As we reach the midpoint of the year, we wanted to provide a recap of the first half of 2026 and share our outlook for the remainder of the year.
At the end of the first quarter, we expected higher oil prices to contribute to higher inflation, higher interest rates, and greater market turbulence. Much of that has played out. That said, one of the more interesting developments is that oil prices have not moved as dramatically as some headlines might suggest. While we expect headline-driven risk to remain part of the market environment, we do not believe oil is likely to return to the elevated levels seen a few months ago.
As energy prices have moved lower, we would not be surprised to see headline inflation begin to move lower over the next several months as well. However, we continue to pay close attention to core inflation, which strips out volatile energy prices and remains elevated, running just under 3%.
The Federal Reserve also remains an important part of the outlook. With Kevin Warsh now at the helm, the message from the Fed appears clear: inflation is the primary focus. While the labor market continues to appear stable, we believe the Fed is likely to maintain its focus on bringing inflation under control. That may mean interest rates stay elevated for longer than markets expected earlier in the year.
On the equity side, one of the most important themes we are watching is artificial intelligence. AI is no longer limited to a handful of large technology names. We are beginning to see it spread across many different industries and companies. For the remainder of the year, we believe the market will increasingly focus on dispersion, meaning which companies are truly using AI to drive revenue growth, improve efficiency, reduce costs, and expand margins.
We believe this could support continued margin expansion within the S&P 500 and other broad market indices. While value stocks have performed well earlier in the year, growth-oriented areas of the market have strengthened more recently, particularly following the latest geopolitical conflict.
On the fixed-income side, we continue to believe it is prudent to remain defensively positioned. If the Fed remains focused on getting inflation under control, interest rates are likely to stay higher for longer. For that reason, we do not want to add longer-term bonds right now. We continue to favor short- and intermediate-term fixed income and prefer taking credit risk rather than duration risk. This is consistent with the positioning we have maintained over the past several months.
The market’s expectations for interest rates have changed meaningfully since the beginning of the year. Earlier in 2026, investors were forecasting three to four rate cuts. Today, the outlook is much closer to a 50/50 split between the Fed holding rates steady or potentially raising them again. Until inflation comes down materially, we expect interest rate uncertainty to remain a key driver of market behavior.
As we look ahead to the rest of the year, we believe three factors will matter most: the path of inflation, the Federal Reserve’s response, and whether companies can turn AI adoption into real earnings growth and margin expansion.
Information in this commentary is gleaned from third-party sources, and while believed to be reliable, is not independently verified. This content is not intended to be tax, legal, investment, or fiduciary advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. Bernardo Wealth Planning recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. Past performance does not guarantee future results.