By Akemi Kondo Dalvi, CPA/PFS, CFP
The U.S. stock market has been incredibly strong in 2026. At the mid-year mark, the S&P 500 has gained about 10% year to date, a figure we would normally be happy to see in a full one-year investment window. In fact, our current six-month return is higher than the historical average annual return of about 9.3% since 1950. That’s great news and most investors are exuberant.
From a financial planning perspective, good markets and bad markets can both be seen as opportunities for long-term investors. In down markets, investors can benefit from loss harvesting, or realizing paper losses as a tax strategy to offset future realized capital gains. On the other side, when the market is up, we may want to consider utilizing gains to cover short-term expenses.
For example, if you’re planning an international trip, now may be a good time to take advantage of the strong U.S. dollar, and lock in some of the recent market gains to reward yourself with a vacation. You may want to also consider locking in gains by accelerating the timing of your Required Minimum Distribution or liquidating cash for expenses you foresee in the next 12 months: home repairs, new car.
Current geopolitical developments have swayed the market weekly as investors try to predict when the war will end, if the Strait of Hormuz will reopen, and when gas prices will come down. These developments have weighed on inflation.
According to the Bureau of Labor Statistic (BLS), April inflation rose 3.8% year-over-year. The key driver was energy costs, which jumped 17.9% annually, accounting for the steepest increase since 2022. As consumers, we see and feel the pains of inflation daily, with gasoline prices at the pump up 50% since the start of the Iran War, and grocery prices uncomfortably higher. As a result, the U.S. savings rate has dropped from 3.2% to 2.6% in April, indicating American are paying more for daily living expenses.
Inflation can be a tough beast to tame. In May, the new Federal Reserve Board chairman, Kevin Warsh, replaced Jerome Powell. Warsh was nominated by President Trump with the expectation that he would cut interest rates, and such predictions were priced in the stock market for 2026.
However, with the current macroeconomic conditions, the likelihood of cutting interest rates later this year has been reduced significantly. In fact, some wonder if the Federal Funds Rate might actually go up instead of down. The Fed has historically targeted a 2% inflation rate. If inflation continues to rise, Fed policy has been to raise interest rates to cool the economy, which could result in more stock market volatility through the end of the year.
Investors may be wondering if stock returns will suffer if inflation keeps rising, but historical data unveils an interesting story. In 23 of the past 30 years, the S&P 500 returns were positive, even in years when inflation was above the historical median. That is because inflation is incorporated into the expected returns demanded by equity investors.
In other words, to the extent that inflation is expected to benefit a company or hurt a company, the stock price moves to account for the adjusted real returns of the company under current economic conditions. In fact, over the past three decades, the S&P 500 posted an annualized return of 7.6% after adjusting for inflation.
Interestingly, small cap stocks have had an even higher annualized return during high inflationary years. The data indicates that investors should not avoid such asset classes, even if inflation expectations are elevated.
As we have seen, one way for investors to deal with inflation is to outpace it. Investing in the market has been a good way to do this historically. If you could benefit from a consultation with a financial professional, please reach out to your Certified Financial Planner or CPA Personal Financial Specialist (PFS). Whether you are exploring investment strategies, cash flow management, charitable gifting, retirement planning, or new tax policy changes, we’re here to help you make sense of it all.
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783, info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.
