2026 Mid-Year Outlook

AI-driven earnings leadership may give way to broader sector rotation as doubts grow over the sustainability of hyperscaler spending and compute demand.

• Markets began 2026 amid the Iran conflict, uncertainty over the Strait of Hormuz and a new Federal Reserve chair, Kevin Warsh, whose strict 2% inflation target briefly shifted rate pricing from no hikes to potentially two.
• Falling oil prices and weaker payrolls subsequently reduced the case for hikes, leaving valid arguments for both cuts and hikes before year-end and supporting a continued wait-and-see stance.
• US equities have benefited from earnings above consensus, but the strongest gains have come from memory and other AI-infrastructure bottlenecks, which may prove temporary.
• Semiconductor and memory suppliers have benefited from AI capex while hyperscalers and the so-called “Lag 7” have lagged; Meta’s announcement that it may sell excess compute has raised questions about whether compute scarcity will persist.
• The implications remain uncertain because Meta may be monetizing excess capacity opportunistically rather than signaling weaker demand, while a shift from consumer memory demand to data-center demand could alter the semiconductor cycle.

Takeaway: Investors should position for continued AI-driven growth while preparing for rotation toward healthcare, financials, defense, automation, robotics, leisure, travel and non-AI infrastructure; the main risks are weaker compute demand, AI overcapacity and changing earnings expectations.