We’ve officially crossed the midway point of 2026. For the last six months, markets have been volatile as they’ve reacted to geopolitical uncertainty, energy supply shocks, logistics disruptions, and other drags on the economy. Yet, despite these obvious headwinds, the economy and markets have shown notable resilience. As we turn to the second half of the year, we remain cautiously optimistic that this broader trend of resilience can continue.
The AI Elephant in the Room: Massive Spending, Rising Risks
For more than a year, a primary engine supporting our economic growth has been massive corporate investment in artificial intelligence. Tech giants have poured hundreds of billions into data centers, connectivity, and hardware. AI and AI-adjacent sectors have helped lift US GDP to a stable 2.1% annualized growth rate.
However, all that exuberance has fueled an AI boom that is starting to look precariously top-heavy. Analysts and federal regulators are increasingly sounding the alarm, drawing unsettling parallels to the dot-com bubble of 2000. We have been repeatedly voicing our concerns about the massive concentrations in the tech sector as well.
The risk here is far-reaching: tech companies are taking on staggering amounts of debt and spending capital at an unprecedented clip, yet clear, widespread profitability has yet to fully materialize. If these companies are unable to make the numbers work and are forced to pull back, the resulting market shifts could impact everything from private credit markets to traditional utilities.
In our view, the core question is less about whether the sector undergoes a valuation adjustment, and more about the timing and nature of how that potential normalization might occur.
So much of the global marketplace is betting on AI meeting or exceeding lofty expectations. Anything short of those goals could disrupt the momentum that has been driving stock prices higher.
While it has buoyed the numbers so far, counting on AI to permanently carry the economy carries inherent risk. Historically, significant market imbalances tend to normalize— whether through a sharp correction or a gradual deflation. Until conditions stabilize, we urge a cautious, disciplined approach that incorporates broad diversification across asset classes. While this strategy may result in missing out on some potential upside, it is designed to help provide downside protection, as it is impossible to accurately time when or how deep a market correction might be.
Looking Ahead to the Second Half
Even with the AI hype potentially masking structural risks and energy prices straining household budgets, the broader economic picture has highlights. The job market appears to have stabilized, with unemployment holding steady at a healthy 4.4% to 4.5%, although workforce participation has dropped to Covid-era levels. For now, we are looking at an economy that has successfully absorbed global shocks rather than fracturing under them.
Looking toward the second half of the year, our baseline outlook anticipates that interest rates may remain at or slightly above current levels. We also believe inflation could begin to ease if Middle East tensions continue to cool. Most importantly, all eyes will likely be on earnings and guidance as tech companies, large and small, begin to issue Q2 results.
Stephen Kyne, CFP® is a Partner at Sterling Manor Financial, LLC in Saratoga Springs. Sterling Manor Financial, LLC is an SEC Registered Investment Advisor. This article contains forward-looking statements and opinions based on information available at the time of writing, and are subject to change without notice.