Economic Growth Steady, but Carried by Investment. Policy a Near-Term Risk.
The build-out of artificial intelligence (AI) data centers continues to elevate business investment and is resulting in soaring profits, framing a constructive backdrop for risk assets. Job growth is still slow, but tax refunds helped to keep consumer spending going despite very sour sentiment and slowing real wage growth. Policymakers may be an active source of volatility this autumn as midterms loom, and tariffs have re-emerged while the Treasury and Federal Reserve (Fed) grapple with the challenge of high inflation, bloated debt and deficits, and the AI investment boom.
Inflation Remains a Challenge.
Growth has been accompanied by stickier-than-expected inflation, prompting markets to turn their attention to potential policy tightening by the Fed later this year. Fiscal and monetary policy started 2026 in an accommodative stance, but both may be moving toward a more restrictive stance. The dual support of fiscal and monetary policy has been key to the markets’ stability since 2022, so a more hawkish tilt could slow gains in risk assets, offsetting some of the positive economic backdrop. Geopolitical risks also remain a source of inflation pressure.
Stock Bull Remains Intact and Fueled by Earnings.
Stocks remain beholden to the AI theme even as leadership broadens. August marked a revival for large-cap and growth stocks that have struggled versus peers so far this year. However, headwinds due to narrowing earnings growth differentials persist – especially for the underperforming Magnificent-7 (Mag-7) group. Valuations are not a material risk according to our models. We continue to watch earnings breadth and margin forecasts for signs of an impending top in stocks. But consensus forecasts are showing no signs of slowing down amid AI’s capex boom.
The Belly of the Curve Remains the Most Appealing.
With Fed-driven binary outcomes on the front-end and fiscal/supply risk troubling the long end, the belly of the curve is expected to provide some volatility shelter. Healthy base yields help cushion drawdowns, while spreads remain tight across fixed income sectors, with ABS offering some idiosyncratic reprieve.
