Schwab Market Perspective: Mid-Year Outlook

During this time of year, we like to take stock of what happened in the first half of the year and compare it with the expectations we had at the beginning of the year when we published our full-year outlooks.

There were a few things none of us saw coming: the Iran war, the effective closing of the Strait of Hormuz, and the impact those things have had on energy prices.

But there were other things that we did see coming, like the ongoing expansion of capital spending (capex) in artificial intelligence (AI) and the buildout of related infrastructure, which drove stocks on both the domestic and global fronts.

Then there are things making up a more complicated picture for the markets and economy—concentrated earnings growth, record household equity exposure, consumer sentiment at historic lows, a bond market that's increasingly competitive with equities on a risk-adjusted basis, and a new Federal Reserve chair.

Take a deeper dive into insights and highlights from our mid-year outlooks:

• Economic growth is rebounding, but consumers are becoming strained by negative real wage growth, weak savings, and rising energy costs.
• Inflation remains sticky, with energy and AI-driven capex adding to already elevated core services inflation.
• Earnings are driving the bull market, but market leadership is narrow and concentrated in AI and energy-related sectors.
• Markets may be vulnerable to disappointment with stretched positioning, a thin equity risk premium, and rising bond yield pressure.
• Labor market conditions have remained relatively stable at the headline level, although hiring trends and some employment measures suggest areas that may warrant continued monitoring.
• Strong earnings expectations have supported equities, but much of that growth remains concentrated in a relatively small group of companies and sectors.
• Consumer sentiment remains weak and household exposure to equities is elevated, which could increase sensitivity to market volatility if conditions change.

• The backdrop for global equities remains supportive in our view, driven by strong earnings growth stemming from increased capital spending from the business sector.
• The AI investment cycle remains one of the primary growth drivers of global economic activity in 2026, but it is also now one of the market's most significant sources of dependency risk.
• We believe the path forward is still positive, but higher inflation, geopolitical turmoil, and policy uncertainty might lead to more frequent bouts of volatility.
• Looking through the second half of 2026, we anticipate a global equity market supported by solid earnings growth, while also facing higher concentration risk and a greater chance that inflation could disrupt returns.

• Going into the second half of 2026, inflation remains sticky and the Fed appears likely to stay patient. Along with fiscal concerns, rising global bond yields, elevated term premiums, and oil prices, those factors could keep upward pressure on long-term Treasury yields. Income still matters for bond investors in the second half of the year, but investors should be selective. We currently suggest investors favor below-benchmark average duration in their bond holdings, although that view could change if growth weakens materially or long-term yields rise enough to improve entry points.
• The three areas of the fixed income market where we currently see opportunities are investment grade corporate bonds, high-yield bonds, and preferred securities, though each comes with risks.
• The risks in the three areas of opportunities are that corporate bond spreads are low relative to Treasuries, high-yield bonds are more sensitive to changes in economic outlook and investor sentiment, and preferreds are more volatile than corporate bonds.