CEO Confidence Tumbled in Q2 2026
“CEO confidence fell back into negative territory in Q2 2026, reversing the surge in optimism in the first quarter,” said Dana M Peterson, Chief Economist, The Conference Board. “CEOs reported that the economy is materially worse now than it was six months ago and expected economic conditions to weaken further over the next six months. Regarding their own industries, CEO assessments about current conditions and expectations in six months deteriorated since last quarter.”
- 15% of CEOs said economic conditions were better than six months ago, down from 39% in Q1 2026.
- 47% said economic conditions were worse, up from just 8% last quarter.
- 33% of CEOs said conditions in their own industries were better than six months ago, down from 42% in Q1.
- 33% said conditions in their own industries were worse, up from 14% last quarter.
- 24% of CEOs expected economic conditions to improve over the next six months, down from 43% in Q1 2026.
- 40% expected economic conditions to worsen, up from 13% last quarter.
- 38% of CEOs expected conditions in their own industry to improve over the next six months, down from 51%.
- 22% expected conditions in their own industry to worsen over the next six months, up from 14%.
31% of CEOs expected to reduce their workforce, up from 27% in Q1 2026. This was higher than the share expecting to expand their workforce (28%, down from 31%). 40% of CEOs anticipated no change in their workforce.
The distribution of planned wage hikes concentrated in the 3-4% range, pulling from higher and lower ranges.
Fed’s Goolsbee Warns U.S. Economy Heading in ‘Stagflationary’ Direction
The energy crisis caused by the Middle East war has central banks in a dilemma: hike rates to fight inflation while imperiling growth, or wait and risk being too late.
In an interview on Thursday, Chicago Federal Reserve President Austan Goolsbee warned that the persistent combination of energy shocks and stubborn inflation could push the U.S. economy into a “stagflationary” direction characterized by a simultaneous rise in unemployment and price growth. (…)
I don’t think that tariff-driven inflation on goods has gone down nearly as rapidly as people wanted. And if you look at services inflation in the U.S., it’s high and rising — and that can’t be from tariffs, and that can’t be from oil. So there are some concerning aspects even separate from the war. (…)
I’m worried about the stagflationary direction—meaning inflation and unemployment going up at the same time. That is entirely possible and the worst-case scenario. That is among the most challenging situations that a central bank can face because raising, cutting or holding rates doesn’t fix the problem.
The more stagflationary shocks we get, the more we’re going to be put in this difficult position as a central bank where we have to choose which is worse: the beginning of a recession or igniting more inflation and expectations becoming unanchored. (…)
For me, the inflation danger is the more immediate threat right now. (…)
The challenge may grow Thursday when new data is expected to show the Fed’s preferred gauge of inflation rose 3.8% in the 12 months through April — almost two full percentage points above the central bank’s 2% target. (…)
While President Donald Trump has said he wants Warsh to act independently as Fed chair, political pressure to bring rates down isn’t far from the surface.
Just hours after hosting Warsh’s swearing-in last week, Trump said he expected rates would come down “very quickly.” (…)
Long-term inflation expectations have taken a hit too. Looking ahead five to 10 years, consumers expect prices to rise an annualized 3.9%, up from 3.5% in April and the highest in seven months, according to the University of Michigan’s consumer survey for May. (…)
Home Alone: inflation and the new Fed chair
Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management
The new Fed chair Kevin Warsh, like Kevin McCallister in Home Alone, faces a lonely vigil: survive until the adults get home again.
The new Fed chair has highlighted an inflation measure that sends an all-clear signal on easing: “trimmed” PCE inflation. Good luck with that; trimmed inflation did a very poor job identifying the 2021 Biden-flation surge which the GOP understandably cites as a policy failure.
In this Eye on the Market we look at inflation signals Warsh faces as he deals with pressure from Trump, who stated that the Fed should cut rates ASAP and that the US should have “the lowest rates in the world”.
Similarly, when asked last December where rates should be a year from then, Trump responded by saying “1% and maybe lower than that.”
