2026 Mid-Year Market Outlook: Volatility, AI Concentration, and a Widening Global Opportunity
By Brian Seay, CFA | Founding Partner, Capital Stewards
Despite higher index levels, markets have handed investors plenty of volatility in the first half of 2026 — and that keeps weighing on the minds of many of the clients and friends we work with across North Alabama. In this mid-year outlook, I want to walk through the biggest questions I'm hearing this summer, lay out where I think the economy is headed, and explain how we're positioning portfolios across stocks, bonds, gold, and real estate.
Four questions come up again and again right now:
Is the AI story still real — or are we sliding into bubble territory?
Am I too concentrated in technology, and what should I do about it?
With inflation back near recent highs on higher oil prices, what happens for the rest of the year?
What does a new Fed chair mean for markets and my portfolio?
Where Markets Stand at Mid-Year 2026
The first half was a round trip. The S&P 500 was essentially flat through most of the first quarter as investors questioned AI's trajectory and rotated out of the "Magnificent 7." Then conflict in the Middle East hit at the end of February, the index fell more than 9%, and it rallied back through the second quarter to finish the half up roughly 10%. That's nearly a 20% swing in six months — a lot of noise for a market that, on net, moved up modestly.
The rest of the world did its part. Developed international stocks (think Europe, Australia, and Asia) rose just under 10%, while emerging markets — one of our core themes — continued to lead, up more than 24% year to date. Bonds were essentially flat as yields rose on higher oil prices. Gold, after a powerful three-year run, corrected sharply in the second quarter and sits down about 7% for the year.
The Long View: Why Staying Anchored Matters
Volatility is uncomfortable in the moment, so it helps to zoom out. Over the last 30 years — a stretch that includes the dot-com bust, the global financial crisis, COVID, and now conflict with Iran — the S&P 500 has still returned nearly 10% annualized. Bonds averaged about 4%, gold just over 9%, and inflation only about 2.6%. Narrow that lens to the last decade and the numbers are even stronger: roughly 15% a year for U.S. large-cap stocks and 11% for gold.
Here's the point I keep coming back to with clients: even if you had invested at the peak right before the financial crisis or right before COVID, you'd be a happy investor today. Staying the course through geopolitical uncertainty is exactly what we counseled during the height of the Iran conflict in our last outlook — and you can now see why it matters.
That does not mean blindly throwing money at any asset. It means building a portfolio deliberately so you can earn the returns your goals require while reducing the volatility you actually feel during drawdowns. You should be confident in your plan in both up and down markets. If you're not, that's a sign it may be time for a second opinion.
The Economy: Slow, Narrow Growth
Real GDP grew about 2% last quarter, and the Atlanta Fed's GDPNow tracker currently points to around 1.3% for the second quarter. Because trade flows have made headline GDP noisy since the 2025 tariff announcements, I prefer to watch a cleaner line item — Real Final Sales to Domestic Purchasers from Q1, essentially how much people in the U.S. actually bought. That came in around 2.5% above last year, but strip out the government and it drops to 1.7%. Then factor in AI capital spending, which added somewhere between 1% and 2% depending on how you define "AI related."
Put that together and the conclusion is striking: without the AI boom, the economy would show very little growth at all. We continue to see growth — but it's narrow growth tied to a handful of sectors. That was our view coming into the year, and it hasn't changed.
The consumer tells a similar "weak but hanging in there" story. Retail sales are running around 7%, but most of that recent bump was higher gasoline prices in April and May that are now easing. The "K-shaped" economy is becoming more pronounced: top earners and asset holders keep thriving on the wealth effect, while the majority of households curb spending in the face of higher prices. You can see it in the data — airline revenue is up, but ticket counts are down; restaurant spending is up in dollars, but visits are down.
The reason so many people feel sour on the economy comes down to real income. Before 2020, real incomes generally grew about 2.5% a year — people felt better off each year. After the post-COVID stimulus faded, and especially with this year's oil spike, real income growth has fallen to almost zero. Lower oil prices in the second half should help, but that gap explains much of the negativity.
The Labor Market: Weaker Than It Looks
The jobs market is producing just about enough jobs to keep everyone employed and not much more. Job openings and the number of unemployed workers have largely normalized after the huge post-COVID gap that drove wages and inflation higher. Critically, we haven't seen a meaningful rise in layoffs — the ingredient a recession typically requires.
What we have seen is a shrinking labor force: people who can't find work simply stop looking, which means the labor market is likely weaker than the headline unemployment rate suggests. Wage growth of about 3.5% over the past year — below inflation in the current environment — confirms there's little upward pressure on pay.
Inflation: Why We Expect It to Ease
Core PCE, the Fed's preferred inflation gauge, sits around 3.4% — well above the 2% target. But I expect most of the oil-driven spike to fade in the months ahead. "Core" inflation is supposed to exclude energy and food, yet nothing is truly immune from energy: it takes diesel to move apparel to the store. History shows energy shocks seep into core inflation and then take roughly a year to unwind.
