The summer months are here, and we've wrapped up a volatile first half of the year. The first quarter of 2026 saw a steep market sell-off primarily due to concerns over the conflict in Iran. As it became clear, however, that the U.S. and Iran were moving toward negotiations, markets recovered.
As the conflict has re-ignited in recent weeks, renewed volatility in energy markets serves as a reminder that geopolitical developments can quickly influence inflation expectations. Despite these geopolitical shocks, the U.S. economy has thus far proven remarkably resilient.
Markets also rebounded following a strong second-quarter earnings season, pushing major indexes back near all-time highs. S&P 500 earnings growth was 28% year-over-year this past quarter, its sixth consecutive quarter of double-digit earnings growth.
While a healthy consumer has historically been the primary driver of the U.S. economy, business investment and government spending have provided much of the support for economic growth this year. Technology companies led the way, driven by historic investment in AI infrastructure. Major technology companies estimate spending up to $700 billion this year on AI initiatives and infrastructure buildout, and the total could reach up to $7 trillion over the next five years. AI-related spending is projected to account for roughly half of total corporate earnings growth this year. Meanwhile, the "One Big Beautiful Bill" is expected to deliver fiscal stimulus equivalent to 1% of GDP in 2026.
Business investment, however, has contributed to a new source of inflationary pressure—computing components. Major semiconductor and memory makers, including Micron, Samsung, Western Digital, and Sandisk, have experienced exceptional revenue and earnings growth. The production of these components, which are critical to the creation of data centers, is contracted years in advance. This has led to significant pricing pressures, with consumer technology products beginning to feel the impact.
While this investment is helping drive productivity and long-term innovation, it also illustrates that technology is no longer purely disinflationary. As demand for AI infrastructure continues to outpace available production capacity, higher costs for key technology inputs may persist.
The second quarter saw one of the most anticipated IPOs in market history. SpaceX, Elon Musk’s space exploration company, went public in mid-June, catching the attention of market participants. The company priced at a $1.7 trillion valuation, making it the world’s seventh-largest company at the time. While SpaceX primarily focuses on space exploration, investors were most intrigued by another business vertical—AI computing infrastructure. In the coming year, we expect to see additional high-profile IPOs, including OpenAI (makers of ChatGPT) and Anthropic (makers of Claude). These companies going public will provide investors with a deeper view into the progression of AI adoption and, ultimately, profitability.
We maintain healthy exposure to energy stocks within equity portfolios. This, alongside allocations to high-quality international and U.S. small- and mid-cap companies, helped our factor-based portfolios mitigate a large portion of the downside experienced in March. We continue to see strong opportunities in those areas of the market in the months ahead.
Elsewhere, Artificial Intelligence (AI) continues its strong trajectory. AI leaders such as OpenAI (makers of ChatGPT) and Anthropic (makers of Claude) are exploring potential IPOs later this year, with media reports suggesting valuations could approach $1 trillion-plus levels. The market continues to reward companies for investing in AI initiatives, but questions of profitability remain.
Capital expenditures are approaching historic levels, and investors will want to see a meaningful return on invested capital. Upcoming earnings reports will be key to understanding how much patience the market will have with leading tech giants.
Amid recent market volatility, Kevin Warsh has been nominated as the next Federal Reserve (Fed) Chair to succeed Jay Powell. Warsh has been vocal in advocating for one to two rate cuts in 2026, but higher inflation and potential labor market instability tied to oil prices may limit the Fed's flexibility. His preference for a smaller Fed balance sheet, now over $6.6 trillion, and his emphasis on fiscal discipline could complicate the Treasury's efforts to refinance government debt at lower rates.
This dynamic will be important to watch, as the U.S. government's fiscal trajectory remains challenging over the long term.
Despite the first quarter's disruptions, the U.S. economy marches forward. Corporate profits are strong, and the consumer, though strained, remains resilient.