Bad Vibes Appear No Match for This Bull Market

MIKE TOWNSEND: We are in the midst of one of the hottest runs by the stock market in decades. In April and May, the S&P 500® rose by 16.1%. That's the fifth best two-month stretch for the index since 1950. If you're listening to this podcast, you're likely very involved in the stock market and likely a beneficiary of this amazing two-month run which wiped out a negative first quarter of 2026 and then some. But seen through the lens of the entire U.S. population, it's relatively few people that have benefited. 

Only about 58% of the population is invested in the market at all. The wealthiest 1% of Americans own about 50% of stocks. The wealthiest 10% own roughly 87% of stocks. The bottom 50% of Americans by net worth own just 1% of stocks. And that's why there's a big disconnect between what's happening in the market and some of the measures of things like consumer sentiment and whether people feel like the country is on the right track or the wrong track. 

Gallup, one of the oldest polling firms in the country, surveys Americans each month on the state of the economy. In May, the poll found that just 16% of respondents rated current economic conditions as excellent or good, and just 20% of respondents said they thought the economy was getting better, while 76% said it was getting worse. It's a strange time. Inflation is rising, gas prices are sky high, geopolitical uncertainty persists. Some members of the Federal Reserve think the Fed may need to raise rates rather than cut rates. So it's easy for investors with big gains in their portfolios to be uneasy about where things are headed, even while the market keeps chugging along. 

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.

Coming up in just a few minutes, I'm going to be joined by my colleague Kasey McCurdy, chief portfolio strategist for Schwab Wealth Advisory™ and a key member of the Schwab Center for Financial Research, for a great discussion about what's going on in the market and whether this positive run is sustainable. But before Kasey joins me, here's a quick look at what's going on in Washington right now.

First up, Congress returned to Washington this week facing a bit of a legislative mess. The Senate in particular is bogged down with its $72 billion plan for immigration enforcement funding. This is the proposal that would fund ICE and Customs and Border Protection for three years, since those agencies were not funded in the agreement that ended the 76-day shutdown of the Department of Homeland Security earlier this spring.

Republicans intend to use the budget reconciliation process, which allows them to bypass a filibuster and approve the bill with just a simple majority vote. It's the same process that was used last year to pass the so-called One Big Beautiful Bill. But a feature of the process is that Democrats can offer an unlimited number of amendments, creating a vote-o-rama that can occupy the Senate for hours or even days on end. And Democrats can and will use that amendment power to force a lot of politically painful votes. 

At the top of that list is the president's anti-weaponization fund, a nearly $1.8 billion pot of money that the administration says will be used to pay restitution to people who feel they were targeted by the previous administration. Democrats are furious about the fund, and many Republicans on Capitol Hill aren't happy about it either. For Republican leaders, the fund has become a huge headache.

Democrats are poised to offer multiple amendments to kill the fund or put restrictions on it, like ensuring that individuals who committed violent acts during the storming of the U.S. Capitol on January 6, 2021, can't receive money from it, something a large number of Republicans have indicated they could support. And the fund itself is the target of a barrage of legal challenges. One judge has already put a temporary halt to it while those challenges move forward.

Senate Republicans are hoping that the administration will take steps to either back off of the fund or put in some guardrails so that they don't have to deal with these potentially painful votes about it. On June 1, the administration sent signals that it may be reconsidering the fund, but it's not totally clear how the administration will proceed. Negotiations to sort that out are ongoing. But until that is resolved, it does not appear that Republicans can move forward on the immigration funding plan. 

One of the complicating factors on this issue and on getting things done in general on Capitol Hill is the growing number of Republicans whose careers are coming to an end and whose willingness to support the administration's initiatives may be waning. The Wall Street Journal called this group the Wounded Bear Caucus. On Capitol Hill, some are calling it the YOLO caucus, using the popular acronym for "You only live once." The group got some new members recently when Senator Bill Cassidy, a Republican in Louisiana, lost his primary for re-election when President Trump endorsed one of his Republican challengers. Last week, the same fate hit four-term Senator John Cornyn of Texas when he was trounced in his primary by Trump-endorsed Texas Attorney General Ken Paxton.