Beyond energy, the disinflationary evidence is broad. The Case-Shiller home price index is up only about 1% over the past year, rents are essentially flat, and new vehicle prices are up just 1.2%, with used-car prices (Manheim) projected to rise about 2% by year-end. Airfare has been hot, but with seat volumes falling, airlines likely lose pricing power once oil retreats. And a soft labor market isn't strong enough to push wages higher.
Add it all up and I struggle to see where hot, "sticky" inflation comes from. Core measures won't fall as fast as gas prices, but I expect continued movement lower through year-end — even without much help from the Fed.
A Note on Oil and Iran
Since the ceasefire, my expectation has been that the "deal" looks a lot like the status quo, with plenty of can-kicking on both sides. The U.S. has largely accomplished what it wanted — degrading Iran's ability to threaten its neighbors — and there's little political appetite for regime change. As long as the Strait of Hormuz stays open, the U.S. is reasonably content with the status quo.
On oil itself, the world has plenty of supply. Prices were in the mid-$60s before the conflict; I expect them to stay somewhat elevated near current levels as markets price a risk premium for future flare-ups. Over the next couple of years, that premium should erode as other Middle Eastern producers build export capacity that bypasses the Strait — removing Iran's leverage. Steadier oil helps the U.S. consumer and the broader economy keep moving forward.
U.S. Stocks: Is This a Bubble?
I get a lot of questions with some form of the word "bubble" in them. Bubbles form when investors get overconfident and bid prices up relative to underlying cash flows. So look at the math. The S&P 500 entered the year expected to earn about $310 per share; that estimate has since climbed to just north of $340 — roughly a 10% jump. Unsurprisingly, the index is up a little less than 10%. Over the past year, earnings growth has actually outpaced price growth.
Valuations tell the same story. The index started the year at about 22x forward earnings and now trades closer to 20x — only slightly above the long-term average near 18x. I start to worry when multiples push past 25x toward 30x; we're nowhere near that. And having worked through the first-quarter earnings season, if anything analysts were too conservative. My read: U.S. large-cap has room to run, and it's simply not true that the market is more of a bubble now than it was in January.
Broadening: Growth, Value, the Mag 7, and Small Caps
"Broadening" is the other theme dominating the morning shows. The reality depends on how you define what's driving markets. Growth continues to outperform value — up 11.7% versus 7.8% — as a narrow economy rewards companies taking share over broad cyclicals like banks and energy.
Here's the wrinkle: the equal-weighted S&P 500 actually edged out the growth index last quarter, and the "Mag 7" as a group is negative year to date. What's working isn't the mega-cap hyperscalers of the last two years — it's the chip names like Broadcom, Micron, and AMD, plus industrials like Caterpillar and Eaton that are tied to the AI capex buildout. So the market's focus is still on AI; it has just shifted along the value chain from cloud infrastructure to the picks and shovels. For growth investors broadly, growth remains the place to be — consistent with what slow, narrow growth has historically rewarded.
Small caps have been one of 2026's quieter surprises, with the Russell 2000 up roughly 22% and on pace for its best first half since 1991. But the story beneath the price matters more. Analysts entered the year expecting small-cap earnings to grow north of 20%, and they've since revised that higher — yet revenue expectations barely moved. That gap is the whole story: this is a margin-and-rate rally (lower interest expense on floating-rate debt, new equipment tax incentives, and AI-infrastructure suppliers doing the heavy lifting), not a top-line boom. Two cautions temper our enthusiasm — the rally has ridden that earnings revision, so the profit bar is now baked into prices, and small-cap estimates have a habit of disappointing. We think falling rates keep small caps in the portfolio, but I wouldn't bank on a repeat of the first half.
International and Emerging Markets: The Case Keeps Building
International exposure has been a consistent theme for us for several quarters, and I expect that to continue. After more than a decade in which owning much outside the U.S. felt like a drag, 2025 delivered a genuine reversal: developed international (MSCI EAFE) returned roughly 32% and emerging markets about 34%, versus around 17% for the S&P 500. That momentum carried into 2026 — developed international up about 10% and EM up more than 24% year to date.
In developed markets, the backdrop is improving off a low base. Europe is leaning on fiscal stimulus — particularly German infrastructure and defense spending — while the ECB keeps cutting against below-target inflation. Japan may be the more compelling structural story: the end of negative rates, corporate-governance reforms pushing companies to return cash, and the pro-growth agenda of new Prime Minister Sanae Takaichi have made it the rare developed market where the central bank is raising rates because growth and inflation are finally normalizing. Add normalizing oil prices — which hurt these economies more than ours — and a softer dollar, and the setup for international stocks looks constructive.
Emerging markets are where our conviction runs highest and the debate is sharpest. The bull case rests on real fundamentals: lower local rates, healthier government balance sheets, improving governance, and faster earnings growth — J.P. Morgan estimates EM earnings growth near 29% for 2026. Increasingly, EM is also an AI story: South Korea and Taiwan supply much of the world's AI chips, China is advancing, and India remains the fastest-growing large economy. That cuts both ways — the EM index now carries a technology weighting north of 30%, similar to the S&P 500, so some of the concentration risk we worry about at home has quietly migrated abroad. Even so, in a slow-growth world we continue to favor growth assets, and that logic extends to emerging markets.
