The Market at Halftime: What the Data Says and What It Means

We are halfway through 2026, and the honest read is this: the macro is resilient but not cooperative. Real GDP grew at a 1.6% annualized rate in the first quarter. Unemployment edged down to 4.2% in June. CPI came in at 4.2% year over year as of May, up from 3.8% in April, with energy accounting for a disproportionate share of that move. Compensation costs rose 3.4% over the year ending in March.

The Federal Reserve kept its target range at 3.50% to 3.75% and, reading between the lines of the April minutes, is in no hurry to move. The 30-year fixed mortgage rate was 6.53% as of late May.

If that were the whole picture, you could call it a slow but stable expansion and leave it at that. The complicating layer is what is happening outside the United States. A US-Iran agreement signed June 17 technically reopened the Strait of Hormuz after nearly four months of effective closure, but shipping has not normalized. Transit counts are running around 35 ships per day against a pre-war average of roughly 110, minesweeping is ongoing, and Iran has asserted the right to charge transit fees going forward. Freight and energy costs remain well above pre-war norms. The path to full normalization is measured in months, not weeks.

On trade, the tariff picture has moved considerably since we started pulling this piece together. The Supreme Court struck down the administration's IEEPA tariffs in February. The replacement 10% tariff under Section 122 was subsequently ruled invalid by the Court of International Trade, and that Section 122 authority expires July 24 regardless. The administration is expected to pivot to Section 301 authority to keep tariffs in place. The legal footing keeps shifting; the direction has not.

What this adds up to is a market where the headline numbers say "okay" but the inputs are volatile enough to punish slow-moving businesses and reward ones with some flexibility built in. That is the environment we are managing through, and it is the lens we apply to everything we evaluate.

When Valuation Expansion Slows, Execution Carries the Load

Private equity returns over the past decade were meaningfully assisted by multiple expansion. The same dollar of EBITDA was worth more at exit than it was at entry, often regardless of what the business actually did in the interim. That math has changed.

With rates elevated and buyers pricing deals more carefully, the path to attractive returns runs through free cash flow growth, margin improvement, and the kind of competitive positioning that holds across a cycle.

We see this in how deals are being evaluated right now. Sellers who built their businesses on strong client relationships, recurring revenue, and lean operations are getting competitive processes. Sellers whose EBITDA depends heavily on addbacks, one-time items, or tailwinds that may not repeat are getting hard looks and discounted offers. Buyers are doing more work up front, not less. That is not a sign of a weak market. It is a sign of a more honest one.

The same logic holds in real estate. Cap rate compression is not doing the work it once did. NOI growth, through better tenant selection, tighter expense management, and improved retention, is where value creation is actually happening. Operators who built institutional processes before rates moved are in better shape than those who assumed the market would keep bailing them out.

M&A: Volume Is Back. Quality Is What Separates the Outcomes.

First-quarter 2026 global M&A exceeded $1.2 trillion, with cross-border activity up 47% year over year. Goldman Sachs says full-year volumes are tracking near the 2021 record. That is real. The nuance is that PwC and BCG both describe the current market as K-shaped: megadeals and AI-adjacent transactions are commanding strong valuations, while mid-market deals require more preparation and a cleaner story to get to the same multiples.

For founder-led businesses in the sub-$10M EBITDA range, the segment we know best, the dynamics are particularly interesting. Demographic pressure is building. A large share of lower middle market businesses are owned by founders approaching retirement age, many of whom deferred exit plans when multiples compressed in 2022 and 2023. That deferred supply is starting to release, and it is meeting a buyer community that is active but selective.

The transactions closing right now are the ones where the seller came prepared: clean financials, a clear customer concentration story, management depth beyond the founder, a transition plan that holds up. The ones stalling are the ones that assumed the market would do the underwriting for them. Advisors who can help founders get ready, not just run a process, are earning their fees. The advisory businesses we follow most closely built their buyer relationships before the mandate, not after signing an engagement letter. That preparation is the product.

Government Services and Cyber: The One Sector Where Demand Is Not in Question

The Department of Defense's FY2026 IT and cyber budget request stands at $66.1 billion, including $14.3 billion specifically for cyber investments. That number does not get cut easily. OMB's 2026 memoranda add directive weight to agency logging, network visibility, software and hardware security, AI governance, and federal technology oversight. Against a backdrop of active conflict and escalating cyber threats, federal technology spending is not slowing down.

What gets discussed less often is the delivery side. Having access to a growing market is not the same as being able to scale inside it. Government services businesses that have built mission-aligned capabilities, cleared personnel, and real teaming relationships are positioned to grow with this tailwind. The ones growing too fast or too broadly, taking on contract vehicles they do not have the depth to execute, are exposed. We watch both types closely, and the gap between them is wider than it has been in years.

