Our 2026 Outlook made a central call: as inflation moderated and tail risks receded, equity leadership would broaden beyond the narrow set of US mega-cap growth names that had led for years. International, EM, and smaller-cap equities would lead rather than follow, cyclicality would be rewarded over incumbency, and stock/bond diversification would return as core inflation held below 3%. For the first stretch of the year, that is what happened: the extended but aging expansion we described delivered a genuine goldilocks phase.
That thesis has since been tested by two of the very risks that piece flagged: a supply-shock resurgence of inflation and a disruption to energy markets.
The three most important topics going into the second half of 2026:
The AI question. The debate is shifting from what AI can do to what it will earn. The buildout is real and large, yet monetization has lagged spending, and investors increasingly question hyperscaler capex and how quickly the technology commoditizes. That doubt has partially reversed the run in semiconductors. Recent weakness in private credit is best read as a symptom of this anxiety, reflecting fear that AI adoption could impair the software companies underpinning many credit portfolios. A close reading of bank earnings revealed no systemic stress, and software has since rallied, suggesting the concerns about AI are growing.
The easy money has been made; from here, returns accrue to those who convert capability into cash flow. A picks-and-shovels tilt toward hardware, while appealing, is not attractively priced today. With Anthropic and OpenAI expected to go public soon, the debate will only intensify.
Inflation and the Fed. Our January framework held that with core inflation below 3%, the Fed would refocus on growth and stock and bond returns would diverge, restoring the 60/40. The corollary was clear: any significant uptick ties these returns back together. Chairman Warsh, initially expected to prove accommodative, has struck a hawkish tone, lifting the median rate projection and removing the easing bias. Above-target core inflation, an energy shock with unresolved effects on fertilizer and goods costs, and surging memory prices in hard goods keep inflation risk alive. Rate hikes are now a possibility the market is explicitly pricing, and stocks and bond remain intensifiers of returns instead of diversifiers.
The Iran war and energy. The June memorandum of understanding has effectively collapsed. Iran resumed attacks on vessels in the Strait of Hormuz in early July, the US responded with sustained strikes and a naval blockade. Brent crude, having fallen to pre-war levels near $71, has surged toward $95 to $100 as key supply routes face disruption. As we have noted, it is the trajectory of energy prices, not the level on any day, that matters most. The longer end of the energy price curve, specifically Brent crude oil futures six to twelve months out, remains the best gauge of how durable any eventual settlement is.
The path forward depends almost entirely on geopolitics. A durable settlement reopens the door to the January broadening: international and EM leadership, cyclical outperformance, a softer dollar, and possibly diversifying stocks and bonds. The current re-escalation points the other way, returning inflation to the fore and restoring US large-cap growth and energy to leadership. This calls not for wholesale repositioning, but for the balance and selectivity we argued from the start. Watch the Brent crude oil futures curve.
