Mid-Year Investment Outlook & Portfolio Positioning

As we move into the second half of 2026, the investment environment appears more constructive than it did at the beginning of the year. Market momentum has improved, economic growth has remained resilient, corporate earnings have exceeded expectations, and market participation has broadened beyond a relatively small group of large technology companies.

While risks remain elevated, particularly surrounding inflation, valuations, geopolitical conflicts, and fiscal deficits, the overall balance of evidence now supports a moderately bullish outlook over the next six months.

As always, the objective is not to predict markets with certainty, but to position portfolios in a manner that allows participation in opportunities while managing risks through diversification and disciplined asset allocation.

Factors Supporting the Markets:

Several developments continue to support economic growth and financial markets:

• Economic Growth Remains Resilient: U.S. GDP growth has remained stronger than many economists anticipated, with expectations for growth in the 2.0% to 2.5% range. The economy has demonstrated an ability to absorb higher interest rates while continuing to expand.
• Labor Market Improvement: Employment data has remained healthy and concerns surrounding widespread job displacement from artificial intelligence have moderated. Businesses continue to hire and labor market conditions remain supportive of consumer spending.
• Strong Corporate Earnings: Corporate earnings growth has continued at a robust pace, supported by resilient demand, improving productivity, and continued business investment.
• Broadening Market Participation: Market leadership has expanded beyond mega-cap technology companies. A wider range of sectors, company sizes, and geographic regions are participating in market gains, which is generally a healthy sign for the sustainability of the current bull market.
• Artificial Intelligence Investment Cycle: Businesses continue investing heavily in technology infrastructure, software, automation, and data-center development. Early productivity benefits from AI adoption are beginning to emerge across multiple industries.
• Manufacturing and Industrial Activity: Domestic manufacturing initiatives, capital expenditures, and industrial activity have improved. Industrial companies may be particularly well positioned to benefit from increased automation and AI-driven productivity enhancements.
• Favorable Midterm Election History: Historically, the twelve months following a midterm election have been constructive for equity markets. The S&P 500 has not finished lower during the 12-month period following a midterm election since 1938. While history never guarantees future results, seasonal and political election cycles remain supportive.

Key Risks and Market Headwinds:

Despite the improving backdrop, several meaningful risks remain:

• Elevated Valuations: Valuations remain above historical averages in several areas of the U.S. equity market. Higher valuations leave stocks more sensitive to disappointments in earnings growth, inflation, or economic activity.
• Persistent Inflation Pressures: Inflation remains a concern. Ongoing AI infrastructure investment is increasing demand for labor, energy, data centers, and industrial equipment. Additionally, geopolitical tensions could place upward pressure on energy prices.
• Federal Reserve Leadership Transition: Investors must adjust to a different policy environment under Federal Reserve Chair Kevin Warsh. Markets may receive less forward guidance regarding future policy decisions, resulting in greater sensitivity to incoming economic data and potentially increased market volatility.
• Geopolitical Uncertainty: Conflicts in Ukraine and the Middle East continue to create uncertainty for global growth, energy markets, and investor sentiment.
• Government Debt and Deficits: Rising fiscal deficits and growing government debt remain important long-term challenges and could contribute to future interest rate and economic pressures.
• AI Execution Risk: Investor expectations for AI-driven productivity gains remain high. If productivity improvements fail to meet expectations, some current market optimism may prove excessive.

Investment Themes:

Equities

• International Equity Opportunities
• International Small Cap Exposure
• Technology & Innovation
• Industrials
• Broadening Market Leadership

Fixed Income

• Short Duration Bonds
• TIPS

Alternatives

• Infrastructure

Bottom Line

While risks remain, including inflation, valuations, geopolitical uncertainty, and growing fiscal deficits, a combination of resilient economic growth, strong corporate earnings, expanding market participation, and continued AI-driven investment supports a moderately positive outlook. Diversification and disciplined asset allocation remain key principles for long-term investors.