MARKET OUTLOOK

We ended last year with all the U.S. stock indices realizing double digit rates of return for the THIRD year in a row. While growth had slowed in 2025 compared to the blistering pace of 2023 and 2024, the equity markets were held up by stabilizing inflation and several interest rate cuts by the Federal Reserve. Now, halfway through 2026, the equity markets continue to climb higher. But inflation is coming in hotter than last year, concerns are growing over the amount of cap-ex (capital expenditures) spending on AI infrastructure, and an ongoing war with Iran has led to higher prices at the gas pump. With all these headwinds in play, why is the stock market still near all-time highs? The following are the strong counterforces that have been keeping equity markets supported for now.

First, robust corporate earnings have been supporting higher valuations (prices) for stocks. While high-flying AI stocks look expensive on paper, the underlying corporate earnings have been incredibly strong. We're also starting to see companies other than the "Magnificent 7" take leadership, though many of those companies are still AI-focused.

Second, the AI story has shifted from looking past the software speculation to the infrastructure build-out, which is causing tailwinds for other sectors. This massive, tangible spending is acting as a major tailwind for companies other than technology firms, such as industrials, tech suppliers, and energy sectors. For example, Caterpillar has more than doubled over the last year.

Third, oil prices haven't increased to levels once feared over the war in Iran and the closure of the Straits of Hormuz. Commercial and strategic petroleum reserves ("SPRs") around the world were used to increase supply, and China dramatically reduced their import of oil. The increase in oil supply helped to keep oil prices from getting much higher than they have thus far.

Fourth, economic growth is still relatively strong and durable, largely in part due to the K-shaped economy, as discussed in our last newsletter. Job growth has stayed positive, and consumer spending, though compressed, is holding up. In the end, a strong economy is viewed much more favorably by investors.

Fifth, the amount of inflows into the stock market remain high. One reason is that employees continue to contribute to their 401(k)s, which are primarily invested in stock funds. These regular, systematic inflows into the market are also helping to drive stock prices higher. As long as employment remains stable, the inflows should continue to support the market.

It's worth noting, however, that while the market has been incredibly resilient, we are starting to see friction beneath the surface and growing uncertainty. The realization has not yet set in that the "hyper-scalers" can't possibly build all the AI infrastructure planned because we don't have enough energy and materials to support it. Additionally, cap-ex numbers aren't reflected in corporate earnings. Therefore, corporate earnings may not be accurately telling the whole story when it comes to AI.

Our biggest concern at this point is inflation. What approach might the Federal Reserve take to control inflation? We now have a new Federal Reserve Chairman, Kevin Warsh, who wants to make changes to how the Federal Reserve operates. He is also known to be "hawkish" (versus "dovish") when it comes to inflation. Hawkish refers to taking an aggressive stance against inflation. With inflation on the increase, the market is now pricing in future rate hikes instead of rate decreases. This could cause the market to pull back.

The last time we had rate hikes was in 2022. That year stocks experienced a bear market with the S&P ending the year down roughly 19% and the Nasdaq down over 33%. There were several core reasons for the bear market in 2022. Russia invaded Ukraine early that year. China continued to maintain its lockdown policy over COVID. The COVID pandemic led to supply constraints and massive government stimulus, causing high inflation. The Federal Reserve aggressively hiked interest rates after having dismissed inflation as "transitory" (short-lived).

We're not implying the market will react the same should the Fed raise interest rates to fight current inflation. But we are closely monitoring the issue. It's important to note that not all sectors of the stock market perform in tandem, and not all sectors of the market perform poorly during bear markets, inflationary periods, or periods of rising interest rates. For example, the energy sector was up 65.7% in 2022, according to research by Cypress Capital. But it is important to be prepared and hold portfolios that are properly allocated.

THE FUTURE FOR SOCIAL SECURITY

The Social Security Board of Trustees released their annual report on June 9, 2026. In their report, it projects that the retirement trust fund (current savings) will be depleted in 2032, which is slightly earlier than the previously projected date of 2034. They sent letters to the President of the Senate and Speaker of the House with their findings. Their report concludes that IF no action is taken by Congress to address the crisis, new incoming payroll tax revenue would be sufficient to pay about 78% of scheduled retirement benefits, resulting in an automatic across-the-board benefit reduction of roughly 22%.

However, that is a worst-case scenario, which, in our opinion, will likely not happen. The Social Security Trust Fund's projected insolvency represents a significant fiscal challenge, but IT DOES NOT MEAN SOCIAL SECURITY IS DISAPPEARING. Workers will continue paying payroll taxes, and the program will continue collecting revenue. The central question is whether lawmakers will enact reforms before the trust fund reserves are exhausted. The last time Congress passed major Social Security reform was in the 1980s. Today, lawmakers continue to debate how to spread the burden of reform. They have proposed numerous options to improve Social Security's long-term finances, and none are without controversy.

