2026 Midyear Outlook: “Bull Market: Endgame?”

The first half of 2026 offered investors no shortage of reasons to worry.

Early in 2026, I told several clients to expect volatility. I did not know what would cause it or what the headlines would say, but I was confident it would arrive. I also encouraged them not to let frightening headlines dictate their investment decisions. Fear attracts attention, sells advertisements and generates revenue for publishers—but it is not a risk-management strategy. As the old joke goes, economists have successfully predicted 12 of the last three recessions.

Markets confronted war in the Middle East, a sharp oil-price shock, persistent inflation, renewed tariff concerns, uncertainty surrounding Federal Reserve policy and growing questions about whether extraordinary investment in artificial intelligence can ultimately generate acceptable returns.

Yet beneath those headlines, the economy and financial markets have remained remarkably resilient—though volatile.

Our outlook for the second half of 2026 remains constructive. We expect the bull market to continue, although leadership may broaden beyond the Magnificent Few—the small group of mega-cap technology and AI leaders that dominated the earlier stages of the advance.

We believe the next phase may increasingly reward smaller companies, industrial businesses, infrastructure providers, international markets, emerging economies and companies capable of translating artificial intelligence into measurable productivity and cash flow.

That does not mean volatility is over. It means we see the current environment as a rotation within an ongoing bull market, rather than compelling evidence that the cycle is approaching its end.

One of the most encouraging features of the 2026 market is that returns have been driven primarily by improving corporate fundamentals rather than investors simply paying ever-higher valuations.

Since the beginning of the year, S&P 500 earnings estimates have increased by approximately 8%, while profit margins are expected to expand for a fourth consecutive year. Global X estimates that the increase in expected earnings has accounted for essentially the entire market advance through midyear. ^[1]

Merrill’s research similarly describes a market in which earnings remain strong while participation has expanded across sectors, individual companies and market capitalizations. ^[2]

Expectations remain demanding, particularly within the artificial-intelligence complex, but investors are not currently paying more for stagnant profits. Earnings are growing, estimates have been rising and corporate margins remain healthy. ^[1],^[2]

We expect the second half to become a more selective, two-speed market. Companies that produce durable earnings, pricing power, improving margins and free cash flow may continue to perform well. Companies supported primarily by an attractive narrative may find the environment less forgiving.

Some economists expect the Federal Reserve to resume raising interest rates because inflation remains above its long-term target.

Much of the recent inflation pressure has come from supply-driven factors involving energy, tariffs, housing, insurance, utilities and geopolitical disruptions. Higher interest rates are not particularly effective at producing more oil, building additional homes, expanding the electrical grid or reopening an impaired shipping route.

Global X argues that financial markets may be pricing an overly hawkish Federal Reserve and questions the effectiveness of raising rates in response to supply-driven inflation. Vanguard expects inflation to remain persistent but projects that the Fed will hold rates steady through 2027 rather than begin another tightening cycle. ^[1],^[3]

One of the more hawkish forecasts comes from BofA Global Research’s U.S. Economics team, which expects three additional rate hikes before year-end. We respectfully disagree—and believe that call may be getting a little too high on its own inflation narrative. ^[4]

Moderating energy prices, softer global demand and lingering weakness across portions of the global economy make a prolonged pause—or eventual easing—more probable in our view. BofA’s forecast is a legitimate risk scenario, but it is not the outcome around which we would construct our central outlook.

A stable or less restrictive Federal Reserve would be especially meaningful for:

• Small and mid-sized companies
• Housing and real estate
• Capital-intensive industrial businesses
• Emerging markets
• High-quality intermediate- and longer-duration bonds

We would not build a portfolio around an assumption of aggressive rate cuts. We do, however, believe investors should be equally cautious about treating another sustained hiking cycle as inevitable.

The strength of smaller companies is another reason we do not believe the market currently resembles a traditional late-stage cycle.

The Dow Jones U.S. Small-Cap Total Stock Market Index produced a price return of approximately 26.7% through June 30, materially outpacing large-cap U.S. equities. Its sector composition also shows that participation extended across technology, industrials, financials, healthcare and consumer businesses rather than one isolated industry. ^[5]

Small-cap performance is not an infallible economic indicator. Some smaller companies remain highly speculative, and these stocks are generally more sensitive to interest rates, credit conditions and economic weakness.

Nevertheless, strong participation among small and mid-sized businesses does not resemble the classic pattern of a late-cycle market in which leadership becomes progressively narrower and investors crowd into a few defensive or perceived-safe companies.