Cassidy and Cornyn are now basically free agents who may or may not be inclined to carry water for a president who campaigned against them. They joined Senator Thom Tillis of North Carolina, who is not running for re-election this fall after the president made it clear he would endorse one of Tillis' potential opponents. Tillis has already been something of a headache for the administration, as for months he blocked the nomination of Kevin Warsh to be Fed chair.

Senator Mitch McConnell of Kentucky is another potential wild card, as he's also not running for re-election and has already bucked the White House on several votes. His Kentucky colleague, the libertarian-leaning Senator Rand Paul, is another unpredictable one. And moderate senators Susan Collins of Maine, who is in a tough re-election fight, and Lisa Murkowski of Alaska have long been willing to go against the Republican leadership on occasion.

Add it all up and combine those wild cards with the fact that Republicans only have a 53-47 margin in the Senate, and it's easy to see why there's a real possibility that the Senate could struggle to get much done in the coming months. And that could imperil some key issues, like bipartisan legislation to boost affordable housing and the stalled bill to create a regulatory framework for cryptocurrency.

The months between now and the election are shaping up to be very unpredictable indeed on Capitol Hill. 

Finally, we've been following the development of these Trump Accounts for children, and now they are officially here. The accounts were part of last year's One Big Beautiful Bill. Children born January 1, 2025, through the end of 2028 will be eligible for a one-time $1,000 starter contribution from the federal government into a brokerage account.

Parents, grandparents, and others can contribute up to $5,000 a year. The account grows via low-fee index funds, and when the child turns 18, it converts to a traditional individual retirement account. Last week, the Trump Accounts app debuted on all platforms. The Treasury Department says that about 6 million families have registered for an account, and those families will now be receiving an email from the government about how to activate that account.

And the $1,000 contributions from the government are set to start flowing into eligible accounts on July 4, at which time parents and others can begin making contributions as well. Accounts will be housed at firms selected by Treasury initially, but it's expected that by next year those accounts can be transferred to any brokerage firm. There's real momentum now for these accounts, but the administration is worried that they could be targets for fraud and misinformation that could cause some parents to be reluctant to open the accounts. And the administration recognizes that there are potentially millions of parents who just aren't aware yet that these accounts and the free $1,000 for babies even exist. So expect to hear a lot of messaging from the administration about these new accounts as it seeks to spread awareness of what it sees as one of the potential legacy making initiatives of Trump's second term as president.

On my deeper dive today, we're going to dig into this bull market, which started on October 12, 2022. Bull markets have historically averaged about three and a half to four years. So this one is right in the average range. Nowhere close to the longest bull market, which lasted from March of 2009 to March of 2020, when it ran into an unprecedented force, COVID.

With the current bull market just now hitting the average mark, what investors are most interested in is whether the run can continue and what forces are out there now that could bring it to an end. To help me answer these questions, I'm really pleased to welcome back to the podcast Kasey McCurdy, chief portfolio strategist for Schwab Wealth Advisory, and a key part of the Schwab Center for Financial Research team. In his role, Kasey thinks about portfolio construction, taking into account economic and market trends to help form Schwab's investment management philosophy. Kasey, thanks so much for joining me today.

KASEY MCCURDY: Great to be here, Mike. I'm glad to be back.

MIKE: Well, Kasey, at the end of March, the S&P 500 was down for the year. And I think if you had asked most investors then, they would have told you that the bull market was over, that something was fundamentally changing. But in April and May, the index rose a stunning 16.1%, one of the best two-month runs ever. And the market is now up more than 10% year to date. Just a month ago, we were describing the rally as being a relief rally triggered by an event, the ceasefire and the war in Iran being the catalyst at the time. But the markets have continued to climb, with mega-cap tech stocks leading the way. After a run up like we've seen, there starts to be a concern about a bubble that with investors piling into the same names, this could now be a momentum rally. So Kasey, will you talk us through what a momentum rally is, and if you see that as what is happening right now?

KASEY: Mike, there's always a question of are we in a bubble whenever you have these type of really strong periods. To answer your question, a momentum rally is price chasing price. Investors buy because something is already working, not necessarily because the fundamentals have improved. There's probably some of that here, especially in tech.

