“Events, dear boy, events.”

-Former British Prime Minister Harold Macmillan

Blink and you may have missed it, but we’re now more than halfway through 2026. Future historians will have a field day sorting through the multitude of monumental events that took place, and yet, the first half of the year was a reminder that headlines and market outcomes are often very different. War in the Middle East, surging oil prices, persistent inflation, and a more hawkish Federal Reserve dominated the news, yet resilient economic growth, strong corporate earnings, and continued investment in artificial intelligence helped propel markets to new highs by midyear.

As we look to the remaining months of the year, the events of the first half are helpful to reinforce the perspective and humility needed when providing any sort of “outlook” on future events. While we believe these outlooks can be a useful exercise to think through possible outcomes and their potential implications on portfolios, we fully recognize the unpredictable nature of markets that can turn on a dime based on events.

With that in mind, we’ve put together a brief collection of thoughts around some key themes in markets. These are not exhaustive or prescriptive, and if you have any questions or want to discuss them further, we’re here to help.

Politics and Geopolitics

Never a dull moment in Washington D.C., June’s peace deal with Iran seems to have fallen apart as hostilities have resumed. As we write, the odds of peace by year-end are a coin flip, with Polymarket odds that the Strait of Hormuz traffic returns to normal by December 31^st at 52% and odds of the Bab el-Mandeb Strait closing by December 31^st at 18%. As the chart below illustrates, these are key chokepoints in the transportation of global oil.

The conflict and path towards resolution continues to be a case study in game theory, with both sides escalating military actions in a calculated manner according to their tolerance for pain. While markets have responded to developments, they have broadly seemed to look past the near-term pain, pricing in expectations that the conflict will not be prolonged.

The path of negotiations will likely dictate where oil prices go from here, and we have no unique insights into how these will play out. We, along with everyone else, know that U.S. midterm elections are later this year, and current prediction markets call for Republicans to narrowly hold the Senate but lose the House to Democrats.

Republicans and Trump are highly motivated to resolve the U.S.-Iran conflict prior to elections, yet thus far, they appear to be willing to endure some pain and prolong the conflict if necessary, leaving the administration in a tight situation.

What could this mean for markets? Historically, midterm election years have, on average, had lower returns and higher volatility. While this year has already been an outlier given strong returns, uncertainty over the length of the conflict could lead to elevated volatility. On the flip side, Q4 of midterm years has, on average, seen stronger returns as investors gain more certainty and confidence on election outcomes. Additionally, while investors tend to feel better about the economy when their party is in control, a split congress can often mean more certainty for markets given the reduced chance of major, disruptive policies.

Our Quick Take: Geopolitical events can drive sharp movements in markets, but they rarely determine long-term returns on their own. While markets continue to price a gradual normalization rather than a prolonged crisis, we note that the path towards a resolution is unlikely to be linear. For investors, that means expecting periods of heightened volatility while remaining focused on the fundamental, long-term drivers of portfolio returns rather than the latest headline.

Inflation and the Fed

Historically, inflation shocks have come in waves, with sharp spikes often followed by a second spike in the subsequent years. Almost eerily on cue, we’ve seen a bit of a second spike this year, primarily driven by the sharp increases in energy prices. The duration of the U.S.-Iran conflict will likely be the primary driver for the near-term path of inflation, though rising healthcare costs and chip shortages will also be key areas to monitor. While the Fed may be able to look past the headline energy impacts for now, the longer the energy prices stay elevated, the greater likelihood that elevated headline inflation translates into core inflation as companies pass through the higher input costs to consumers.

The Fed is well aware of this, and indeed, for whatever concerns markets had about Fed independence and a puppet Fed Chair, newly appointed Chair Kevin Warsh does not seem overly eager to cut rates in the current environment; a sentiment backed by the broader FOMC committee that seems to be leaning more hawkish – a stance they can afford to take, given the upside inflation risks relative to the downside risk of the economy. Aligned with market expectations, we tend to view the likelihood of a hike greater than the likelihood of a cut, though depending on how events unfold, it would not be surprising to simply see the Fed stay on hold for the remainder of the year. It is not yet apparent whether the new chairman is simply jawboning to get markets to do the work for the Fed or whether they are serious about raising rates.

What could this mean for markets? So long as markets can maintain confidence that the conflict in the Middle East will resolve in a timely manner, a cautiously bullish narrative can likely stay intact. Whether the Fed hikes or not, the more important number to watch remains the 10-year Treasury yield, which currently sits at 4.7% – a level that has typically led to greater market volatility in recent years. As the conflict persists, we could see yields remaining elevated or moving higher, though our base case calls for that falling back below 4.5% by year end as markets regain confidence following the mid-term elections.

Our Quick Take: With energy prices the key swing factor for inflation, we expect the Fed to hold its hawkish bias as long as the war drags on and growth holds up – though either could shift quickly. We caution against over-extrapolating the impact of one rate hike from the Fed, preferring to focus more on the longer end of the curve which tends to have a greater impact on markets.

Artificial Intelligence

A key sustaining force behind both economic growth and market performance has been the extraordinary investment associated with artificial intelligence. The first phase of the boom was comparatively simple: companies needed more computing power, which meant more chips, memory, networking equipment, data centers and electricity. Investors identified who was selling the picks and shovels, and those companies were rewarded accordingly.

The next phase could be more complicated. The market is beginning to ask not merely how much money will be spent, but what companies will receive in return for  their investment. That seems to be a reasonable question as the hyperscaler companies are committing to capex levels that would once have been associated with national infrastructure programs. In doing so, businesses long admired for being capital-light have become voracious consumers of capital, redirecting an increasing share of free cash flow toward chips and data centers.

As we look ahead, the question is no longer whether artificial intelligence is transformative, but whether companies can earn an attractive return on the enormous investments being made today. Early evidence is encouraging, as companies deploying AI most effectively are beginning to report productivity gains. If those trends continue, AI could support higher profit margins, stronger earnings, and broader economic productivity over time.

What could this mean for markets? The AI investment cycle remains one of the strongest structural forces in the market. However, regardless of the payoff, we are mindful that the AI trade has become a crowded source of market momentum. Periodic volatility and sharp rotations are a natural consequence of this concentration, especially when expectations move faster than near-term earnings. Additionally, the character of the trade is changing as investors increasingly reward those companies showing measurable improvements in productivity, profitability, and return on invested capital. While we believe AI remains a durable long-term investment theme, we expect leadership to continue broadening as investors place greater emphasis on execution, profitability, and returns on invested capital.

Our Quick Take: We remain constructive on AI’s long-term economic potential. As the investment cycle matures, we expect markets to become increasingly selective, rewarding companies that successfully monetize AI while becoming less forgiving of those that simply continue spending.

In Conclusion

As always, our outlook is less about predicting the next headline than preparing portfolios to withstand whatever headlines come next. Harold Macmillan’s implication that history is shaped by “events” remains as true today as ever. We cannot predict the next event, nor should we pretend to. What we can do is build portfolios designed to endure them. That, ultimately, remains the purpose of thoughtful investment management.

Geopolitics will remain unpredictable, inflation may prove more persistent than many hope, and artificial intelligence will almost certainly continue to reshape the economy in ways we cannot yet fully anticipate. The first half of the year was an excellent reminder of why we advocate for staying disciplined amidst uncertainty. In truth, no one knows what will happen next, but that uncertainty is a feature, not a bug. As we navigate ever tighter micro-cycles of greed and fear, a portfolio grounded in diversification and focused on long-term goals rather than short-term headlines remains the most reliable way forward.

We look forward to seeing what the rest of the year brings, and as always, we’re here to help.