How is the second half of 2026 shaping up?

The first six months of the calendar year were volatile, punctuated by the conflict in Iran.

Despite that, markets have performed very well.

World shares are up an impressive 10.4 per cent, having been 9.5 down from their peak at the March lows.

Some markets have been much stronger, with emerging market shares up 22.7 per cent and Japan 17.2 per cent higher.

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The S&P 500 in the US has increased 9.6 per cent, and while that’s a great return for just six months it masks some big divergences under the hood.

The Magnificent 7 cohort of stocks has gone sideways, while the Russell 2000 index (which is made up of smaller companies) has rallied more than 20 per cent.

Australian shares are marginally higher in 2026, while the UK and Europe are up 6-8 per cent.

The local sharemarket has lagged international stocks, with the NZX 50 index close to flat year-to-date.

That sluggish performance has mirrored the housing market.

Prices are slightly lower compared to the beginning of the year, while sales activity is down almost five per cent on last year.

However, investors and business owners will be hoping to put the first half behind them as odds of a resolution in the Middle East improve.

Ships are moving again through the Strait of Hormuz, while US crude oil has traded under US$70 in recent days.

That’s more than 35 per cent below the April highs of over US$110 and nearly back to pre-conflict levels.

With a bit of luck, inflation pressures will ease and we won’t need to see central banks tighten monetary policy as much as feared.

Markets still see a move in the OCR next Wednesday as more likely than not, but it’s no longer a sure thing and the peak looks set to be lower than feared.

That’ll be a big positive for our sharemarket, where sectors like utilities and listed property are sensitive to interest rates.

New Federal Reserve Chair Kevin Warsh has more options, given the Fed Funds Rate range is already much higher at 3.50 to 3.75 per cent.

Investors still see the chance of hikes in the US this year, but if inflation has indeed peaked Warsh could elect to stay on hold.

Even with central banks under less pressure, the next test for investors could be the upcoming earnings season.

A key reason for the resilience of markets has been the impressive earnings growth we’ve seen in 2026, which has been more than enough to offset geopolitical and macro concerns.

Over the next few weeks many of the US heavyweights will begin reporting earnings for the June 2026 quarter, and the bar is high.

Analysts are expecting (year-over-year) earnings growth for the S&P 500 of 23 per cent, on the back of revenue growth of 12 per cent.

That would be the seventh consecutive quarter of double-digit earnings growth and the strongest since 2022 (when the US economy was rebounding from the pandemic).

To be fair, those optimistic numbers are driven by an expected doubling of earnings for the energy sector and a 60 per cent rise for tech stocks.

The likes of industrials, real estate, consumer staples and financials are forecast to post increases in the more modest range of 5-10 per cent.

Politics is also shaping up as a key theme over the balance of 2026.

We’re just four months out from polling day and the race has tightened, with New Zealand First increasingly looking to be in a pivotal position.

Midterm elections are also taking place in November.

These are held every four years, and they typically mean a bit more volatility across markets.

All 435 seats in the US House of Representatives will be contested, as will 35 of the 100 seats in the Senate.

The president’s party typically loses seats in both the House and Senate in midterm elections, with the impact usually more pronounced in the House (where every single seat is up for re-election).

Trump’s Republicans currently control both the House and the Senate, but they’re expected to lose control of the House.

You’re never really out of the woods when it comes to financial markets.

Put one challenge behind you, and there’s always another lurking around the corner to take its place.

That’s part of investing, and it’s why we get such attractive long-term returns from asset classes like shares.

If we’ve seen the back of the oil shock, that puts us in a much better space in terms of inflation and monetary policy.

That’s especially so with the global economy having proved more resilient than many had expected, again.

Next stop is navigating the high expectations of earnings season, then refocusing on some key political events over the back end of the year.

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