We’re now in the midst of summer heat when markets have traditionally been relatively quiet, as many institutional traders go on vacation. This year has been anything but quiet, dominated by two major headlines — AI and the war with Iran. We’ll try to address each.
Market Performance Year-to-Date
Let’s quickly review what is happening in the market. Here are the numbers for the first half of 2026:
While US stocks have had a great return through the first half of 2026, the real standouts have been Emerging Markets, Asia, Small Caps, and Large Value—the leaders of the pack. This is quite a reversal from the last 10 years, during which these segments had significantly underperformed. Fixed income told a different story: global bonds were negative through June 30th, and as of this writing, US bonds have also flipped negatively due to rising interest rates.
We’ve also had a change in Federal Reserve chairs with Kevin Warsh succeeding Jerome Powell, who, in an unusual move, will continue to serve on the Federal Reserve Board. We’ve seen so far that Warsh is a little more like Alan Greenspan insofar as he is more opaque with his thoughts and the position of the Federal Reserve.
The War with Iran Impacts Inflation
Through June 30th, the Consumer Price Index (CPI) was 3.5%, down from 4.2% in May. Core CPI, which excludes food and energy, also eased to 2.6% from 2.9% in May (although these numbers have been changing daily due to changes in the price of oil). Though still above the Fed's 2% target, inflation appears to be coming under control. While we have seen an increase in inflation rates this year, the Federal Reserve is still anticipating a lower funds rate in 2027 and beyond.
My best guess is that over the long term, the Fed is not as concerned about inflation as it is other objectives. Geopolitical impacts on stock and bond markets tend to be very temporary as prices stabilize once the issues are resolved.
Keep in mind that we are five months into the war with Iran and, overall, it appears that the market is largely ignoring this issue with one significant exception – inflation and its effect on interest rates. Usually, the market disruptors are what is unknown, not what is known.
AI’s Impact on the Markets
The second major issue affecting the markets has been Artificial Intelligence (AI). We have seen tremendous growth in the largest tech companies' performance over the last 5 years. This year was different. Is AI spending going to cause similar issues to the dot-com years or the fiber optic boom (does anyone remember Lucent?)? The recent pullback in large tech is instructive: it reminds investors “Don’t put all your eggs in one basket.”
As far as the larger story of tech and the stock market, what we’ve seen time and again is a long-term positive relationship between the stock market and technology.
Long-Term Diversification Is as Important as Ever
So far, 2026 has seen larger stock and bond market swings. It’s important to keep a long-term perspective and remain diversified. No one knows what will happen to short-term stock market or bond market movements. What we have seen is that continuing to have a long-term perspective benefits investors.
Below is probably the most important chart in this blog—rolling returns of the S&P 500 since 1926. Over a 12-month holding period, a stock portfolio only has a 62.6% probability of having a positive return. But hold that stock portfolio for 5 years and your likelihood of having a positive return jumps to 89.3% and keeps climbing.
The message is clear: Wealth is produced through time in the market and not market timing.
Looking at the data, I continue to be positive primarily due to expected earnings growth. I continue to be positive as well on bonds. Higher yields translate to higher returns over time.