Global X also expects small- and mid-cap profit margins to improve after several years of stagnation. ^[1]

We also believe the broadening of market participation may be an early indication that the economic benefits of artificial intelligence are beginning to extend beyond the largest technology companies—a possibility we explore further below.

As the familiar saying goes, history may not repeat itself, but it often rhymes.

That raises a speculative—but potentially important—question: What if portions of the economy have already experienced something resembling a recession, even though the aggregate economic data never satisfied the traditional definition?

We are not suggesting that the United States has experienced a conventional recession. Real GDP increased at a 2.1% annual rate in the first quarter of 2026, and the unemployment rate was 4.2% in June. Several important measures of production and investment have also continued to expand. ^[6],^[7]

But those headline statistics may not fully describe the experience beneath the surface.

Over the past several years, many rate-sensitive, consumer-facing and economically cyclical businesses have operated in conditions that felt recessionary. Financing became more expensive. Housing activity weakened. Smaller businesses faced higher borrowing and labor costs. Portions of manufacturing and commercial real estate struggled. Lower-income consumers came under pressure, while hiring became increasingly concentrated in a narrower collection of industries. ^[7]

At the same time, extraordinary earnings from the Magnificent Few, enormous AI-related capital spending and continued strength among higher-income consumers may have prevented that weakness from appearing as a traditional economy-wide contraction. ^[1],^[2]

In other words, perhaps we did not avoid every element of a recession. Perhaps recession-like conditions occurred unevenly, moving through different industries and households at different times while the strongest companies and investment themes masked their effects at the aggregate level.

If that interpretation is correct, the recent strength in small- and mid-cap stocks may be more than a speculative rally. It could be an early indication that the portions of the economy left behind during the previous phase are beginning to recover. ^[5]

Stable or declining interest rates would reinforce that possibility. Smaller companies, housing, financials, industrial businesses and other rate-sensitive areas generally have more to gain from an improvement in financing conditions than cash-rich mega-cap companies that were never especially constrained by the cost of capital.

Artificial intelligence could make this transition even harder to recognize.

The AI investment boom helped support economic growth and corporate profits during the weaker period. Now, AI adoption may improve productivity and margins throughout the broader economy. But that transition will not benefit every company equally. ^[1]

Some software-as-a-service businesses may face disruption as AI changes how software is created, priced and consumed. At the same time, some of today’s foundational-model leaders may confront intensifying competition, rapidly declining inference costs and the challenge of earning adequate returns on unprecedented capital investment.

This means economic recovery and technological disruption can occur simultaneously. Companies may be recovering from the effects of higher interest rates at the same time that their business models are being challenged by AI.

That combination could make the next phase of the cycle unusually difficult to interpret. Traditional economic indicators may appear healthier while individual companies and industries experience significant disruption. Meanwhile, the stock market may broaden even as some of the previous cycle’s most celebrated leaders struggle to justify their valuations.

This remains a hypothesis rather than a conclusion. But it offers one possible explanation for several developments that might otherwise appear contradictory:

• Economic growth has remained positive, but many households and businesses have felt under pressure.
• Mega-cap earnings have been extraordinary, while much of the market previously stagnated.
• Small-cap stocks are now strengthening even though many commentators describe the cycle as mature.
• AI is simultaneously supporting aggregate growth and threatening established business models.
• Interest rates remain restrictive, but the sectors most sensitive to them may already have absorbed much of the damage.

The Middle East conflict posed a legitimate threat to global energy supplies. The Strait of Hormuz normally carries the equivalent of roughly one-fifth of global petroleum-liquids consumption, and the disruption was among the most consequential the modern oil market has experienced. ^[8]

Nevertheless, the oil market adapted more effectively than many of the most alarming forecasts assumed.

Brent crude traded in an exceptionally wide range. Front-month futures reached $118 per barrel on April 29 and fell to $72 on June 26, while spot prices moved from above $125 during the spring surge to the high $60s in early July. Renewed hostilities later pushed prices higher again. ^[9],^[11]

The most extreme projections—$150 and even $200 per barrel—were generally conditional scenarios based on a prolonged and severe impairment of the Strait, not the central forecast of every economist or energy strategist. Risk managers were right to consider them. ^[14]

But investors should distinguish between:

• An outcome that is physically possible
• An outcome that is economically probable
• An outcome dramatic enough to dominate a television segment

The feared $200 oil shock has not materialized to date. Consumers reduced usage, producers redirected shipments, governments released reserves, supply routes adapted and demand fell sharply before prices could approach the most extreme estimates. ^[10],^[11]

Perhaps the most surprising development was China’s response.

