this K shaped economy where the wealthy are propping up the spending data while everyone else lags behind. How vulnerable do you think the broader economy is if equity is suddenly correct.
I think, Remy, we've got to watch what consumers are doing, not so much what they're saying. They've been showing some sort of caution in many of these sentiment surveys for a while, but they're spending money. Now, the bear would turn around and say, yeah, but they're spending more money than their incomes, or it's rising faster than their incomes. Therefore, the savings rate's falling, and that can only last so long. So I think that's to be watched very carefully. Consumers are feeling good. They are spending at the high end out of the wealth effect that has come from the massive increase in stocks over the last few years.
Well, Bob, we will have to leave it there for today, but thank you so much for joining us. And thank you so much for sharing your insights as well as your perspective. Have a happy Fourth of July.
All the best. Thanks. You too.