Before getting into the details, three big picture charts below:
- the surge in US commodity prices which may feed into core consumer and producer price inflation, at least temporarily;
- the rising sensitivity of the US business cycle to changes in inflation;
- and deteriorating US public finances.
During Warsh’s term (if he lasts as long as prior Fed chairs), he will preside over the dreaded crossover point: in 2031 entitlements, interest and other mandatory outlays are projected to permanently exceed Federal tax revenues for the first time. In other words, the scope for a monetary policy mistake is getting narrower by the day, and rising Treasury yields are rapidly shrinking the equity risk premium earned by investors.
Inflation indicators the Fed watches include labor market tightness, price pressures in the manufacturing sector, supply chain tightness and the “output gap” which measures how far actual growth is above/below potential growth. (…)current values are much closer to conditions that have historically prompted the Fed to raise policy rates rather than to lower them.
That may be why the futures curve is now pricing in Fed hikes instead of the cuts that were priced in at the start of the year.
Superwonky: averaging several different monetary rules of thumb (Taylor rules, inertial, alternative r*, forward-looking) yields a Fed Funds range of 4.00% – 4.85% compared to the current range of 3.50% – 3.75%.
Inflation expectations can be derived from household surveys and from inflation-linked bond markets. Both have risen a small amount since the war began. (…)
I’m not going to torment you by listing all the differences between PCE inflation and CPI inflation; the Fed looks at both but reportedly has a preference for the former. One major difference: housing inflation is more heavily weighted in CPI while computer software and accessories are more heavily weighted in PCE. Since March 2025, software inflation has exceeded housing inflation by 9% (12% vs 3%).
Producer prices are rising for several reasons: rising transport costs due to higher energy prices; copper and aluminum demand for energy storage, solar panels and EV production; soaring costs for electronic components and memory chips due to the AI boom; rising costs for application software (at least until the Agentic AI shock shows up in the data); higher US tariffs; and new export controls from China on rare earths and medical equipment.
Silver lining: core PPI is often a poor predictor of future PCE inflation.
While it’s impossible to know the precise reasons for it, US productivity has picked up since the launch of GPT in the fall of 2022 with even larger gains in the information sector and in the IT data processing subset. The Warsh view on AI focuses on its potential to boost the supply side of the economy which would argue for lower rates.
This differs from the Powell view that in the short run, AI capital spending is likely inflationary on the margin.
JP Morgan’s economists believe that the FOMC staff and much of the rest of the committee are likely more aligned with Powell on this issue, and do not foresee a scenario where the committee gets enough clarity on productivity gains (which generally come with a multi-year lag) to justify lower rates in the near term.
It’s also worth remembering that productivity gains often don’t get recognized by the Fed until years after the fact. In 2019, Fed researchers recalculated deflation in the Information and Communication Technology sector in the 1990’s and found roughly double the ICT deflation than levels reported in official statistics for both software and equipment. They also recomputed PCE inflation for consumer digital services (data, voice and video to households over internet, mobile and cable networks).
Even though the consumer digital access basket is only 2.5% of consumption, the revision was large enough to cut ~50 basis points from overall PCE inflation from 2008 to 2018. End result: in both cases, real growth and productivity gains were understated.
US 30-year Treasury yields have not consistently exceeded 5% since 2007 but have just crossed that threshold. The US equity risk premium (the estimated excess return in equity markets over bond markets) has been falling and now stands at its lowest level since the early 2000’s.
Also shown below: investor complacency is rising as illustrated by the declining price for downside protection on the NASDAQ.
A lot is riding on normalization of energy prices and an end to the Iran war, since fossil fuel energy independence hasn’t insulated the US from sharply rising US commodity prices.
Productivity gains from AI will be important to track since they might be the crux of Warsh’s argument that the Fed avoid hiking rates even if economic indicators suggest they should.
