Economic Flash: Changing Tides? 

Our Take

The central question for investors today is not whether the long-term outlook for innovation in the US economy remains compelling—it does—but whether market expectations are beginning to run ahead of what can realistically be delivered in the near term. June was not a bad month because investors gave up on growth; it was challenging because the market began to question how much of that growth has already been priced into the narrowest and most expensive parts of the market. Even so, the late-month S&P 500 rebound and the strong second quarter all point to resilient risk appetite. Underneath that index-level strength however, leadership shifted away from the very stocks that had carried much of the bull market that is stretching toward 4 years now.  

That rotation matters. For much of the past few years, investors have treated AI capital spending as both an earnings story and a macro story. It has supported corporate profits, industrial demand, power infrastructure, semiconductor exports and portions of small-cap and cyclical sector performance. And, to this point, AI has followed through with generating meaningful revenue and productivity gains across the economy. Did June end that story? No, not likely, but it did remind investors that even powerful secular themes can become vulnerable when expectations, valuations and financing assumptions move too far ahead of realized cash flows. Moreover, as investors project further into the future, markets will become increasingly vulnerable to disappointment should those projections fail to materialize. 

The new Fed regime is also important. New Chair Kevin Warsh has telegraphed a less guidance-heavy posture straight out of the gate, emphasizing data over policy commitments. Meanwhile, he takes over at a time when the Federal Reserve’s challenge is increasingly complex: it has less flexibility than in previous cycles given the absolute level of interest rates and must balance persistent inflation risks against emerging growth concerns. That said, less forward guidance may actually suit the Fed and the economy better, focusing investor attention on more concrete data versus parsing convoluted Fed statements, hopefully reducing interim Fed commentary importance. Given the complexity of today’s environment however, it also means markets are likely to absorb more uncertainty directly in the form of volatility.  

In our quarterly commentary due out in mid-July, we will discuss the concept of “chokepoints,” critical yet narrow pathways through which economic growth, global trade, and capital increasingly flow; an extension of the multipolar world thesis we have put forward over the past several years. Events such as the pandemic, the war in Ukraine, and the conflict in Iran have highlighted the global economy’s dependence on a relatively small number of supply chains, transportation routes, energy systems, and strategic resources. Whereas for decades economic hegemony of a handful of likeminded nations dictated outcomes, any one of a broader group of less cooperative group that control or influence these chokepoints can hold the global economy hostage. While individual crises may fade, the vulnerabilities they exposed will remain.  

And these chokepoints are not limited to geopolitics. The AI buildout itself is dependent on scarce resources, including advanced semiconductors, power generation, transmission infrastructure, water availability, data center capacity, and financing. The pace of innovation may ultimately be constrained less by demand than by the ability of infrastructure and capital markets to keep up. In this sense, today’s investment opportunity remains substantial, but so do the practical limitations that may affect how quickly that opportunity can be realized.   

As we enter the second half of 2026, the practical implication is not to abandon risk assets or retreat from innovation-driven opportunities. Equity market breadth is improving: stronger participation from industrials, health care, financials and selected international markets is a welcome development. That said, volatility is also likely to remain elevated as chokepoints flare up. Consequently, now, when markets are strong, is a good time to revisit portfolio construction, not just when they are under stress. Concentration risk can build quietly during periods of success. 

Along those lines, the combination of elevated inflation, higher-for-longer rates, geopolitical supply risk and concentrated AI expectations argues for more balance across portfolios. Real assets, hedge funds and other diversifiers continue to play an important role, not because they will work every month, but because the investment environment is less likely to reward a single source of return. A well-diversified portfolio—drawing on public equities, fixed income, real assets, private investments, and other diversifying strategies—can help reduce reliance on any single outcome while maintaining exposure to long-term growth.