As we pass the midway point of the year, it is easy to think a full year’s worth of events has already come to pass. The One Big Beautiful Bill’s stimulus landed in investors’ pockets, the Supreme Court ruled numerous executive order tariffs unlawful, and an oil shock and military conflict arrived in Iran. Software businesses went, and are still going, through their own existential moment, a new Fed chair took center stage, and SpaceX went public in the largest IPO in history, listing at a valuation above anything markets have seen. And we’re just getting warmed up. Despite it all, markets have hummed along, with the exception of their pullback in March following the closure of the Strait of Hormuz. Why? Quite simply, fundamentals.
Companies around the globe have been reporting growing profits, some extraordinarily so. While everything we listed above mattered before, and matters still, six consecutive quarters of double-digit earnings growth have guided investors to see past the rest, and rightfully so. Revenues in the U.S. have grown by 11.9% over the past year and earnings by 28.8%, and U.S. companies sit atop record profit margins. The difference versus recent years is that growth has not been confined to a handful of companies. The equal weight index is outperforming the cap-weighted index by nearly 2% through June, small cap stocks have returned more than twice as much as their larger peers, and emerging markets are off to another great start in 2026, doing so in spite of China’s year-to-date sluggishness. Meanwhile, consumers echoed this optimism in their actions (spending) though not in their mood (sentiment), all while facing higher prices at the pump. In short, the first half of 2026 has been an extraordinary mid-cycle run, with AI at the center of the story but, notably, no longer the whole of it. That does not mean markets are without risk. In focusing so singularly on earnings, the market has taken its eye off the Middle East. The global economy is waiting with bated breath for resolution and the return of free-flowing resources, but the parties remain stubbornly far apart.
Additionally, consumer spending has been strong, but the power behind it has come from tapping savings as wages struggle to keep up with inflation amid energy spikes. That works for a time, but not forever. As we look to the second half of the year, we remain guardedly optimistic. In the following pages, we outline the key developments that have shaped where we stand today and how we believe portfolios should be positioned for tomorrow. We check in on the three themes we set out in December (AI Playbook, Navigating Valuation and Noise Resistance) and find the groundwork holding. Our positioning within U.S. equities and across the globe has been additive thus far, and we believe our conservative positioning in fixed income is both justified and a partial offset to the risks noted above. Consistent with the discipline we described in December, we see little need for wholesale change at mid-year. As we wrote then, sometimes no action is the best action.
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