Market Outlook

During the first half of 2026, AI datacenter spending drove strong stock returns of semiconductors, technology hardware and equipment, and capital goods industries (industrials companies that sell electrical and power equipment, machinery, etc.). Those industries contributed 10.7% of the S&P 500 Index’s 10.2% total return (Bloomberg). This means that the aggregate return of the rest of the of companies in the S&P 500 was negative. As the quarter progressed, investors debated the sustainability of AI growth, margins, and stock returns. We address the debate in our Summer Market Outlook based on a foundation of facts.

Our 2026 Investment Outlook examines the forces we believe are most likely to shape markets in the year ahead—from the evolution of AI investment and productivity gains to labor market dynamics, inflation trends, and the shifting stance of fiscal and monetary policy. We explore where risks may be building, where opportunities may be broadening, and how disciplined portfolio positioning can help navigate an increasingly complex environment.

Our 2026 Investment Outlook examines the forces we believe are most likely to shape markets in the year ahead—from the evolution of AI investment and productivity gains to labor market dynamics, inflation trends, and the shifting stance of fiscal and monetary policy. We explore where risks may be building, where opportunities may be broadening, and how disciplined portfolio positioning can help navigate an increasingly complex environment.

Fiscal policy uncertainty, which drove the decline in stocks this spring (S&P Global), receded during Q3 and helped lift stock valuation multiples.  Job growth slowed materially, but outright job losses remained subdued, and consumer spending was stronger than expected.  Inflation picked up somewhat, but the Federal Reserve placed greater emphasis on the weakening labor market data than the increase in inflation, which it believes is being driven by transitory upward pressure from tariffs.  As a result, monetary policy easing resumed in September, and bond yields declined materially across the curve as investors priced in additional rate cuts ahead.  Meanwhile, investment in artificial intelligence continued to exceed expectations, fueling excitement about a prolonged period of rapid growth.  Against this backdrop, stocks continued their steep ascent from the April low, and while AI-related stocks continued to do well, the best performers were highly volatile, low quality, small capitalization, and cyclical stocks.

Unprecedented. The second quarter began with reciprocal tariff announcements that alarmed investors and sent stocks into free-fall. By April 9, the S&P 500 had declined 20% from its February high. Remarkably, just 89 days after the reciprocal tariff press conference, the stock market had climbed more than 28% from its intraday low on April 9 and closed the quarter at an all-time high. Based on market data dating back to 1900, it was the fastest recovery to a new record high following a decline of 20% or more from the prior peak (The Wall Street Journal).

In this mid-year investment update, we reflect on a highly eventful first half of 2025 and share our current outlook for the remainder of the year.

In our outlook for 2025, we wrote about the following factors that we thought would impact investment returns this year: Artificial Intelligence Investments and Commercialization of AI Applications, Labor Market Conditions, Inflation, and Fiscal and Monetary Policy. We provide our latest thoughts on each of these topics in this update, after a quarter characterized by a lot of market-moving news and a corresponding increase in stock market volatility.

Our outlook for 2025 is based on the following factors that we believe are most likely to impact investment returns: Artificial Intelligence Investments and Commercialization of AI Applications, Labor Market Conditions, Inflation, and Fiscal and Monetary Policy.