Diversifiers: Bonds, Gold, and EM Debt
Fixed income took the long way around. The year opened with markets convinced the Fed — soon to be led by new Chair Kevin Warsh — would keep cutting, and the 10-year Treasury fell near 3.94% by late February. Then oil spiked, core inflation ticked back up, and the market priced those cuts out, briefly even flirting with a hike; the 10-year backed up to roughly 4.67% by late May before easing into summer. The round trip left higher all-in yields and better income for new money, a yield curve that has re-steepened to a normal upward slope, and corporate credit spreads pinned near multi-decade lows. We used the rise in yields to add longer-term bonds to portfolios. Our view leans a touch more constructive on duration than the cautious consensus: if oil drifts lower and a soft labor market pulls inflation down, intermediate-term bonds locked in at today's yields become increasingly attractive — while we stay mindful that large deficits and heavy issuance keep pressure on the long end.
Gold, which we've held for three years, detracted last quarter. After an all-time high near $5,589 in late January, it corrected and has drifted to roughly $4,150 — about 25% below its peak. The culprits were precisely the forces above: rising real yields, a firmer dollar, higher oil, and a hawkish Fed all raise the opportunity cost of holding an asset that pays no interest. In other words, the very conditions that bruised gold are the ones our outlook expects to reverse. The structural case is intact: central banks bought a record ~1,237 tonnes in 2025 and are expected to add 750–850 tonnes this year, deficits keep feeding the debasement trade, and investor allocations remain tiny — Morgan Stanley pegs gold at just 0.17% of U.S. private financial portfolios. I see gold moving higher into year-end as central banks resume buying.
Emerging-market bonds have been the happier story — essentially the mirror image of gold's headwinds. Local-currency EM debt returned roughly 19% in dollar terms in 2025, beating U.S. bonds by nearly ten percentage points, powered by a weaker dollar and credible EM rate cuts. The second-quarter bounce in the dollar and oil temporarily dampened returns, but the appeal that drew us in remains: EM bonds still yield close to 7% versus roughly 4% for U.S. bonds, real yields sit near 2.5%, and EM government debt-to-GDP is about half that of the U.S. The chief risk is a sustained dollar rally — which is exactly why we hold it as one diversifier among several rather than a stand-alone bet.
What This Means for Your Portfolio
The Iran conflict added uncertainty, but the bigger takeaway is that markets and economies have a long history of working through shocks — and investors do best when they stay anchored to a well-built, diversified plan. My base case is a soft-but-stable U.S. economy, inflation that eases as the oil spike fades, and a leadership shift that continues to reward broader diversification.
Practical steps from here:
Rebalance. Trim technology exposure if it grew too large after the spring run-up, and add to what's lagged within your target allocations.
Keep equities diversified. Own the Mag 7, but also smaller companies and — importantly — international stocks.
Extend duration if you're holding too much cash. Today's higher yields are an opportunity to add longer-term bonds.
Use real assets thoughtfully. Gold as diversification, and real estate only where prices reflect today's rates.
Get a second opinion. If this environment is keeping you up at night, treat that as a prompt to have your portfolio reviewed.
This is the kind of intentional, long-term stewardship we practice with every client — not chasing headlines, but building portfolios designed to accomplish real goals.
Frequently Asked Questions
Is the stock market in an AI bubble in 2026? By the numbers, no. S&P 500 earnings estimates have risen from about $310 to north of $340 per share this year, and the forward P/E has actually compressed from 22x to roughly 20x — only slightly above the long-term average near 18x. That's not the signature of an expanding bubble.
Will inflation come down in the rest of 2026? We expect it to ease. Core PCE near 3.4% is elevated mainly because of the oil spike, which should fade. Flat rents, roughly 1% home-price growth, modest vehicle-price increases, and a soft labor market all point lower.
Why are emerging markets outperforming in 2026? Lower local interest rates, healthier balance sheets, improving corporate governance, and faster earnings growth — J.P. Morgan estimates EM earnings growth near 29% for 2026 — plus growing exposure to the global AI supply chain.
What does a new Fed chair mean for interest rates? Markets entered the year expecting Chair Kevin Warsh's Fed to keep cutting, then priced cuts out when oil spiked. If inflation eases as we expect, the Fed regains room to ease — a constructive backdrop for intermediate-term bonds.
Is gold still worth holding after its 2026 pullback? We think so. Gold is down about 7% year to date and roughly 25% off its January peak, but the structural drivers — record central-bank buying and tiny investor allocations — remain intact, and the conditions that hurt it look set to reverse.
Brian Seay, CFA, is the Founding Partner of Capital Stewards, a fee-only fiduciary registered investment adviser based in Huntsville, Alabama, serving entrepreneurs, engineers, defense contractors, and retirees across North Alabama, Georgia, and Tennessee.
Have questions about how your portfolio is positioned for the second half of 2026? Schedule a conversation with Capital Stewards.