2026 Mid-Year Outlook: Half-time for the bulls

10 minute read

The World Cup kicked off last week, and for the next month much of the world will be watching (many of us at StashAway will be too!). Any football fan knows the cliché: it's a game of two halves. The side that walks off ahead at the break hasn't won anything yet, and the one that’s behind still has 45 minutes to turn it around.

Markets are reaching their own half-time, and the bulls are ahead. It was a volatile first half, but the scoreboard reads well: the S&P 500 is up about 9% so far and the tech sector has gained 30%.

At this point in the game, every coach asks the same question: what might change after the break? For markets, three questions stand out: how far sticky inflation could push the Fed, whether the market can absorb a record wave of IPOs, and whether the rest of the market can hold up if the AI rally pauses. In this month’s CIO Insights, we assess whether the bulls can hold their lead – and the case for risk assets with it – into the second half.

Key takeaways

• How far will sticky inflation push the Fed? Energy costs have kept headline inflation elevated, and some market participants now see a Fed rate hike on the table for later this year. We think that is premature – even with recent hawkish comments from new Fed chair Kevin Warsh. Historically, the Fed has tended to hike into energy shocks only when the spike fed through into wages and other prices – what economists call second-round effects – and there's still little sign of that today. So a hike, if one comes, looks more like a question for 2027 than for 2026. 
• Can the market absorb a record wave of new IPOs? Beyond the Fed, the other near-term concern is whether the supply of and demand for shares will stay balanced as a record wave of mega-cap initial public offerings (IPOs) comes to market. The data suggest demand should be deep enough to take it up: companies are buying back their own stock at a record pace, and trillions of dollars are still sitting in cash on the sidelines. In short, we don’t expect these IPOs to tip the market’s supply and demand too far out of balance in H2.
• If the AI rally takes a pause, can the rest of the market hold up? The sharpest near-term risk is the AI names themselves: after a strong run they look stretched, and given how much of market gains and household wealth now rests on them, a correction there could pull the broader market down with it. That said, we believe the rest of the market could still offer some cushion, as earnings are growing at a solid pace across the broader market – not just in tech. Valuations also support that view: they are above recent averages, but not unusually stretched. Together, that suggests there is room for investors to rotate beyond AI rather than exit equities altogether.
• The forces underpinning risk assets remain intact. So amid potential volatility, stick to the “FACTs”. The months ahead could bring some volatility, with tech positioning stretched and summer liquidity thin, but we'd treat any pullback as a chance to add. Corrections that turn into drawn-out bear markets almost always come with a recession or an aggressive Fed tightening cycle, and we see low odds of either this year. The longer-term forces we see underpinning risk assets (Fiscal policy, AI, China, and Trump – what we call the “FACTs”) haven't changed. Our ERAA® investment framework still reads the backdrop as one of inflationary growth – a regime that has historically rewarded both equities and gold. And especially now, with market gains concentrated in tech, we'd spread exposure across asset classes rather than equities alone.

(See our Glossary at the end for a breakdown of the terms used in this article.)

H1 2026: A hot start, an energy scare, and an AI-led recovery

In our 2026 Macro Outlook: Just the FACTs, our read was that the four forces we saw shaping the economy and markets in the year ahead – Fiscal spending, AI advancements, China's recovery, and Trump's agenda – would run it hot. That played out early on in the first half: AI investment supported equities, while safe-haven flows, continued central bank buying, and broader macro uncertainty helped drive gold to record highs, as shown in Chart 1.

That held until late February, when war in the Middle East drove energy prices higher and pulled equities and bonds down together through March (read more in CIO Insights: Navigating Dire Straits). The disruption was severe, but coordinated strategic oil reserve releases cushioned the blow. Equities recovered into Q2 as a strong, AI-led earnings season drew attention back to the tech companies driving the AI investment cycle (see CIO Insights: Earnings season, brought to you by AI).

As we approach the second half, the hot economy we expected has largely materialised, though the path was more volatile than anticipated. Fiscal and AI spending kept economic activity firm, and US tech stocks led the market's recovery into mid-year. The questions now are whether that can hold, and what could knock it off course in H2.

