Diamond Capital Management Market Commentary

Sir John Templeton observed that bull markets are “born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” A related Wall Street adage holds that bull markets climb a “wall of worry.” In other words, the most favorable environments for stocks often unfold despite a steady stream of reasons to be concerned, and that has certainly been the case in 2026.

 At the start of the year, Wall Street consensus expected U.S. growth to slow as economic conditions “normalized” following a strong 2025. Conversely, we believed growth could instead advance, supported by slack in several sectors of the economy and incoming fiscal stimulus. Thus far, our view has been validated: most inflation-adjusted growth indicators have improved since January, including the Weekly Economic Index, which has accelerated year-to-date.

In late February, conflict between the United States and Iran sent oil prices sharply higher and pressured equities. Even then, credit conditions remained accommodative, reinforcing our view that the equity market weakness would likely prove temporary.

Inflation then became the dominant concern. From March through May, the BLS reported a series of hotter-than-expected CPI readings, prompting many pundits to turn bearish. Our work suggested that lower effective tariff rates, softer wage growth, and stabilizing oil prices would allow inflation to moderate. In June, headline CPI declined 0.4% month over month, while core CPI was unchanged. Interest rates have also contributed to investor anxiety. After the Senate approved Kevin Warsh as Federal Reserve chair, hawkish commentary from Chairman Warsh and other FOMC members pushed long-term rates higher as investors contemplated the possibility of another hiking cycle. We continue to believe the interest rate volatility should stay contained as inflation moderates and federal issuance slows in the second half of the year.

Despite these concerns, the most important variable, real economic growth, has continued to improve. Equities have responded accordingly. As of August 7, the S&P 500 was up roughly 13% year-to-date, while the small-cap Russell 2000, arguably a broader reflection of the domestic economy, was up more than 20%.

If the U.S. economy continues to expand, corporate earnings should grow over time, and the stock market should reflect that growth. The “wall of worry” is meant to be climbed.