But I wouldn't call this a pure momentum rally. This started, as you noted, as a relief rally. We had seen the drawdown, and then we took off. But since then, earnings have really given this rally more fuel. And the rebound has been unusually strong. Usually we only see these types of rebounds following a recession or really a large drawdown. In this circumstance, the S&P 500 was down only about 10%.

And that sell-off, it was broad-based, but the starting point was different. So I'll call out the difference between what you've seen in tech companies relative to the rest of the index. In Mag 7, the cohort of the largest companies, tech focus, those really started to decline early in the year. Meanwhile, the rest of the other 500, call them the other 493, they helped hold the index together.

And to be honest, that was really a healthy sign. It was great to see that the companies that weren't the largest in the index were keeping us afloat. Now, following the downturn, some of the lagging tech leadership has snapped back quickly, and they closed the gap, and they really returned to parity between the Mag 7 and the other 493. So momentum may have lit the match, but earnings have kept that fire going. And Q1 earnings have helped validate this move. More than 80% of S&P 500 companies have beat expectations. Now, looking ahead, the question is, can earnings keep showing up?

MIKE: Let's dive into those earnings. There's FOMO, the fear of missing out, but there's another term that came from veteran analyst Ed Yardeni, and that's FEMO, "fabulous earnings momentum." So if this is an earnings rally, does that mean that performance is broadening—that it isn't just tech doing all the heavy lifting? When it comes to earnings, what sectors are you seeing improve?

KASEY: I always enjoy a good acronym from Ed Yardeni, and this is no different, the fabulous earnings momentum. I like that. Well, the stock leadership right now, it still looks narrow, but the earnings participation, it looks healthier. Tech is doing the heavy lifting when it comes to total earnings contribution, but the rest of the market is also doing pretty good. Many of the non-tech sectors are producing solid earnings growth in the order of double digits for Q1. And that's the distinction. The market feels narrow because we've seen these tech companies do really well recently, but the earnings breadth continues to improve. Now the risk is that forward expectations remain concentrated in just a few areas.

MIKE: Well, let's talk about some of those areas. And as you might imagine at my events—I'm sure this is true when you talk to investors as well—many of the questions are focused on AI. Artificial intelligence companies have certainly been big contributors to the rally, but there are concerns about valuations and their accelerating spending. And there are questions for investors around whether it may be too late to participate in this area.

So what's your guidance on investing in AI, and maybe more importantly, are we still in an environment where the companies that are creating and building AI systems and infrastructure are carrying the market, or should investors increasingly be thinking about companies that are embracing AI and putting it to work in their everyday business, no matter what kind of business they're in?

KASEY: I think right now is a point that we're seeing this shift underway. We seem to be moving from an AI 1.0 to AI 2.0. What I would say is the builders to the infrastructure providers, and then eventually into the adopters and monetizers. You can think about it as who builds it to who earns from it. Where the first phase really rewarded a lot of the chips and the cloud providers and the models and the compute providers.

That phase, it's not over, but the opportunity set is certainly widening. And hyperscalers [DH1] are deploying huge cash flows into infrastructure, and energy, materials, and the capacity. And the next wave may be companies that are using these AI tools to actually cut costs. They're using them to improve margins, to improve the speed of their workflows, or even create new revenues.

And we've seen that show up already. I'll note, if you think about that period following the end of March where the markets rallied very strongly, a lot of that was driven by the tech sector. And if you narrow into that tech sector, the highest performing cohort are not the largest companies. Many of them are much smaller than the ones that you have heard about in the Mag 7, for example. And so now going forward, the question is, "What is going to be the return on this AI investment?" And the hyperscalers, the ones that are spending those billions of dollars, I can tell you they are not doing it for fun. They certainly expect to see that cashflow coming back. And so right now, the AI trade seems to be moving from builders to suppliers to users.