There’s also pressure that will come from the White House to ease, which might end up being the defining act of Warsh’s tenure at the Fed. Let’s hope for his sake that he does not end up like Arthur Burns, for whom the adults did not return in time.
What Could Possibly Go Wrong?
Ed Yardeni:
The bull case for the stock market remains intact. The S&P 500 rose to yet another record high today. The economy and the labor market remain resilient. Consumers are spending. The AI boom is boosting capital spending. Corporate earnings are soaring on strong revenues growth and higher profit margins. The odds of a recession in 2026 fell to 19% today, the lowest reading of the year. Stock prices are rising on FEMO (fabulous earnings momentum) rather than FOMO. (…)
But a disciplined bull monitors the risks. Here are the ones we’re watching:
(1) Elevated valuation.
(2) Earnings exuberance.
(3) Bond Vigilantes and hawkish Fed. An unexpected rate hike at the July meeting (which we are expecting) could unsettle the stock market.
(4) The war and oil prices.
(5) Concentration. Micron alone accounts for a staggering 51% of S&P 500 EPS growth revisions since February 27.
(6) Mixed sentiment. 54.8% of consumers expect stock prices to be higher in 12 months, well above the long-run average of 35.5%. That’s the most bullish reading on equities outside of the recent highs. From a contrarian perspective, that’s bearish. With household wealth increasingly tied to equity portfolios, a market sell-off would trigger a negative wealth effect more quickly and sharply than in prior cycles. That could cause consumers to retrench, resulting in a recession.
(7) Funky private credit.
(8) Monster IPOs. The deal’s 4.29% float is deliberately small, generating an estimated $42 billion shortfall between index demand and available float as SpaceX seeks fast-track index inclusion. Passive and active managers benchmarked to the S&P 500 would need to sell existing large-cap holdings to make room for that deal and for the gigantic IPOs of OpenAI and Anthropic.
(9) AI is too expensive. Our main concern currently is that agentic AI is a budget buster. AI is supposed to cut labor costs, increase productivity, and boost profit margins. There is another side to this story.
Ed could add to his long list “The war and input supplies”. It’s not just prices, it’s the availability of critical inputs to sustain world production.
One Million New-Car Buyers Are Gone and They’re Not Coming Back Soon High gas prices, rising interest rates and stubborn inflation are keeping buyers at home and cars on the lots
(…) consumers—stung by persistent inflation, rising fuel prices and high interest rates—are balking at prices that have risen to around $50,000 on average.
Americans were buying around 17 million cars and trucks a year before 2020; industry analysts don’t expect the market to return to that level until the end of the decade or later. They now forecast total annual sales of about 16 million vehicles or fewer this year, and that outlook has grown even dimmer as the conflict in Iran keeps gas prices high. (…)
While around one-quarter of models in the U.S. go for between $25,000 and $35,000, an even bigger share tops $55,000, according to data from the car-shopping website Edmunds.
Executives at the world’s biggest automakers say they recognize that a new car is out of reach for more Americans. Some have promised to bring out more affordable models. But no one predicts significant relief soon.
Historically, stagnating sales led automakers to juice demand by rolling out deals and incentives that eroded their profit margins. That isn’t the case this time, particularly as America’s automaking giants, GM and Ford, are making solid profits selling fewer vehicles.
“I don’t want to say automakers are OK with this level of sales, but they kind of are,” said Ivan Drury, an Edmunds automotive analyst. “It’s not like back in the day when they’d be hacking away at the price to lift sales.”
That’s because selling big trucks and SUVs that dominate those automakers’ lineups is more lucrative than selling larger volumes of cheaper cars. (…)
“For now, things are going well. But what happens if we hit another recession?”
Buyers are left with few options. They could turn to used cars, but those are similarly climbing in price. Many choose to keep their old cars running longer. The average car on U.S. roads is now about 13 years old, a historic high, according to S&P Global.