Question 1: How far will sticky inflation push the Fed?

Higher energy costs pushed headline inflation into the 4% range as of May, and some market participants are now pricing in a rate rise from the US central bank this year. That would matter for equities. Higher rates raise borrowing costs for the companies spending heavily on AI, and they hit tech valuations hardest, since much of those companies' value sits in profits years away – and higher rates shrink what those future profits are worth today. That’s why rate hikes are considered one of the key risks to the rally.

At Kevin Warsh's first meeting as Fed chair in June, the US central bank held its policy rate at 3.5% to - 3.75%. But its projections in its latest “dot plot” showed a committee split down the middle: half see a hold or cut by year-end, half see at least one hike. Put together, the updated projections and Warsh's hawkish tone have led markets to price in a hike by October. But we read this as a new chair establishing his inflation-fighting credibility early – a signal aimed at anchoring expectations more than a commitment to act. What the Fed actually does will depend on the data, and as we explain below, the data aren't yet making the case for a hike.

Whether the Fed acts depends on what economists call second-round effects: whether a one-off jump in energy prices spreads into wages and the prices of everything else, turning a temporary spike into lasting inflation. If the jump stays contained, inflation falls back on its own once it drops out of the annual numbers, and the Fed can wait. If it spreads, the Fed will have to move.

Wages are where that spread can become entrenched. Chart 2 below plots inflation, wages, and the fed funds rate over the past three decades. In 2003 and 2011, geopolitical shocks pushed oil and headline inflation higher – to 3.0% and 3.9% respectively – but wages didn't follow in either case, and the Fed didn't hike. In 2022, inflation rose on pandemic supply disruptions and stimulus-fuelled demand, wages rose with it, and the Fed delivered its fastest hiking cycle since the 1980s.

The situation today appears to be closer to the first pattern. The Atlanta Fed's wage tracker has eased from 4.3% to 3.5% over the past year, with average hourly earnings and the employment cost index at similar levels and still drifting down. So while inflation is up, the pass-through to wages that would push the Fed to hike isn't happening. That’s why we see a hike – if one were to come at all – as a 2027 question at the earliest.

Finally, it’s worth noting that over the past three decades, the Fed has not initiated a new hiking cycle in the second half of a midterm-election year.

Question 2: Can the market absorb a record wave of IPOs?

The second question is the wave of new listings hitting the market. SpaceX has already gone public with a record $75 billion IPO, OpenAI and Anthropic are likely to follow in the second half, and Alphabet has announced an $80 billion equity raise of its own.

Why this matters comes down to simple supply and demand. Company shares are like anything else that trades: when there are fewer of them and plenty of money chasing them, prices rise more easily; when a flood of new ones arrives, that same money gets spread across more stock. For years, demand has outstripped supply: companies bought back and retired their own shares faster than new ones were created, so the pool of stock was shrinking even as money kept flowing in from regular saving and investing. That tailwind has benefitted the US market for much of the past two decades.

A wave of listings this size pushes in the opposite direction, and the question is whether it’s big enough to tip the balance. The answer is in Chart 3 below, which shows net equity issuance since 2000. JPMorgan estimates that announced buybacks and leveraged buyouts are still likely to exceed new share sales by roughly $1.5 trillion in 2026¹.  (Buybacks are when companies repurchase their own shares, reducing the amount available in the market; leveraged buyouts  are debt-funded acquisitions that often take companies private.)

Even taking a more conservative approach and adjusting for the number of shares, that would leave net new supply at around $200 billion in 2026 – up from roughly zero last year, but still just 0.3% of the S&P 500’s $63 trillion total market capitalisation. In short, by either measure, demand is likely to outpace or remain broadly in line with supply again this year, removing one potential headwind from the market.

That said, far less stock will reach the market than the headline valuations suggest: $1.75 trillion for SpaceX at the time of listing, and an estimated $1.8 trillion combined for OpenAI and Anthropic. When a company lists, it sells only a portion of its shares to the public – its “free float” – while insiders and early investors keep the rest. SpaceX, for example, floated only about 4% of the company. Assuming a similar initial float for OpenAI and Anthropic, the three mega-IPOs together would amount to roughly $140-150 billion of new public equity supply. 