For the five years preceding the conflict, China imported an average of approximately 11.5 million barrels of oil per day. Since April, imports have averaged roughly 8 million barrels per day, and June shipments fell to about 40% of prewar levels. ^[12]

Separate customs data placed June crude imports at 7.12 million barrels per day—the lowest level since October 2016. The International Energy Agency also reported that crude imports into China and Japan each fell by roughly 40% during the disruption, while Chinese refinery activity remained sharply reduced. ^[10],^[13]

The important observation is not merely that Chinese buying declined when oil became expensive. That would be a normal demand response.

The more concerning development is that Chinese crude purchasing did not quickly normalize even after oil prices fell dramatically from their highs. That does not conclusively prove that China’s entire economy is weaker than reported. Imports are affected by inventories, strategic reserves, refinery maintenance, product-export restrictions, shipping conditions and procurement schedules. ^[11],^[12]

However, the data raise a legitimate question about the health of Chinese property, construction, transportation and household demand. ^[12]

Reuters reported that Rystad Energy expects Chinese gasoline and diesel use to decline by approximately 6.6% and 6.9%, respectively—roughly twice the declines it expected before the conflict. China’s property crisis has already weakened construction-related diesel demand, while weaker automobile sales and rapid electrification are also reducing petroleum consumption. ^[12]

There are two possible interpretations.

The more troubling possibility is that China’s underlying economy is materially weaker than its headline data suggest.

The more constructive possibility is that electric vehicles, electrified transportation and improved efficiency are permanently reducing the amount of oil required to support Chinese economic activity.

The truth may include elements of both.

Either way, China may no longer be the reliable marginal source of global petroleum-demand growth that investors assumed for much of the past two decades. ^[10],^[11],^[12]

This is also one reason we prefer a selective approach to emerging markets rather than treating the entire asset class as a single investment. EM ex-China provides exposure to Latin American reform and commodities, Southeast Asian manufacturing, Indian domestic growth and North Asian technology without making the entire allocation dependent on Chinese policy or economic data. ^[15]

We remain constructive on the long-term economic impact of artificial intelligence.

However, the investment opportunity is no longer limited to semiconductor designers, cloud platforms and the largest technology companies.

The AI buildout requires enormous quantities of:

• Electricity
• Data-center capacity
• Cooling equipment
• Optical networking
• Memory and storage
• Transformers and switchgear
• Copper and strategic minerals
• Cybersecurity
• Engineering and construction

Global X estimates that mega-cap technology companies may spend more than $700 billion on capacity during 2026, potentially approaching $1 trillion in 2027. The more immediate beneficiaries may include the physical infrastructure, components and raw materials required to support that expansion. ^[1]

This may turn industries traditionally viewed as cyclical—materials, industrial equipment, electrical infrastructure and construction—into participants in a longer-duration secular investment cycle. ^[1]

We also expect attention to gradually shift from the companies building AI toward the companies that can use AI to improve productivity.

Financial services, healthcare, logistics, manufacturing, professional services and consumer businesses may create meaningful value by automating administrative work, improving decision-making and lowering operating costs.

The eventual winners may not be the companies talking most loudly about artificial intelligence today. They may be the companies quietly converting it into higher margins and stronger cash flow.

U.S. companies remain among the most profitable and innovative businesses in the world. We are not advocating abandoning the United States.

We do believe the relative opportunity outside the U.S. has improved.

Emerging-market equities continue to trade at a substantial valuation discount to the S&P 500, while investor allocations remain comparatively low. At the same time, several emerging economies offer improving earnings, domestic reform, attractive income or structural growth that is not dependent on the same drivers as the U.S. mega-cap complex. ^[15]

Vanguard’s 10-year capital-market projections place the expected-return ranges for developed international equities, U.S. value and U.S. small-cap companies above those for U.S. growth stocks. These are long-term estimates rather than forecasts for the next six months, but they illustrate the importance of starting valuations when estimating future returns. ^[3]

The international opportunity is not one uniform trade. Different regions offer different economic exposures:

• Developed international markets: Value, financials, industrials and dividend income
• India: Domestic consumption, infrastructure, manufacturing and favorable demographics
• Southeast Asia: Supply-chain diversification, foreign direct investment and advanced manufacturing
• South Korea and Taiwan: Semiconductors and AI infrastructure
• Latin America: Financials, commodities, political reform and domestic rate-cutting cycles
• EM ex-China: Broader diversification with less direct dependence on Chinese policy

We believe country, sector and valuation discipline will matter more than simply buying a broad international index without understanding its underlying exposures. ^[15],^[17]

The U.S. dollar remains supported by relatively high interest rates, deep capital markets and continued foreign demand for American assets. Merrill reports that foreign ownership of U.S. securities reached a record $35.1 trillion during the first quarter of 2026, reinforcing the structural attractiveness of U.S. markets. ^[2]

For that reason, we are not forecasting the end of the dollar’s role as the world’s leading reserve currency.