MIKE: Do you worry at all, Kasey, about a backlash coming with regards to AI? One of the big pushback points right now is data centers, with more and more concern from ordinary people about the environmental impact, about the effect on electricity and water prices in neighborhoods. Earlier this spring, Maine became the first state to outright ban data centers. And then you have what appears to be kind of a never-ending existential argument about AI itself and its impact on society and jobs. Even the White House seems a bit unsure what to do. Just a week or so ago, we expected an AI-related executive order from the president, but it was delayed due to internal disagreements about exactly what it should say. On June 2, the president signed a slimmed-down version of the executive order that does give the government the ability to preview new AI models before they're released to the public. So from an investing standpoint, is this all just background noise to the AI juggernauts, or should investors be tuning in to how some of these debates play out and the potential that they could be eventually a drag on some of the momentum?

KASEY: I wouldn't dismiss the backlash as noise, even for those large players. AI as a technology certainly has a lead right now, but I will say that public relations is a bit of a problem. The public debate is often, as you noted, around a lot of the existential concerns, things about jobs or water, the use of power and land. And a lot of that right now is built around this fear that seems to be rising in relation to AI. I know all of us have seen the videos of graduations where you're seeing new grads actually boo at just the words of AI. So public relations, I would say, is a very important factor. Now, some of the concerns are real. And I will note for myself, I live in Colorado, and water and land use is very sensitive and certainly protected.

And the risk of that local pushback is that it's going to slow down the progress that we're seeing in data centers and increasing compute and all of the power investment that's needed. That becomes a market issue because investors are already expecting a return on their investment from AI. And so if the infrastructure gets blocked, that ROI (or return on investment) clock does not stop. So the best path is a thoughtful deployment that is earning the public's trust. So we need progress, but progress needs permission.

MIKE: Yeah, and some of that permission is going to come from the regulators. And I think poor regulation is a risk. It's an important one. We're already seeing that in Washington with the administration's internal struggles that have played out in recent weeks. And I think Congress is way behind in terms of deciding what it might want to do when it comes to regulation in this area. Europe has implemented some rules of the road. That could eventually be a model. 

But I think members of Congress are really struggling to keep up with the rapid pace of developments in the AI space. And as a result, there just aren't that many lawmakers who have developed a clear idea of how to design sensible regulations that put some guardrails in place without stifling innovation. So this is definitely an area that we need to watch on Capitol Hill.

Well, let me shift gears a bit to something else in the headlines. Investors who recognized the opportunity with AI and got in early certainly have benefited. Now we have some mega IPOs coming up, possibly as soon as next week. Public interest is super high in these companies that are looking to raise a staggering amount of money and will have tremendous market valuations, possibly approaching $2 trillion. So what are your thoughts on these gigantic IPOs? And what should we be paying attention to if we're thinking about participating in these offers? 

KASEY: Well, the environment right now is certainly very exciting in regards to a lot of these developments. Aside from any one IPO, the concept of bringing this amount of capital into the public markets with this amount of attention from investors—it is thrilling. And I love that we're bringing people into the market conversation. What we've seen post 2020 is that the enthusiasm from the retail investor has been incredibly strong and this just adds to that enthusiasm. For what I would call myself—a market nerd—this is really feeling like the Super Bowl, and we're talking about so many things that doesn't often get attention, such as market capitalizations and float adjustments, private holdings, public issuance, lockup periods, index eligibility. I could go on and on. I absolutely love it. But investors need to separate a company's valuation from the investable market value. And I'll bring back a comment I shared the last time we spoke. Interesting ideas and investable ideas are not always the same thing. So these IPOs, they may come with a lot of excitement and expectations, but they're also highly speculative as they transition from private to public valuations. And that needs to come with a lot of disclaimers.

One thing that I think needs to be noted is around the fast-tracking of index inclusion. Previously, there has been a long period between initial offering and being added to an index. Now, that time has been reduced in many cases. So it's hard to say what that impact from those changes will be. But one thing I want to note is around how those companies may be added to indexes. 