Profits from more-expensive vehicles are helping offset the higher costs of doing business in the auto industry in the 2020s. Nearly every automaker is paying billions of dollars more each year to foot the bill for President Trump’s tariffs. Ford incurred about $2 billion on tariffs last year. Car companies are also erasing billions from their balance sheets as they walk back costly electric-vehicle investments. (…)
Yet introducing new cheap models isn’t part of GM’s plan. A spokesman said the company is “very comfortable” with its portfolio as it stands today, noting that developing a new vehicle is costly and money the company should spend only if a model will add value over time. (…)
John Murphy, a longtime auto analyst and corporate adviser, for years had been certain that the auto market would return to its 17-million-a-year days. He doesn’t think that anymore.
Reaching that level would require a big surge in vehicles available for less than $40,000, which doesn’t appear in the cards.
“Automakers are more disciplined,” Murphy said. Covid-driven supply-chain shortages showed automakers that they could make a lot of money selling fewer vehicles at higher prices. Before then, companies would slash prices to outsell one another, afraid of losing market share.
“It’s great for investors, great for stock prices and good for cost of capital,” he said. “They’re actually running the business in a much more focused way.” (…)
Elsewhere in today’s WSJ:
Several dozen Democratic lawmakers recently urged Trump to bar Chinese automakers from building cars in the U.S. and called for a ban of Chinese carsmade in Mexico or Canada, saying, “We must not cede the American auto industry to a strategic competitor intent on global dominance.” (…)
Some policymakers believe the investments could help reinvigorate local manufacturing industries. When Japanese carmakers expanded in the U.S. in the 1980s and 1990s, it forced U.S. carmakers and suppliers to adopt new approaches that ultimately made those companies more resilient and benefited car buyers. (…)
In yesterday’s Daily Edge:
EV sales are growing as more affordable models are available both from domestic manufacturers including Volkswagen AG and Stellantis NV, as well as Chinese brands led by BYD Co. In Germany, Europe’s largest market where a new subsidy is in place, EV sales jumped 41%.
FYI:
Entry-level electric cars like the BYD Seagull sell for under $10,000 USD, and there are over 200 EV and hybrid models available for under $25,000 USD. For comparison, the average price of a new car in the US is roughly $51,456 USD.
FYI #2 but unrelated:
- Asked whether he would be open to a deal under which Iran and Oman were handed control of the Strait of Hormuz, Trump said: “Nobody is going to control it. It’s international waters, and Oman will behave just like everybody else, or we’ll have to blow them up.”
- Trump again appeared to seek to pressure Washington’s Arab allies, including Saudi Arabia and Qatar, to normalise ties with Israel, suggesting it should be a condition for the US reaching a deal with Iran. “I think they owed that to us,” he said. “I’m not sure we should make the deal if they don’t sign.”
Remind me what were the objectives of that war again?
FYI #3 and also unrealetd:
The DOJ Wants to Know Who on Reddit and X Is Criticizing ICE’s Tactics In seeking identities of those behind anonymous social media posts, the Trump administration is intensifying its pursuit using grand jury subpoenas.
The US Justice Department is seeking the names, addresses, and banking information of Reddit and X users, ratcheting up efforts to identify social media critics of government deportation efforts.
The US Attorney’s Office for Washington, led by Jeanine Pirro, a close ally of President Donald Trump, has subpoenaed the social media companies as part of criminal investigations, asking for personal information on at least two anonymous posters behind accounts that have chided immigration enforcement efforts, according to records shared by attorneys for the users. (…)
Even if no charges ultimately are filed, the attorneys contended in interviews that rooting out identities of dissenters is at the very least an intimidation tactic. (…)
Anonymous speech is a bedrock of the US political system, said First Amendment Coalition Executive Director David Snyder. He pointed to The Federalist Papers, which are 18th century essays written to encourage ratification of the US Constitution by some of the nation’s founding fathers. They used the pseudonym “Publius.”
“They understood at a very visceral level that in order to speak your mind, sometimes you need to be able to do so anonymously,” Snyder said, “so the government doesn’t come after you.”