Construction Management: Volatility Is the Product's Best Argument

This is not an easy moment to be running a construction-dependent business. Tariffs on building materials raise costs and pass them through to end users, and the legal instability around the tariff regime creates its own planning problems. Bids priced under one set of assumptions get repriced when the rules change. The Associated Builders and Contractors reports the industry needs to attract 349,000 net new workers in 2026 just to maintain labor equilibrium. And Hormuz disruption has kept energy and freight costs elevated well above pre-war norms, with full normalization still months away.

None of this reduces the requirement for national brands to open new locations, complete remodels, or hit rollout schedules. If anything, it raises the premium on firms that know how to manage through it.

Preconstruction rigor, vendor relationships, jurisdictional familiarity, and a track record of delivering through disruption are worth more in a chaotic input environment than in a stable one. Businesses with 20 years of relationships and 10,000 completed projects have something that cannot be built overnight.

Architecture and Design: Soft Billings Reward Integration

The AIA/Deltek Architecture Billings Index came in at 48.3 in April, below the 50 line that indicates growth, and has stayed there since January 2023. That is a long stretch of soft demand, and it has forced a real sorting in the profession. Firms that were growing on volume alone, adding headcount and offices when billings were strong, are under pressure. Firms that built diversified practices and deep client relationships are holding up better.

The firms we find most interesting right now are the ones that followed clients through the full project lifecycle rather than stopping at schematic design. An integrated practice that can deliver architecture, interior design, MEP and structural engineering, value engineering, and construction administration under one roof is harder to replace than one that hands off at design development and moves on. In a soft billing environment, that stickiness is an economic advantage, not just a service quality story.

Real Estate: The Properties Performing Best Are the Ones Being Run Best

The CRE financing environment is more nuanced than the rate environment would suggest. The Fed's April Senior Loan Officer Survey showed banks reporting unchanged or easier terms across almost all CRE loan categories, a better read than the credit-tightening narrative that dominated 2023. Capital is not cheap, but it is available for well-underwritten deals. That is a meaningful distinction.

Industrial and flex space is the clearest bright spot. JLL reported Q1 2026 leasing at 145.2 million square feet with 50.9 million square feet of net absorption. NAIOP is forecasting 345.9 million square feet of industrial absorption for the full year. Domestic manufacturing and logistics demand are real, not projected.

Multifamily is more complicated. CBRE's 2026 outlook points to a 105% monthly premium to buy versus rent, a 3.4 million single-family home shortage, and a lock-in effect from owners holding pre-2022 mortgages who are not selling. Structural demand is intact. The problem is supply: elevated deliveries in the Southeast, South Central, and Mountain regions are keeping rent growth below pre-pandemic norms in oversupplied markets. Where you are matters a lot. How you operate matters even more.

Office continues to bifurcate. JLL shows leasing up 7.6% year over year with positive net absorption for a third straight quarter. That is not an office recovery story. It is a story about prime, well-amenitized space in the right markets leasing well while generic commodity office keeps struggling. The question is not whether office works. It is which office, at what basis, for which tenants.

Our View Going Into the Second Half

We enter the second half of 2026 with a clear conviction: the conditions we have described above are not theoretical. They show up in every business and real estate asset we evaluate. Tariff uncertainty and construction cost volatility are in the bids our portfolio companies are receiving right now. Cyber spending directives are in the RFPs our government services platforms are pursuing. Soft ABI readings are visible in the design firm pipelines we review. K-shaped M&A dynamics shape how we are coaching founders on transaction preparation.

Our job is not to predict macro outcomes. It is to find and build businesses that can perform regardless of which direction things break. What we look for in an acquisition is the same thing we try to build once we own something: repeatable delivery, transparent reporting, and the kind of client relationships that hold through disruption. The gap between businesses that merely participate in their markets and those that compound inside them will keep widening in the second half.

We are grateful for the trust you place in us and for the founders and management teams who choose to build alongside us. As always, we welcome any questions these observations might prompt.

Sources

The Market at Halftime: What the Data Says and What It Means

When Valuation Expansion Slows, Execution Carries the Load

M&A: Volume Is Back. Quality Is What Separates the Outcomes.

Government Services and Cyber: The One Sector Where Demand Is Not in Question

Construction Management: Volatility Is the Product's Best Argument

Architecture and Design: Soft Billings Reward Integration

Real Estate: The Properties Performing Best Are the Ones Being Run Best

Our View Going Into the Second Half

Sources

Macroeconomic Data

Sector Research

Defense & Government Technology

Energy, Trade & M&A News

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