On the surface, the U.S. economy continues to look quite impressive, as it is not just proving resilient in the face of both macroeconomic uncertainty and the conflict with Iran, but also appears to be accelerating. However, when one looks under the surface, economic strength is not as broad based as we would ideally like.
While consumer spending, which accounts for about 70% of the domestic economy, continues to be quite strong, it remains concentrated in the wealthiest 10% of the population. Moreover, current economic growth is notably reliant on the massive capital investment being made in the infrastructure for artificial intelligence (AI). It is a major reason why the domestic economy is much stronger than that of most of America’s foreign peers.
On the more positive side, hiring remains steady and the job market is well-balanced between available workers and available jobs. This overall environment continues to provide a solid foundation for economic stability, despite some of the current headwinds.
Today’s biggest economic challenge is almost certainly the recent surge in inflation, much of which is attributable to the cost of the AI buildout, the impact of tariffs, and the higher energy and food-related costs associated with the closure of the Strait of Hormuz. Importantly, some of these pricing pressures are expected to ease in the coming months, particularly if a reopening of the Strait allows energy costs to continue their recent retreat.
Looking ahead, interest rates remain an important factor. With inflation still well above long-term targets, expectations of interest rate cuts by the Federal Reserve have been replaced by expectations for modest increases in short-term interest rates.
This suggests that borrowing costs could stay higher for longer than many had previously expected. That said, technological innovation and a resulting increase in productivity are expected to reduce both inflation and interest rates over the intermediate and longer term.
In regard to the domestic equity markets, extraordinary gains in corporate profits have increased the attractiveness of U.S. stocks in general. Even so, only a relatively small group of technology-focused companies has driven much of this year’s market gains, while most non-technology-related sectors have significantly lagged the S&P 500 Index. This very narrow leadership makes the overall market appear stronger than what some investors may be experiencing individually, particularly if they have well diversified portfolios.
Over the longer term, broader participation across market sectors will likely be necessary to sustain the bull market. In the meantime, there has been a notable change in leadership, with most of the very large technology stocks that have dominated the market over recent years significantly lagging the broad U.S. equity market in 2026.
Foreign economies and foreign markets, in general, were much more negatively impacted by the closure of the Strait of Hormuz than what was experienced domestically. As such, they may benefit more from the anticipated reopening of the Strait than will the U.S. This potential catalyst, along with the fact that international markets are generally much less highly valued than are U.S. stock markets, may allow them to resume the leadership role that they enjoyed prior to the onset of the Iran conflict.
All things considered, while we remain fairly neutral in our outlook for the world’s fixed income markets, we continue to like the prospects for most equity markets both at home and abroad. That said, we are a little less optimistic about Europe, which is battling stagflation, and China, which has its own unique set of challenges.
As always, our focus remains on guiding you through these changing conditions with a steady, long-term approach. While short-term headlines may fuel uncertainty, innovation, accelerating earnings, and economic progress continue to create meaningful opportunities for investors willing to remain disciplined and stay true to their longer-term path.
Key Takeaways
- The economy remains stable, supported by balanced employment and continued innovation.
- Rising costs on consumer goods, gas at the pump, and groceries are still impacting household budgets, though there are early signs of potential relief ahead.
- Interest rates may remain somewhat elevated in the near term, which could weigh on the housing market and contribute to investment market volatility.
- A majority of this year’s market gains have been concentrated in a few highly volatile areas and, while it may be tempting to chase those gains, most investors are probably best served by maintaining a diversified and long-term-oriented investment strategy, at least for the bulk of their portfolio.
- While there is always the risk of short-term market fluctuations, the anticipated combination of strong economic growth, declining inflation, a resilient consumer, a hopeful resolution in the Iran conflict, and very strong corporate profits should ultimately reward most investors for sticking to their long-term investment plan.
What This Means For You:
If you have questions about how these trends may impact your portfolio or financial plan, we encourage you to reach out. This is a great time to review your investment strategy, ensure your allocation is aligned with your long-term goals, and confirm you are positioned appropriately for both opportunities and potential risks ahead.
Please don’t hesitate to connect with your personal advisor - we’re here to help you stay informed, confident, and on track for the long term.
Additional Disclosures:
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice to meet the particular investment needs of any investor. Past performance does not guarantee future results. Investing involves risks, including the loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.