At the beginning of the year, we wrote about a few themes that we thought might indicate what was in store for 2026. We review those themes below in light of what has transpired in the first half of the year:
2026 Themes – Revisited
Noise Resistance
Some would say that financial markets moving through the Iran war (and corresponding oil shock) largely unscathed is an example of “Noise Resistance” in its purest form. Continued tariff volatility, a new Fed chair, a record IPO and more widespread concern about AI profitability all failed to dislodge markets from their growth posture. The discipline of seeing past headlines has been the year’s best-rewarded decision so far.
AI Playbook
AI capital spending, estimated at more than $1 trillion thus far, has been funded largely by operating cash flow, and demand still outpaces supply, a dynamic rarely seen in prior late-stage bubble scenarios. However, debt funding is becoming more common, which is a trend to watch more closely going forward. Classic bubbles pair euphoria with borrowed money. Today, we observe full prices, strong but unproven fundamentals and only pockets of mania, but not the leverage (at least not yet). The jury remains out whether AI is a bubble. For now, we continue to suggest measured exposure and thoughtful diversification.
Navigating Valuation
Valuations remain full across most markets, but earnings have kept up: six consecutive quarters of double-digit growth and record margins have continued to drive prices up. Bonds continue to offer attractive returns, relative to risk, and serve as a counterbalance to downside risk potential of a fully valued stock market.
Economic Backdrop
As we pass the midway point of the year, it is easy to think a full year’s worth of events have already come to pass. Some of these have included the Supreme Court ruling that numerous executive order tariffs were unlawful, the U.S. and Israel attacking Iran leading to the closure of the Strait of Hormuz, a new Fed chair taking center stage and SpaceX going public in the largest IPO in history. Despite it all, markets have hummed along, with the exception of their pullback in March following the initial energy shock due to the war. Why? Quite simply, fundamentals.
Companies around the globe have been reporting growing profits. U.S. companies have experienced record profit margins, with revenues growing by nearly 12% over the past year and earnings by nearly 29%. A positive development compared to previous years is that the growth isn’t the result of just a handful of companies performing quite well. Now small-cap stocks have returned more than twice as much as their larger peers and emerging markets are off to another strong start. Despite facing higher prices at the pump, consumers have continued to spend. In short, the first half of 2026 has been pretty extraordinary, but risks remain.
In focusing so singularly on earnings, it could be argued that markets have taken their eye off the Middle East. The global economy is waiting with bated breath for resolution and the return of free-flowing resources, but the parties remain stubbornly far apart. Additionally, consumer spending has been strong, but the power behind it has come from tapping into savings since wages have struggled to keep up with inflation amid energy spikes. This pattern cannot go on forever.
Core inflation has been steady, running between about 2.5% and 2.9%, whereas headline inflation has been more volatile (from 2.4% in January to 4.2% in May before easing to 3.5% in June). Core inflation is what economists use to track underlying inflationary trends (and is what’s used to set interest rates) but headline inflation is what households pay and more closely tracks actual purchasing power. With the war in Iran still unresolved, the squeeze on real purchasing power connects directly to households’ falling savings rate which, as noted above, is unsustainably funding consumption.
Fixed income remains broadly attractive as all-in yields appear to be a good value relative to the last 20 years or so. In a market where most risk assets trade at full valuations, fixed income offers a meaningful reduction in risk for only a modest concession in expected return.
Where Do We Go From Here?
If asked in December whether an oil shock from strikes on Iran would be good or bad for markets, you would be hard pressed to find someone brave enough to say “good.” Yet here we are, more than halfway through 2026, and markets are resoundingly in the green. That is because a single variable rarely drives outcomes. Looking at a global conflict in isolation tells us little about the future, especially for prices or inflation. We hold this view with appropriate humility as the current conflict has not abated and markets continue to price a resolution that has yet to arrive. However, the discipline for long-term investors is not prediction, it is recognition. Those who recognize that this too shall pass tend to profit from that patience.
This year has reinforced the importance of remaining diversified as the best performers have broadened beyond just the largest U.S. companies. The strong relative performance of small and mid-cap equities year-to-date supports a key theme we introduced at the beginning of the year: investors do not need to rely solely on the largest AI beneficiaries to participate in the next phase of the cycle. As AI-related investment spreads across the global economy, smaller companies, non-U.S. equities and real assets may all play a role in capturing a broader set of opportunities.
The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, sectors or markets in general. The above statistics and/or commentary have been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness. Past performance is no guarantee of future results.
Specific securities discussed herein are illustrations and do not represent securities purchased, sold or recommended for client accounts. Such information does not constitute, and should not be construed as, a recommendation to buy or sell specific securities.
This is not a complete analysis of every material fact regarding any company, industry, or economic condition. Due to shifting market conditions, all expressions of opinion are subject to change without notice.
The information contained in this document does not cover all tax strategies that may apply, is not a complete guide to tax planning, and does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters. Before implementing any ideas suggested here, consult with your tax advisor regarding your specific tax situation.
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