We do, however, believe the dollar may be approaching a local high.

The broad trade-weighted dollar remains elevated, but it has eased modestly from its late-June peak. If the Federal Reserve remains on hold or eventually lowers rates, geopolitical tensions moderate and investors increase allocations outside the United States, several of the forces supporting the dollar could weaken. ^[16]

Global X notes that the dollar failed to behave as a traditional flight-to-safety asset during portions of the geopolitical crisis. Its research suggests the dollar could resume weakening following normalization, while Vanguard’s longer-term model also projects an unfavorable expected-return range for the U.S. dollar index. ^[3],^[15]

A softer dollar could:

• Increase U.S.-dollar returns from foreign investments
• Reduce financing pressure on emerging economies
• Support commodity prices
• Improve translated earnings for multinational U.S. companies
• Encourage capital flows into underowned international markets

This is a developing thesis, not a confirmed trend. But it strengthens the case for maintaining thoughtful international diversification rather than assuming U.S. assets and the dollar will always outperform simultaneously.

Our research priorities for the second half include:

U.S. Market Broadening

We see potential in quality small- and mid-cap companies with improving margins, manageable leverage and positive earnings revisions. ^[1],^[5]

Financials, industrials and selected consumer-discretionary businesses may also benefit from resilient economic activity and a stable or less restrictive interest-rate environment.

AI’s Physical Infrastructure

Power generation, grid equipment, data-center cooling, memory, networking, electrical components and engineering businesses may provide exposure to AI investment without relying exclusively on the valuations of the largest technology companies. ^[1]

Materials and Strategic Resources

Copper, uranium, rare earths and selected mining companies stand to benefit from electrification, data-center construction, national-security priorities and years of constrained capital investment. ^[1]

Cybersecurity and Defense Automation

The expansion of AI increases the value of protecting proprietary data, models and digital infrastructure. Defense spending is also increasingly tied to robotics, autonomous systems, communications and advanced computing. ^[1]

Developed International Markets and EM ex-China

Lower starting valuations, improving earnings and the possibility of a softer dollar strengthen the case for increasing attention outside the United States. ^[3],^[15]

India and Southeast Asia offer compelling structural-growth stories, while selective Latin American markets provide value, income and reform potential. ^[15]

High-Quality Fixed Income

Current yields offer meaningful income and diversification. We see an argument for gradually adding intermediate-duration government and high-quality bond exposure, particularly if rates remain stable or eventually decline. ^[3]

Credit spreads are comparatively tight, so we would be selective about accepting additional corporate-credit risk merely to capture a modest increase in yield.

Our view is constructive, but not complacent.

The principal risks include:

A genuine inflation resurgence. Broad-based inflation accompanied by accelerating wages and demand could force the Fed to tighten.

Disappointing earnings. Expectations are high, and companies must convert capital spending and AI adoption into revenue, margins and free cash flow.

A deeper Chinese slowdown. Continued weakness in property, consumption and industrial demand could pressure global growth and commodity exporters.

Renewed energy disruption. An escalation that again restricts Gulf shipments could produce another oil spike.

Credit deterioration. Smaller companies and lower-quality borrowers remain sensitive to financing costs.

Valuation and concentration. Even a healthy bull market can experience meaningful corrections after strong gains.

Volatility should be expected. Volatility by itself does not establish that an economic expansion or bull market has ended.

Our base case for the second half of 2026 is:

• Economic growth remains positive.
• Interest rates remain stable or eventually decline.
• The most extreme oil-price fears continue to prove overstated unless supply disruptions worsen materially.
• Corporate earnings support further equity-market gains.
• Small- and mid-cap participation remains constructive.
• Market leadership continues to broaden.
• Developed international and emerging markets become more attractive.
• The dollar approaches or passes a local high.
• AI investment increasingly benefits power, infrastructure, materials and productive adopters.
• The broadening market may reflect the early recovery of economically sensitive businesses that already endured recession-like conditions beneath otherwise positive headline data.

For years, investors were rewarded primarily for concentrating in U.S. mega-cap growth companies.

The next phase of the market may reward a much broader combination of businesses, regions and investment styles.