Investors began the year positioned for a faster pace of Federal Reserve (Fed) rate cuts as inflation cooled and growth moderated, yet the economy proved more durable than expected. Consumer spending remained a key engine, supported by a resilient labor market and healthy household balance sheets, while corporate earnings generally exceeded expectations, backed by solid fundamentals and ongoing AI-related capex spending. Still, the path forward was not linear, as headlines repeatedly sparked volatility, from geopolitical tensions with Iran, to a sharp reassessment of parts of the software sector. Against this backdrop, higher energy prices kept long-term rates elevated, yet the Fed remained patient and data-dependent, guiding policy decisions off longer-term inflation and growth data.
As we look to the second half of the year, the outlook remains encouraging. Economic growth should continue at a steady pace, inflation is expected to gradually moderate and corporate fundamentals remain robust. Our repeatable, disciplined investment process is built for this environment: We form a clear view on growth, inflation and policy and translate it into a cohesive portfolio that right-sizes risk. As conditions evolve, we make measured adjustments while staying anchored to our disciplined approach.
In this piece, we’ll reflect on how we positioned portfolios in the first half of the year and how we’re thinking about the opportunity set ahead.
Taking the offense in equities: Pro-risk positioning powered by earnings, AI and a broader opportunity set
Equity markets in the first half of 2026 were defined by three key themes: strong earnings, continued investment in AI and a broadening of market leadership. Earnings provided the foundation, with investors rewarding companies that delivered durable revenue growth, strong margins and consistent cash generation. Alongside this, AI remained the standout theme, as infrastructure capex accelerated and investor focus moved beyond headline leaders to the wider ecosystem of AI enablers. As the period progressed, leadership also broadened beyond the mega-cap cohort, creating a more dynamic and opportunity-rich equity backdrop that directly informed our pro-risk portfolio positioning over the period.
How did this translate into our equity portfolio positioning?
Portfolios were positioned to capitalize on these key market drivers by maintaining a pro-risk equity overweight, while staying disciplined amid day-to-day noise. In the Tactical models, which are built to pursue shorter-term opportunities (12-18 month investment horizon), we increased our equity exposure, particularly in U.S. large caps, where earnings momentum and cash generation appeared most durable. A key differentiator was our deliberate tilt toward technology and communication services as direct beneficiaries of the AI investment cycle, which we viewed as resilient given lower oil sensitivity, a solid AI capex backdrop and strong margins and balance sheets. We also increased international equity exposure to diversify, focusing on emerging markets given attractive valuations and AI supply-chain exposure, particularly in parts of Asia. More recently, acknowledging how much markets have rallied, we marginally trimmed our broad equity exposure in favor of core fixed income.
A similar constructive stance guided the Strategic models, implemented with respect to their 3-5 year investment time horizon. We remained positive on U.S. equities while selectively reallocating toward emerging markets, supported by earnings revisions, compelling valuations and AI supply-chain exposure. As the period progressed, we shifted back toward the U.S., underpinned by continued AI strength, solid corporate earnings and resilient consumer fundamentals, alongside fading overseas catalysts within international developed markets.
Overall, both portfolios remained constructive on equities led by the U.S., complemented with emerging markets exposure.
Maintaining possession in fixed income: Pro-risk positioning in extended credit, core bonds for stability
Fixed income markets in the first half of 2026 delivered resilient performance despite slower growth and ongoing macro uncertainty. The backdrop was shaped by a “higher-for-longer” rate regime, where sticky inflation, large fiscal deficits and periodic energy shocks kept long-term Treasury yields elevated. Within this environment, credit markets remained resilient, with tight spreads supported by strong corporate balance sheets, robust demand for yield and low default rates. Overall, income re-emerged as a key driver of total returns for portfolios.
How did this translate into our fixed income portfolio positioning?
Portfolios were positioned for a fixed income backdrop where yields were attractive, but security selection mattered. Overall, we maintained a modest pro-risk tilt, primarily through an overweight to extended credit (i.e. assets with a higher yield and a slightly higher risk profile), supported by appealing all-in yields and a still-benign default environment. Even so, earlier in the year portfolios trimmed some extended credit, shifting incremental risk-taking toward equities as conviction increased and opportunities looked slightly more attractive. As the first half of the year unfolded and equity volatility increased, portfolios leaned a bit more defensive, adding to core bonds. With growth and inflation dynamics suggesting the 10-year Treasury yield was near the upper end of its expected range, higher-quality fixed income looked like a more attractive entry point (yields ~4.6%), while continuing to serve as a long-term ballast in the portfolio. To fund this, we shifted a portion of equity positioning into core bonds, increasing our duration exposure, while narrowing our overall underweight.
Strategic trades remained aligned with the Tactical portfolios, reflecting the same underlying views. More recently, we rebalanced back to intended active positioning after market moves created some drift. These actions were designed to capture income while maintaining flexibility as conditions evolved.
Overall, both portfolios remained constructive on extended credit (even as some positioning was reallocated to equities), while maintaining exposure to core fixed income.
Expanding the playbook with alternatives: Maintaining exposure for alpha, income and diversification
Our long-term capital market assumptions suggested an increasingly volatile environment with wider dispersion between top and bottom performers, driven by economic nationalism, fiscal activism and rapid AI adoption. At the same time, stock-bond correlations have turned positive, reducing diversification benefits of traditional mixes. Although resilient earnings and a cooling inflation narrative have provided some support, the broader backdrop remains uncertain, reinforcing the role of alternatives as a satellite sleeve built to add differentiated drivers, enhance resilience and deliver higher returns. Looking ahead, we expect alternatives to play a larger role, with more portfolios across all investor types incorporating them in their mix.
Looking ahead: A patient, precise game plan for portfolio positioning
As portfolios remain focused on separating durable strength from short-term noise, we expect markets to be shaped by an evolving mix of fundamentals, innovation and macro conditions. Continued earnings strength should remain a key pillar for risk assets. With that backdrop, we expect the AI theme to move from excitement to execution, with markets increasingly rewarding tangible monetization, stronger margins, accelerating cash flows and broadening leadership. At the same time, we continue to focus on the potential for inflation to cool if signs of progress toward a sustained peace agreement helps to bring oil prices down, improving the outlook for rates and real returns.
Against that backdrop, portfolios are maintaining a constructive, pro-risk tilt, implemented primarily through U.S. and emerging market equities. In fixed income, portfolios remain overweight to extended credit while keeping core fixed income exposure as a ballast. In practice, that means staying disciplined rather than reactive: sizing exposures to each client’s objectives, adding risk when it is rewarded, trimming when the balance shifts and rotating across sectors and regions as leadership evolves. We will continue to maintain a measured and thoughtful approach to keep portfolios resilient and well diversified, positioned to participate in upside, while remaining prepared for changing conditions.