That still looks manageable given the strength of buybacks. US companies announced a record $533 billion in buybacks in April and May alone. Annualising the pace of the first five months puts them on track to buy back nearly $1.9 trillion of their own stock in 2026 – an increase of around $250 billion from 2025, and still comfortably more than the new listings add.

What’s more, new supply should also come through more gradually. At listing, only the shares sold in the IPO can trade immediately. The rest sits with insiders and early investors, who are typically locked up for around 180 days, with some variation. SpaceX, for instance, will unlock in stages over the first year, with its biggest shareholder, Elon Musk, locked in until June 2027. That means the bulk of the potential supply won't become tradeable until 2027. 

Even then, the scale is smaller than it looks. As Chart 4 shows, JPMorgan puts the potential free float added in 2027 at around $1.3 trillion. But most of that is a “mechanical” shift in how shares are classified once lock-ups expire – shares becoming eligible to trade is not the same as those shares being sold. So, as with the Fed, any risks stemming from larger supply is a question for 2027 rather than 2026.

Finally, the demand side is also supportive. Passive equity funds and ETFs typically absorb a few tens of billions of dollars a month, supported by regular contributions into retirement accounts and investment plans – steady buying that, over a year, would add up to more than the issuance coming to the market. A further $8 trillion sits in US money market funds², a deep reserve that could add to demand if even part of it rotates into equities. In short, the market looks able to absorb the wave of new supply.

Question 3: If the AI rally takes a pause, can the rest of the market hold up?

That takes us to our last question: after a strong run, the AI names look stretched, which raises the question of whether the rest of the market could hold up if they pull back.

Concentration risk is the issue here. Tech-related sectors make up more than half of the S&P 500, which is large enough that a drawdown in tech would move the index even if every other sector holds flat. What’s more, the top tech names added an estimated $3.8 trillion to household wealth in 2025³, and that wealth has been supporting consumer spending. A sharp correction would be felt twice: once in the index, and again through spending and the economy.

The good news is that the rest of the market has earnings on its side. As we shared last month, Q1 2026 was the strongest earnings season since 2021. As Chart 5 shows, that breadth looks set to hold. Eight of the eleven S&P 500 sectors (in light blue) are expected to grow earnings by 10% or more over the next 12 months. The growth also extends beyond the US: emerging market earnings are expected to lead at around 56% in USD terms, lifted by tech giants in South Korea and Taiwan. Chinese (19%), European (14%) and Japanese companies (13%) are also expected to post solid earnings growth.

That said, earnings growth only provides a cushion if stocks aren't already priced for it. Here, valuations may also give investors some solace. As Chart 6 shows, the S&P 500 is trading at around 20x forward earnings (the price investors pay for a dollar of earnings expected over the next year) above its 10-year average of about 19x. Global equities beyond the US are trading at around 14x, versus an average of 13x. While both are higher relative to recent history, they remain within one standard deviation of their averages – meaning that valuations are elevated but not unusually stretched.

With earnings growing across sectors and regions, and valuations elevated but not stretched, any money that moves out of the AI names would have somewhere to go. That’s why we believe a pause in the rally would more likely mean a rotation into other sectors and markets, rather than a significant pullback for the market as a whole – a key reason we stress the importance of holding a diversified portfolio. A deep bear market in AI-related stocks is the scenario that would change this, since the damage would likely spread through household wealth into spending.

A pullback needn't turn into a bear market 

After the decent gains that equities have seen so far this year – about 9% for the S&P 500 and around 30% for just the tech sector – it’s not implausible that the tide of the markets could turn choppier from here. As we noted, the AI names look stretched, and seasonally thinner trading during the summer can magnify selling. (Investors need to go on vacation, too!) Any pullbacks in the months ahead would be normal, letting markets cool after a strong run.

That said, we don't expect a market pullback to necessarily mark the start of a deeper, drawn-out decline. Looking over the past 75 years of market data, the declines that turned into bear markets almost always arrived alongside a recession, an aggressive Fed tightening cycle, or both, as highlighted in Chart 7.

