Despite repeated forecasts to the contrary, the U.S. economy remains in fine health, though growth has been increasingly driven by business investment rather than consumer strength. Above-target inflation has weighed on consumption and sentiment, while corporate prospects remain strong: second-quarter S&P 500 earnings were near the best on record, with 8 of 11 sectors reporting double-digit earnings growth from a year ago.1
Artificial Intelligence is increasingly shaping both the economy and portfolios. Companies that invested heavily in AI-related capital expenditure have started to see meaningful returns, likely motivating further spending and intensifying competition for capital. As AI expands from a U.S. equity story into fixed income and other asset classes, it is also changing traditional portfolio relationships and reinforcing the need for new sources of diversification. For more about the portfolio implications of potential economic outcomes, read the BlackRock Investment Institute’s latest Outlook.
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AI infrastructure companies have grown earnings at an accelerated rate
Source: FactSet, Goldman Sachs Global Investment Research, as of Aug. 14, 2026. AI infrastructure groupings determined by GSIR. S&P 500 ex AI infrastructure determined by S&P 500 Index earnings growth, ex Energy GICS Level I earnings growth.
Chart description: AI infrastructure earnings growth reached 54% year over year in Q2 2026, compared with 14% for the S&P 500 excluding AI infrastructure.
iShares A.I. Innovation and Tech Active ETF
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iShares Flexible Income Active ETF
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iShares Systematic Alternatives Active ETF
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This summer’s market sell-off showed how the AI volatility story is changing. The increasing use of leverage has amplified price action in both directions, while concerns around the return on AI capex have added uncertainty. In June and July, the PHLX Semiconductor Index (SOX) saw moves greater than +/-5% on 33% of trading days, versus just 3% over the prior 10 years.2 Uncertainty surrounding AI likely remains, but we see the long-term opportunity it could present.
Portfolio takeaway: We believe the AI sell-off will fade, but brace for likely elevated volatility.
Federal Reserve Chair Kevin Warsh struck a hawkish tone in his Jackson Hole speech, but we still see room for the Fed to hold rates steady in September rather than hike aggressively into year-end. This comes as inflation cools and the labor market continues to soften, with three-month average job growth slowing to +20,000.3 A less guidance-focused Fed could increase rate volatility, while resilient growth and elevated issuance may keep pressure on longer-term yields.
Portfolio takeaway: We prefer front- and intermediate-term Treasuries as the yield curve steepens.
Heading into the midterm elections in November, headline risks remain elevated across domestic politics, discussions over the AI data center buildout, and geopolitics. Historically, equities have experienced tailwinds as election uncertainty fades, averaging a 14.1% return in the six months following midterms since 1970, compared to 5.7% in non-midterm years.4 Meanwhile, disruptions in the Strait of Hormuz remain a key risk – to not only energy prices, but also inflation and broader markets. Explore more in What history says about 2026 midterm elections and market performance.
Portfolio takeaway: As political and geopolitical situations evolve in 2026, we believe the key is to stay disciplined and remain invested, with solid fundamentals remaining the core driver of markets.
Evidence from Q2 earnings showed that the AI opportunity is becoming broader, not more zero-sum. We now see investable opportunities in, around and beyond the theme.
While Q2 earnings delivered broad fundamental strength, we continue to see the most compelling opportunities in AI infrastructure stocks. The AI economy continues to expand as providers of frontier models grow revenue, AI adoption spreads, and an increasing share of compute shifts from training toward inference and real-world usage. At the same time, elevated AI concentration makes diversification increasingly important: high-quality dividend exposures can provide near-term cash flows, while quality strategies with strong balance sheets can offer greater resilience if real rates remain high. During the June 22–July 29 AI sell-off, dividend-paying stocks gained 8%.5 Explore more in Are we in an AI bubble? The AI boom in context.
Portfolio takeaway: We favor AI stocks for their strong earnings growth potential, while dividend-payers and quality screens can provide more diversification and resilience.
We continue to prefer emerging markets over developed international markets, and view the strongest opportunities concentrated in Asia. Taiwan and South Korea remain central to the semiconductor and memory supply chains powering AI, with EM earnings expected to grow approximately 20% over the next 12 months.6 Opportunities may also be broadening across China, India, and Japan. Explore more in International investing 2026: Why consider global stocks?
Portfolio takeaway: We favor a selective approach in Asia, with thoughtful portfolio sizing given higher volatility and concentration risks.
Elevated risk-free rates and real yields provide an attractive starting point for forward returns within fixed income. With spreads historically tight, we favor harvesting carry while remaining selective about where credit risk is deployed.7 Thirty-year TIPS are yielding about 3% for the first time since the Global Financial Crisis of 2008, with real yields elevated across maturities and positioning in inflation-mitigating investments still relatively light.8
Portfolio takeaway: We favor an up-in-quality bias while remaining nimble and active on duration.