New targeted proposals, however, are emerging. One proposal receiving attention would cap annual Social Security benefits for very high-income retirees, for example, limiting combined benefits for some couples to $100,000 per year. Other solutions include:

In our opinion, it's unlikely Congress will allow the program that over 70 million voting Americans rely on to fall into insolvency. The future of Social Security will likely involve a combination of policy changes that would be more politically and financially viable than relying on any single measure. The most likely policy changes would involve lifting the wage cap on high earners, gradually increasing the payroll tax rate, and a phased-in increase in the retirement age. Therefore, changes will likely impact those who are still working and earning higher wages, as well as those younger clients with many years before retirement.

For those who are eligible to collect benefits but have not yet filed, starting sooner to avoid future changes to Social Security may be unnecessary and futile. Additionally, collecting before your full retirement age will permanently reduce your benefits and possibly impact survivor benefits in the future. If you are uncertain as to when the most optimal time would be for you to begin collecting Social Security benefits, feel free to call our office.

A REMINDER OF CHANGES BROUGHT BY SECURE ACT 2.0

Secure Act 2.0, passed in late 2022, was meant to improve retirement savings options for Americans. One of the key changes was increasing the RMD age from 72 to 73 then again to 75 for those born in 1960 or later. The following are reminders of changes that may not be as well known.

The first is the expansion of "QCDs" (qualified charitable distributions). This allows individuals to gift money to qualified charities from their retirement accounts and avoid taxation of the distribution and without having to itemize (filing a Schedule A). In 2026, the annual QCD limit is $111,000, and the one-time gift can be up to $55,000.

The second is regarding 529s. The act allows transfers to be made from unused 529 education account balances into a Roth IRA for the designated account beneficiary without penalty or taxation. Once in the Roth, the earnings continue to grow tax-free for retirement. To do so, the 529 account must have been established for at least fifteen years. Also, any transfers into the 529 must have been made at least five years prior. Lastly, the beneficiary must be eligible to make Roth contributions (meaning they must have earned income that is less than the income threshold, which is $153,000 for single filers and $242,000 for married filers in 2026).

The third affects the catch-up contributions to 401(k)s and other employer-sponsored retirement plans for those age 50 and older. STARTING IN 2026, if your gross W-2 wages exceeded $150,000 in the prior calendar year, all catch-up contributions to your employer-sponsored retirement plan will need to be made as after-tax (or Roth) dollars. This rule does NOT apply to Simple IRAs.

The last impacts employer matching contributions. Employers will now be able to provide employees the option of receiving match contributions to the Roth 401(k). Previously, matching in employer-sponsored plans were made solely on a pre-tax basis. However, check with your employer to make sure the plan provider and payroll systems are updated to accommodate this change.

A NEW CHAPTER FOR HORIZON

As you all know, Suzanne Satler, our Client Accounts Administrator, will be retiring on September 30th of this year after having been with us for over 32 years. It will be hard to see her go as Suzanne has been such an instrumental part of our success and a valuable team member.

Fortunately, we are pleased to announce that we are bringing on Rachel Landauer as our new Client Accounts Administrator. Rachel has big shoes to fill, but she is excited for the opportunity and all that she has to learn. Originally from Gettysburg, Rachel was drawn to Pittsburgh to attend the University of Pittsburgh and Chatham University and decided to make Pittsburgh her home. She comes to us after working with a law firm in Pittsburgh. She will join us on August 3rd so that she can train with Suzanne for two months before Suzanne's departure.

Please join us in offering our best wishes to both these women.

IMPROVING OUR CLIENT EXPERIENCE

We are excited about a new software platform we will be using that will enhance our practice and improve our clients' experience. We're subscribing to the Black Diamond wealth management and portfolio accounting platform that will be used for our clients with advisory accounts held at Charles Schwab. This platform will enable us to improve the reports we are providing to clients. These next level reports will summarize how their accounts are invested, how their accounts are performing, and changes that have occurred in their accounts. For clients who desire a more interactive experience, they will also have access to a client portal and mobile app. But clients can continue to use their Schwab account statements or the Schwab website to view their accounts. The client portal and app are merely optional ways for clients to get more details on their Schwab accounts, if desired. We are looking forward to implementing the software in the coming months.

Sources: Cypress Capital

Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group, Inc./Trustmont Advisory Group. Inc. Trustmont Financial Group and Trustmont Advisory Group do not provide tax or legal advice, or supervise tax, accounting or legal services. Trustmont representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Lastly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities. Past performance is not a guarantee of future results. Dollar cost averaging does not assure a profit or protect against a loss. Diversification can help an investor manage and reduce the volatility of an asset's price movements; however, no matter how diversified a portfolio is, risk can never be eliminated completely.