Let me give a hypothetical. A $2 trillion company with a 4% float, which "float" refers to the percent of public stock available, means the company has about $80 billion of public stock outstanding. That's the number that indexes generally use for sizing, not the total company market cap. And that difference is important because a $2 trillion market company would immediately be a top-10 index holding, but not one that only has 80 billion of public float. So depending on index rules, it may be much smaller at first, and inclusion can take time and depends on a lot of factors, including eligibility, liquidity, float, profitability, and most importantly, each individual index's provider's rules. So for clients, the real consideration is their own position sizing in these very speculative names. So I will call it out: They are certainly exciting times and maybe exciting companies, but they are speculative single-stock investments. And we are encouraging our clients to be thoughtful about that sizing relative to their broader diversified portfolios.

MIKE: Well, Kasey, amid all that excitement and interest, I do want to look at the flip side for a minute. Juxtaposed to all the good news are some worrying signs. The Fed's preferred inflation measure, the Personal Consumption Expenditures Price Index, or PCE, that rose to 3.8% in April, the highest level in almost three years. Consumer sentiment is at an all-time low. We are all keenly aware of high gas prices, which I think most analysts agree are not coming down rapidly no matter how quickly the war in Iran is resolved. There just seems to be a lot of disconnect between how the market is performing and how people are feeling about the economy. 

And there are valid concerns that could cause the markets to stumble, such as a drop in consumer spending or pressures on profit margins, a tightening of monetary policy, overall slower growth. So to what degree should this be worrying investors? I mean, no one wants to pull away from a market that's still heading upwards, but how are you talking to investors about those kinds of concerns and when there might be a time to get a bit more defensive in your portfolio?

KASEY: This divergence is something that I get a question about quite often. So I appreciate you bringing it up. I think right now what we're seeing is that markets are pricing in the aggregate strength that I noted before, while households are feeling all of the personal costs that have really developed post COVID. And that disconnect has been with us for that entire period. So markets, they are responding to earnings, jobs, consumer spending, growth in GDP, and most importantly recently the AI optimism. While households, they're experiencing the inflation cost, the additional insurance, rent, and mortgage rates that are higher, the daycare and groceries. And it points to the fact that inflation can cool while the price level still feels painful. Said another way, inflation can fall in year-over-year terms yet still feel expensive. And that's what we experienced up until this point. Now, unfortunately, inflation is even starting to increase from here, which is just adding to that consumer angst.

What we've seen in that period is that asset owners have done very well. Those that are invested in the market or own homes have benefited from this climb in prices, whereas non-asset owners may feel further behind because they are not participating in the same way. And that creates a gap between the market confidence and the consumer's mood. So we don't want to ignore the sentiment, but when we're thinking about markets, we don't want to confuse those bad vibes with bad fundamentals because most recently the fundamentals continue to show up.

MIKE: Yeah, I think it's a really important point you make, particularly about inflation and the way that inflation falling doesn't necessarily have a one-to-one corresponding result in prices. And I think that's often where the disconnect gets for the average consumer. But I want to talk about some of those other side of the fundamentals that you were talking about. And that's the bond side of the portfolio.

Yields keep pushing higher. It feels like the traditional way that investors expect equities and bonds to behave, where they move in opposite directions just isn't holding up. So where can investors turn to get diversification when stocks and bonds are moving in tandem?

KASEY: As a portfolio strategist, this is the place where I feel like I have to often push back against, because fixed income is still an important component in our portfolios. And I'll try to address some of the challenges that we've faced recently. And I think that represents why this continues to be a topic of discussion. Most notably is a few years prior in 2022, we had a situation where inflation was rising very quickly. We reached 9% on year-over-year terms. And the Fed was hiking their fed funds rate aggressively to try to combat that inflation. Well, when bond yields are rising, that means the price is going down. And in that period, you also saw equity prices declining. And so both parts of a portfolio, let's say the classic 60% equity 40% bonds, were in negative territory. And that feels very bad.

But I don't think that's representative of where we are today. Today, you are seeing a period where high-quality yields are above 4%. And, barring default, that provides investors more income cushion than they have had previously. When building a portfolio, I like to break it into two parts and think about it as the stocks are the engine, while the bonds are the seatbelt. Bonds are still the ballast. They provide the liquidity, and the income, and the defense. But in small inflation-driven sell-offs like the ones we've seen recently, most notably earlier this year, the bonds may not offset the stocks perfectly. What that means is that a seatbelt does not make every bump comfortable. It's there in the event of a crash.