AI has moved beyond an equity story and into core fixed income holdings. This evolution may put upward pressure on the yield curve and ultimately could make U.S. investment-grade credit a less effective portfolio diversifier. The five hyperscalers (Amazon, Microsoft, Alphabet, Meta and Oracle) issued approximately $200 billion of investment-grade debt in the first half of 2026, nearly double their issuance during all of 2025.9
Portfolio takeaway: With corporate bonds’ rising exposure and correlation to technology, we believe investors could consider alternate sources of diversification, including liquid alternatives and market-neutral strategies.
Investors may need additional sources of diversification as AI encompasses a rising share of traditional asset classes in their portfolios. Within equity sleeves, dividends and quality can prove useful diversifiers, while looking beyond investment-grade credit can limit a bond allocation’s correlation to equities. Increasingly, investors are looking beyond stocks and bonds to alternatives or commodity strategies that historically have been negatively correlated with equities to play a more meaningful diversification role. Market stress this summer reinforced that need, with the total risk of the average moderate financial advisor portfolio analyzed by BlackRock rising to 11.3% from 10.8% at the beginning of the year.10 Explore more in How to diversify with bitcoin, gold and alternative investments.
Portfolio takeaway: We believe investors could consider hedge fund-style strategies as an additional source of diversification and return drivers that are less dependent on broad market direction.
ETF flows and investor sentiment have begun to show a diverging story: BlackRock Investment and Portfolio Solutions polling data signals rising advisor confidence11, but flows show that investors continue to allocate cautiously into bond funds and money markets (cash). In fact, bond mutual funds and ETFs have attracted about $912 billion this year, approaching an all-time record.12
With earnings remaining strong, market leadership broadening, and flows far from exuberant, the current environment suggests the equity rally may have more room to run. Explore more in H1 2026 ETF & ETP Market Trends: Flow & Tell.
Portfolio takeaway: Investors appear to be balancing caution and opportunity, favoring income and stability while telling us they intend to add U.S. equities and liquid alternatives.
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1. FactSet as of Aug. 7, 2026. S&P Sectors as represented by GICS Level 1 classification.
2. Philadelphia Stock Exchange Semiconductor Index, as of Aug. 13, 2026.
3. Bureau of Labor Statistics, as of Aug. 7, 2026, representing July 2026 labor market data.
4. Bloomberg, data as of Aug. 13, 2026. Based on average S&P total return since 1970 indexed to election dates or hypothetical election dates. Midterm years as follows: 1970, 1974, 1978, 1982, 1986, 1990, 1994, 1998, 2002, 2006, 2010, 2014, 2018, 2022. The “0” on the x-axis represents the Midterm/Presidential election date, which falls on the first Tuesday in November. In non-election years, hypothetical election dates were used. Month approximations based on average of 21 trading days in a month. Y-axis numbers represent total return of approximately 6 months before and after a midterm indexed to midterm date, with the value of the midterm date being 100. Index performance is for illustrative purposes only. Index performance does not reflect any management fees or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
5. Bloomberg, as of Aug. 13, 2026. Sector exposure represented by Morningstar Dividend Yield Focus Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
6. Bloomberg, as of Aug. 13, 2026.
7. Bloomberg, as of August 13, 2026. Spread tightness based on ICE BofA U.S. Corporate and U.S. High Yield Index option-adjusted spreads, both of which are below the 10th percentile of their historical 20 year ranges.
8. Bloomberg, as of Aug. 12, 2026. Past performance does not guarantee future results.
9. Goldman Sachs Research, July 27, 2026. Hyperscalers are large technology companies that operate cloud computing infrastructure at significant scale, including Amazon, Microsoft and Google.
10. BlackRock Investment and Portfolio Solutions, as of Aug 14, 2026. “Advisor models” data is as of June 30, 2026, based on the 1,004 “moderate” risk cohort models collected by BlackRock. Advisor models collected by BlackRock are grouped into five risk cohorts for analysis, based on total equity allocation. Models in the “moderate” risk cohort are defined as any portfolio with an overall equity allocation of between 50-65%. BlackRock’s risk model data is supplemented by asset allocation and fund characteristic data from Morningstar. The portfolios analyzed represent a subset of the industry, and not its entirety. As such, there may be certain biases present in the data that reflect the advisors who choose to work with BlackRock to analyze their portfolios.
11. Polling conducted by BlackRock Investment and Portfolio Solutions, as of Aug. 13, 2026 based on results from the two following surveys: June 9, 2026 with answers reflecting 163 unique respondents and August 13, 2026 with answers reflecting 178 unique respondents.
12. Morningstar, as of July 31, 2026. Showing flows into Mutual Funds & ETF ex money market ex fund of funds as classified by Morningstar for trailing 12 months from Dec. 2006 to July 2026. Bond performance as represented by YTD U.S. Aggregate Total Return Bond Index. Bucketing as determined by Morningstar.
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