2026 Mid-Year Outlook

The first half of 2026 tested markets with geopolitical tensions, an energy shock and persistent inflation concerns. Yet investors have largely remained focused on growth opportunities, particularly those linked to artificial intelligence. In this mid-year outlook, LSEG experts examine the trends shaping macroeconomics, equities, retail, funds and structured finance as investors prepare for the months ahead.

• The 2026 oil shock looks very different from 2022

Despite a major disruption in energy markets, inflation expectations and financial conditions have remained relatively contained compared with the post-pandemic and Ukraine-driven shocks.

• AI continues to drive market leadership

Strong earnings growth, record margins and sustained investment in AI infrastructure are supporting equity markets and investor sentiment.

• Selectivity matters

From consumers seeking value to investors navigating credit and housing markets, the second half of 2026 is likely to reward disciplined decision-making over broad market exposure.

The year began with markets confronting what the International Energy Agency described as one of the largest oil supply disruptions on record. Yet the economic backdrop is very different from the inflationary environment that followed Russia’s invasion of Ukraine in 2022.

Lower inflation, softer demand growth and greater flexibility across global energy supply chains have helped limit the economic fallout. While government bond yields remain elevated, financial conditions in major economies are still close to long-term averages.

US large-cap equities remain near record highs after one of the strongest earnings seasons in recent decades.

Technology companies continue to account for a disproportionate share of earnings growth, but market leadership is gradually broadening beyond the Magnificent Seven. At the same time, investors are asking whether billions of dollars in AI infrastructure spending can generate sustainable long-term returns.

Companies including Meta, Alphabet and Microsoft continue to generate returns above their cost of capital, suggesting the current AI investment cycle remains economically justified.

Retail earnings delivered a strong start to the year, supported by solid employment conditions and resilient consumer spending.

However, beneath the headline figures, spending behaviour is becoming increasingly fragmented.

• Higher-income consumers continue to support premium brands.
• Middle-income consumers are becoming more selective.
• Value-conscious shoppers are gravitating toward discount and off-price retailers.

Retailers with strong brands, pricing power and disciplined inventory management are likely to be best positioned for the second half of the year.

Fund flow trends suggest investors continue to prioritise growth opportunities despite heightened geopolitical uncertainty.

In particular, enthusiasm surrounding artificial intelligence has continued to attract capital into US equities and technology funds.

While global investors have followed different allocation paths, confidence in AI-driven growth increasingly appears capable of offsetting concerns around tariffs, conflict and economic uncertainty.

Activity across housing and mortgage-backed securities markets has remained resilient.

Improving inventories, stable issuance and modest house price appreciation are contributing to a gradual normalisation of housing market conditions.

Key themes include:

• Increasing housing inventory
• Stable mortgage rates
• Recovery in agency issuance
• Moderate home price growth

Affordability remains a challenge, but the broader housing market appears more balanced than it has been in recent years.

Source: LSEG Yield Book. Past performance is not a guide to future returns. Please see the end for important legal disclosures.

Across non-agency RMBS, CMBS and CLO markets, issuance has remained robust despite continued macroeconomic uncertainty.

Investors continue to favour securitised credit markets, supported by relatively stable credit performance and strong demand.

Key risks include:

• Higher-for-longer interest rates
• Refinancing pressure
• Credit dispersion
• Sector-specific stress, particularly within software-related lending

While the outlook remains constructive, market participants are paying closer attention to collateral quality and issuer discipline.

After years dominated by inflation concerns and rate uncertainty, fixed income markets are entering a more balanced environment. Investors are increasingly shifting their focus from macroeconomic speculation to fundamentals, income generation and security selection.

Higher yields continue to offer attractive opportunities across government, investment-grade and select credit markets, while easing inflation pressures have improved visibility around future monetary policy.

However, opportunities are unlikely to be evenly distributed. Credit quality, duration exposure and sector allocation will become increasingly important as investors navigate a market where returns are expected to be driven more by fundamentals than central bank intervention.

Key insight

Higher yields have restored fixed income as both an income source and a portfolio diversifier.

What to watch

• Central bank policy signals
• Inflation trends across major economies
• Credit quality and default activity
• Investor appetite for duration risk

While 2026 has been defined by resilience, the second half of the year will be shaped by the interaction of several long-term forces: artificial intelligence, energy security, shifting consumer behaviour, geopolitical fragmentation and evolving capital markets.

The common thread across every asset class is adaptation. Organisations, investors and policymakers are adjusting to a market environment where uncertainty remains elevated, but opportunities continue to emerge.

Rather than signalling a return to pre-pandemic norms, current market conditions suggest the emergence of a new operating environment—one where technology-led productivity gains, selective risk-taking and disciplined capital allocation are likely to define success.

Key insight

The most important trend of 2026 may not be resilience itself, but the ability to adapt to constant change.

Looking ahead

As investors position for the remainder of the year, several themes will remain in focus:

• The long-term impact of AI investment
• Energy security and commodity market volatility
• The path of inflation and interest rates
• Consumer spending resilience
• Housing market stability
• Credit market fundamentals

The dominant theme of 2026 so far is resilience.

Markets have absorbed geopolitical shocks, inflation concerns and elevated rates while continuing to focus on long-term growth opportunities. The expansion of artificial intelligence investment remains a critical driver of corporate earnings and investor sentiment, while housing and credit markets have shown notable durability.

The months ahead will help determine whether these trends can be sustained. For investors, the focus is shifting away from broad market direction and towards identifying where resilience, earnings growth and strong fundamentals remain most durable.