Why the second half of 2026 could be more challenging for investors

The fundamental drivers of the AI investment cycle remain intact, but leadership within this theme will likely continue to evolve in the second half. Here are three trends we’re watching within this theme:

• Investors become more selective about AI exposure: Earnings growth among AI leaders remains strong, companies are investing heavily in the technology and enterprise adoption continues at a rapid clip. At the same time, investors are becoming more selective about where they seek AI exposure. In our view, that selectivity is a healthy feature of a maturing cycle.  
• Leadership is expanding across the AI ecosystem: While AI hardware helped lead the early stages of the AI boom, cloud providers, software companies and infrastructure-related businesses are beginning to play a larger role. In our view, this type of rotation across hardware, software, cloud and infrastructure is what a maturing bull market typically looks like.
• More sectors beyond tech may see the benefits: Financials, industrials, materials and utilities are sectors that could all benefit as AI-related investment spreads throughout the economy. Smaller-company stocks and some international markets have also shown encouraging signs as investors look beyond the largest technology companies.

Overall, we believe the AI trade is maturing, and leadership could expand beyond the largest tech companies, creating opportunities across a broader range of sectors and markets.  

3. Can policy stay out of the way? 

Policy developments may make the ride bumpier through year-end, but they likely won't change the market’s long-term direction. Here are a few issues and events to watch:

• New Fed leadership: Under Chair Kevin Warsh, the Federal Reserve has reduced its use of forward guidance while maintaining a strong focus on returning inflation to its 2% target. As a result, investors may see larger market reactions around Fed meetings in the second half, particularly if inflation shifts the outlook for interest rates. 
• Trade: The Supreme Court decision striking down the reciprocal tariff framework in the first half removed the worst-case scenario for corporate earnings. However, industry-specific tariffs under several sections of the law remain in place, and the White House is likely to keep tariffs as a negotiating tool through year-end.
• U.S. midterm elections: Historically, stock volatility has risen in the months leading up to midterm elections regardless of macro conditions. And while elections generate noise, history shows that election-year outcomes rarely shift market or economic direction. Investors who anchor their portfolios to political forecasts have generally underperformed simple, diversified portfolios over time. 

4. Can geopolitics stay contained? 

While developments involving Iran initially rattled markets earlier in 2026, investors have largely looked through subsequent Middle East headlines, in part because the U.S. economy is far less dependent on foreign oil than it was in the past. 

In our view, so long as oil remains below $100 per barrel and market fundamentals remain intact, investors could treat Middle East developments as temporary disruptions rather than a permanent threat to the broader market outlook. That said, ongoing tensions could continue to be a source of market volatility in the second half. Iran still has the ability, and incentive, to disrupt shipping in the Strait of Hormuz and keep energy prices elevated without triggering a broader conflict. 

Beyond the Middle East, Russia and Ukraine remain an underappreciated risk. Russia's deteriorating economic and battlefield position keeps odds of a stalemate elevated and could test NATO cohesion on the subject through year-end. 

5. What does all this mean for investors? 

Overall, the second half is likely to carry more volatility catalysts than the first. In our view, investors may want to consider the following actions:

• Prepare for potential volatility rather than spending time trying to predict its source. Overall, don’t let uncertainty drive portfolio decisions that undermine long-term returns.
• Stay diversified with intent. This includes areas that have lagged Big Tech and AI leaders. For example, small- and mid-cap equities, international equities, dividend payers and defensive sectors may be types of stocks to consider.
• Pay attention to your goals and time horizon. Investors positioned for the intermediate to longer term have been rewarded for staying the course through several volatility episodes during this cycle. We don’t see the second half shaping up any differently at this point. 

Bottom line: Midyear market outlook 

The bar for further gains in stock prices is high, leaving markets with less room for error. Earnings disappointments, shifts in the AI narrative, unexpected moves from the Fed or evolving geopolitical headlines could all test investor confidence. With expectations elevated, it may not take much to unsettle markets and surprises in any of these areas could lead to periods of volatility.  

Despite these potential challenges, however, we remain cautiously optimistic about the second half, given the market’s strong fundamental underpinnings. Corporate profits are growing well above historical trends, thanks to AI. The economy continues to expand. The labor market has cooled but remains healthy. Consumer and corporate balance sheets have held up through elevated inflation and, by most measures, should remain on firm footing through year-end. Thus, we believe such a durable foundation should carry the market through the noise even if the ride gets bumpier in the second half. 

Position your portfolio for the months ahead

An Ameriprise financial advisor can help you evaluate potential opportunities and risks as the back half of the year unfolds.