And in a true growth scare, the high-quality fixed income can still help. My colleague Liz Ann Sonders has noted that we're in a more temperamental environment where right now inflation can really drive short-term performance. But again, in those growth-scare environments, I would still expect investors to see fixed income as the ballast, the quote- unquote "seatbelt" in their portfolio.

MIKE: Well, taking into account, Kasey, that temperamental environment, let's end with your outlook for the rest of the year. We're hearing some analysts increasing their outlook to an S&P 500 target of 8,000 or higher by the end of the year. Yet you can't ignore some of these tensions in the market that we've been discussing. There just is a lot of uncertainty about where inflation is headed, what the Fed will do. The Fed seems just as likely to hike rates this year as to cut rates. We've got a midterm election looming. There's just a lot for investors to sort through. So where do you see things going from here? I mean, even if the market continues to trend upward, there can certainly be a lot of volatility along the way. So what kind of portfolio do you think investors should be striving for as we head into the back half of 2026?

KASEY: There is a lot for investors to sort through. I know we've talked about the beginning of this year feeling like many years already. The second half certainly doesn't have a lack of uncertainty by any means. So when I think about the first half, I really call out the resilience that we've seen. The markets seem to look through and persevere despite a lot of different challenges. So going forward, the thing that I want to focus on is the AI return on investment, making sure that all of this capital expenditures have a justification.

So these hyperscalers who are spending hundreds of billions of dollars need to make sure that they are getting a return on that money, which means the bar is rising. And anytime that you have high expectations, there's greater risk for not meeting those bars. Investors, they need to make sure that they are seeing proof show up. The proof would come through productivity. It'll show up in margins or revenue and cashflow. It really is important that the economy and the market is valuing what we are investing into it. And I will say that that perseverance has really been reflective of our economy and the market for the past several years. I want to take a moment just to acknowledge what we have pushed through in relation to the pandemic back in 2020 and then the inflation following the reopening followed by Fed hikes, a banking crisis, there were tariffs last year, and throughout all of that, there were a number of geopolitical shocks. Despite all of those challenges, the markets are once again back near all-time highs. And I think that says a lot about the corporate adaptability. 

But the easy part of the rebound may be behind us. And so looking forward what we're advising our investors to do is to stay invested. I would think about your long-term allocations. When markets are at all-time highs, this could be a good opportunity to consider rebalancing. It's a useful form of profit-taking. 

I'd also watch out for concentration. We often find that our clients are currently allocating high percentages to individual names, and that can increase your portfolio's risk without realizing the impact from that one stock. And most importantly, be certain to keep portfolios aligned to your long-term plan. This is not a market where every headline deserves a portfolio reaction, and the best way to have that confidence is to have a long-term plan.

MIKE: Yeah, that's great perspective, Kasey, as always. I do think the markets have gotten better in the last couple of months at not sort of overreacting to every headline. And that's certainly something investors need to be aware of. I also think it's a great time to remind everyone listening that if you want to have a deeper discussion about the specifics of your portfolio, reach out to your financial consultant or your wealth advisor today. Make sure your financial plan remains aligned with your goals and your risk tolerance, your outlook.

Kasey, this is a really great conversation. Appreciate your time today. Thanks so much.

KASEY: My pleasure, Mike. And as always, I encourage investors to develop their own investment philosophies. In Schwab Wealth Advisory, we focus on helping investors build personalized plans, construct portfolios purposefully, and manage them with discipline over time. And we want to make sure that we pass along our knowledge and experience to all of you. So thank you for the time.

MIKE: That's Kasey McCurdy, chief portfolio strategist with Schwab Wealth Advisory. You can find his commentary on schwab.com/learn.

Well, that's all for this week's episode of WashingtonWise. We'll be back in two weeks with a new episode when my colleague Collin Martin will join me to break down Kevin Warsh's first meeting as chairman of the Federal Reserve and how the bond market is reacting. Take a moment now to follow the show in your listening app so you get an alert when that episode drops, and you don't miss any future episodes. And don't forget to leave us a rating or review. Those really help new listeners discover the show.

For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript. I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.