The economy entered the second half of 2026 on stronger footing than many expected. Consumers have continued spending, the job market has remained healthy, and companies have generally delivered solid earnings. Those factors have helped support the economy and financial markets despite ongoing uncertainty. 

As we look ahead, five key questions are likely to influence markets, as well as investor confidence, in the months to come: 

1. Will Inflation Continue to Ease?

Our view: Yes, but the journey may have ups and downs. 

Inflation (the rate at which prices rise over time) has cooled considerably from its highs, but getting all the way back to the Federal Reserve’s 2% target—meaning prices rise at a much slower, healthier pace of only 2% per year—may take longer than many expected.

One of the biggest variables remains energy prices. If oil prices rise, businesses often face higher transportation and production costs, which can eventually make everyday goods and services more expensive for consumers. Encouragingly, many other areas of inflation have continued to improve.

While we expect occasional bumps along the way, we believe the longer-term trend still points toward gradually lower inflation.

2. How Long Will Interest Rates Stay Elevated?

Our view: Probably longer than markets anticipated earlier this year.

Because the economy has remained resilient and employment has stayed relatively strong, the Federal Reserve has had the flexibility to keep interest rates elevated, while ensuring inflation continues moving in the right direction.

If inflation keeps cooling, we still expect rates to gradually decline over time. However, the timing has become less predictable. Investors should be prepared for a “higher-for-longer” environment, where borrowing costs remain above the unusually low levels experienced for much of the decade after the Global Financial Crisis.

3. Can AI Continue to Live Up to Expectations?

Our view: Yes, but investors will increasingly expect proof, not just promise.

Companies continue to invest enormous sums in artificial intelligence (AI), including semiconductor chips, data centers, cloud infrastructure, and computing power. So far, those investments have helped drive strong earnings growth for many of the market’s largest technology companies.

While we don’t expect the build-out of AI infrastructure to slow anytime soon, investors will increasingly focus on whether those investments produce measurable results through higher productivity, stronger revenue growth, and improved profitability.

We continue to believe AI is one of the most compelling long-term investment themes, but we also expect markets to become more selective, rewarding companies that can clearly demonstrate real business value.

4. How Could Geopolitical Events Affect the Economy?

Our view: Energy prices remain key, as they’re often the first ripple from geopolitical events.

Geopolitical developments, including tensions involving Iran, can quickly influence oil prices. If oil prices remain elevated for an extended period, they could increase inflation, reduce consumer spending, and complicate the Federal Reserve’s ability to lower interest rates.

History also shows that markets often recover from geopolitical shocks when energy supplies remain stable and conflicts fail to broaden significantly.

Rather than trying to predict geopolitical events themselves, we focus on understanding how changes in energy markets could affect inflation, economic growth, and overall market sentiment.

5. What Could the Midterm Elections Mean for Investors? 

Our view: Expect more volatility, but not necessarily a different long-term market outlook.  

Midterm election years have historically been more volatile, with larger market pullbacks than other years in the election cycle. However, those periods of uncertainty have not necessarily prevented markets from delivering positive returns over time. 

The bigger risk for investors is reacting to election headlines and abandoning a long-term plan. Some of the market’s strongest days often occur during periods of uncertainty, making it difficult to step out of the market and successfully get back in at the right time. We believe investors are best served by staying invested, staying diversified, and focusing on the long-term drivers of market returns—most notably, earnings growth, inflation, interest rates, and economic growth.

What All This Means for Investors

Taken together, these themes reinforce the importance of staying diversified and maintaining a long-term perspective on investments. We continue to believe investors should spread their portfolios across different sectors, asset classes, and regions rather than relying too heavily on a single investment theme. While we remain optimistic about the long-term opportunities created by AI innovation, we also see opportunities in other areas of the market as higher interest rates, a resilient economy, and periodic geopolitical volatility create a broader set of investment opportunities.

Bottom Line

The second half of 2026 is unlikely to reward investors who try to predict every headline. Instead, we believe patience, diversification, and disciplined portfolio construction remain the best approach for navigating whatever comes next.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor’s specific circumstances. Investing involves risk, including possible loss of principal.

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