Outside of those conditions, corrections have tended to be shallower (a median decline of 12%) and quicker to recover (a median recovery of 4 months). And as we shared above, we see a low probability of either trigger in H2: the Fed looks unlikely to raise rates this year, and the AI investment cycle driving growth and earnings is still running. That's why we'd treat any pullback as a chance to add.

Our view for H2: We’re sticking to the “FACTs”

Beyond the AI supply chain, broader S&P 500 earnings guidance is more positive than usual. As shown in Chart 4, of the 267 S&P 500 companies that have issued full-year guidance for the current fiscal year (FY 2026 or FY 2027), 58% have set EPS forecasts above where analysts had it (positive guidance) and 42% below (negative guidance)1. In most quarters, more companies issue negative guidance than positive.

In short, the longer-term case for staying invested hasn't changed. The same forces we laid out in our 2026 Macro Outlook at the start of the year – Fiscal policy, AI advancements, China's recovery, and Trump's agenda, or the "FACTs" – are still shaping the economy, and on balance they continue to point to a supportive backdrop for equities.

But investing isn't only about being in equities. Our ERAA® investment framework still classifies the current backdrop as one of inflationary growth – where inflation is likely to stay above target alongside steady growth – a regime that has historically been beneficial for both equities and gold. General Investing portfolios powered by StashAway are positioned for that environment today, with a mix of asset classes that shifts as the macro backdrop changes.

Ultimately, a strong first half doesn’t settle the score. So even though the bulls are ahead at the break, we’d still advise staying in your seats. While you’re at it, keep a diversified lineup of asset classes that’s matched to your risk level, so you’re better placed for whatever the second half brings.

Authors

Stephanie Leung, Chief Investment Officer

Stephanie and her team oversee the full spectrum of investment products and portfolios offered at StashAway. She brings more than two decades of investment expertise across multiple asset classes. Prior to joining StashAway in 2020, she managed investment portfolios at institutions such as Goldman Sachs and multi-billion dollar family offices in the region.

Justin Jimenez, Head of Macro and Investment Research

Justin has more than a decade of experience in economic and investment research, and contributes to shaping the investment office's views on the global economy and asset classes. Prior to joining StashAway in 2022, he was an economist at Bloomberg.

Glossary

Dot plot

A Federal Reserve chart showing where each policymaker expects interest rates to be in the future. Each dot represents one policymaker’s forecast.

Second-round effects

When an initial price shock, such as higher energy costs, feeds into wages and other prices, turning a one-off rise into lasting inflation.

Share buybacks

When a firm uses its cash to repurchase its own shares, leaving fewer shares in circulation.

Leveraged buyouts

The acquisition of a company funded largely by borrowed money, often to take it private.

Net equity issuance

The number of new shares entering the market through IPOs and share sales, minus the shares removed through buybacks and buyouts.

Free float

The portion of a company's shares that the public can trade freely, excluding those held by founders, insiders, and early investors.

Correction

When a market falls 10% or more from a recent high – a meaningful pullback, but not yet a bear market.

Bear market

When a market falls 20% or more from a recent high – a deeper decline that usually signals broader investor concern.

References

1. Panigirtzoglou, N., Inkinen, M., Yeole, M., & Mehta, K. P. (2026). Share buybacks exceeded half trillion dollars in just April and May. J.P. Morgan Global Markets Strategy, Flows & Liquidity.
2. Harris, A. (2026). Dash for cash sends money-fund assets to record $8.3 trillion. Bloomberg. Retrieved from: https://www.bloomberg.com/news/articles/2026-05-29/dash-for-cash-sends-money-fund-assets-to-record-8-3-trillion
3. Edwards, J. (2026). AI capex and the 'wealth effect' from tech stocks (like Nvidia) now drive one-third of U.S. GDP growth, top analysts say. Fortune. Retrieved from: https://fortune.com/2026/02/26/ai-capex-wealth-effect-tech-stocks-nvidia-third-us-gdp

Disclaimer: Returns data as of 17 June 2026 unless stated otherwise. Past performance is not indicative of future returns.