Key Takeaways
- The equity bull market is expected to continue through the second half of 2026, supported by resilient U.S. growth, AI investment and solid earnings.
- With the Federal Reserve expected to stay on hold, resilient earnings could continue supporting U.S. Growth stocks despite lingering inflation pressures.
- U.S. small caps look attractive thanks to compelling valuations, easing rate expectations and diversification beyond today's mega cap leaders.
We believe the bull market will continue through the second half of 2026.
See more: Market Broadening Gains Momentum as AI Uncertainty Grows
Our recently published H2 2026 Economic and Market Outlook, What the New 'Warsh' Cycle Means for Markets, is summarized below.
Macroeconomy
- The U.S. economy is on strong, stable footing, with data volatility (especially in oil dynamics) reflecting temporary, exogenous interruptions rather than long-term, structural disruptions.
- We anticipate continued economic growth in the second half, fueled by AI capital spending. Street consensus earnings growth for this year and next is ambitious but doable.
- With oil erasing most of its war-driven gains, we expect soft inflation prints this summer. However, inflation remains structurally higher than the Fed’s longstanding 2% target; collapsing energy prices may only provide partial relief.
Monetary Policy
- The Kevin Warsh-led Fed will challenge the policymaking and communication status quo. Forward guidance will be significantly reduced, while the Fed may start consulting different data sources in its monetary policy operations.
- Given the rolling nature of oil’s war-induced volatility, along with the overall health of the U.S. economy, we don't see a strong case for meaningful federal funds policy action. We expect the Fed to remain firmly on hold for the remainder of 2026, confounding the consensus expectation of one or two quarter-point hikes between now and yearend.
Geopolitics
- The conflict with Iran appears to have peaked in Q2. While intermittent flare-ups are likely, the geopolitical risk to equities has abated, allowing markets to refocus on tariffs, China, and AI. The pivot from “headline risk-to-bottom line risk” is something investors should welcome.
Equities
Most of our stock market views have not changed materially over the last half year. The biggest is stocks versus bonds. Our Models team continues to overweight equities.
We recently upgraded Growth in U.S. equities. We would characterize that as neutral within the broader Growth-versus-Value framework. Our regional bias is toward the U.S. relative to developed and emerging markets. We’re also bullish small caps over large caps.
Our upgrade to Growth rests on earnings resilience, which we think is thematic for the next several quarters. In short, both Growth and Value will see earnings leap in 2026 and 2027, owing to the lagged effect of outgoing Fed Chairman Jay Powell’s monetary easing campaigns of 2024 and 2025. The magnitude and extent of the pop in Growth stocks’ earnings should enable the group to grow into its valuation.
We expect U.S. corporate earnings to continue outpacing non-U.S. peers, some of whom may be more hamstrung by further Iran flare-ups than the energy-independent United States.
Lastly, because small caps tend to have more floating-rate debt than large caps, we believe small caps stand to benefit as the market reduces its expectations for one or two quarter-point rate hikes over the remainder of the year. Additionally, we argue that the group trades at a compellingly cheap valuation, a multiple reminiscent of its differential relative to large caps that preceded seven subsequent years of outperformance from 1974–1981. Small caps’ relative valuation is also akin to the differentials witnessed before they embarked on their legendary 2000–2017 besting of large caps. If nothing else, small cap exposure may be a hedge to a market that has become mega-cap growth-dominated.
While volatility may increase under a more data-dependent Federal Reserve and a fluid geopolitical landscape, we view pullbacks as distractions, rather than reasons to abandon risk assets altogether. Investors who remain disciplined should be well positioned to navigate the second half of 2026 and beyond.
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