2026 Midyear Market Outlook for Long-Term Investors (EP.264)

0:02We all need to make smart decisions with our money. The Long Term Investor podcast shows you how by distilling complex financial matters into easily digestible lessons. And now here's your host, Chief Investment Officer at PlanCorp and the author of Making Money Simple, Peter Lazaroff.

0:21The Long Term Investor:Welcome back to The Long Term Investor. Today, we are doing a mid-year market check-in for long-term investors, covering what has happened so far in 2026, why markets have been stronger than many expected, and what investors should watch as we move through the second half of the year. In a few weeks, I'll be sharing my quarterly webinar with my email subscribers. So if you want a full rundown of what's been going on recently and what I'm thinking about going forward, sign up using the link at the top of the episode description or by visiting thelongterminvestor.com. Now, let's start with U.S. stocks, which were up about 10 % year-to-date, which might surprise people given the war in Iran, the effective closing of the Strait of Hormuz, and the impact those events have had on energy prices.

1:12The Long Term Investor:But the reason stocks have held up is pretty straightforward. It's just that earnings have been stronger than expected. And a lot of that earnings growth is coming from companies tied to the AI buildout. And I've actually included a chart from Vanguard in the show notes at thelongterminvestor.com that does a really nice job showing this visually. Basically, what you're going to see is that the broader AI complex, those companies who are benefiting from demand for chips, data centers, networks, and other AI infrastructure, those companies are expected to grow earnings by 109 % in 2026, compared to, for example, 31 % for all companies and only 18 % for non-AI-related companies.

1:58The Long Term Investor:So this AI story does come with a capital spending question. With the largest hyperscalers spending nearly$800 billion on capital expenditures this year and more than $900 billion in 2027, the spending supports earnings across the AI supply chain, but it also raises the bar. Investors are eventually going to need to see that these investments produce durable profits, productivity gains, and cash flow. So the question is not whether AI matters. It clearly does. The question is whether expectations have moved so high that there is less room for disappointment. Now, these haves and have-nots in the AI space, I think, also explains the disconnect between Wall Street and Main Street that we've seen the past six months.

2:47The Long Term Investor:On one side, business investment is strong, again, thanks to the AI infrastructure build-out. But on the other side, many consumers are still under pressure. They're dealing with negative real wage growth, weak savings, and rising energy costs. I do think that the labor market looks relatively stable at the headline level. So that's not necessarily a headwind for the consumer, but it's also not necessarily a source of strength. And as I was putting together the webinar that, again, you can get if you sign up for my newsletter at the top of the episode description, I noticed there's a data point from the Federal Reserve that stood out a little bit because it says that equities now represent more than 47 % of household financial assets, which is nearly triple the level since the 2008 financial crisis low.

3:34The Long Term Investor:And so what that says to me is we have a consumer that isn't hurting, but it's certainly not thriving. We kind of have this K-shaped economy. And what that says to me when equity ownership is so high that a meaningful stock market correction could probably affect confidence in spending in some way. Now, moving beyond the U.S., international diversification continues to be important because different parts of the world have different sector exposures, different economic drivers, and different risks. The most common developed international benchmark is the MSCI EFI, and it has its largest country exposures in Japan, the U.K., France, Switzerland, and Germany.

4:15The Long Term Investor:Its largest sector weights are financials and industrials, while technology is just over 11%. So that's very different than what you have in a U.S. portfolio, so international markets can help diversify, but it also means that developed international markets have not had the same direct AI tailwinds as U.S. or parts of Asia. Year-to-date, the developed international markets are up a little bit more than 9%, so it's fairly similar to U.S. markets, but they've generally been more negatively exposed to the economic effects of the energy shock. Emerging markets, on the other hand, they have been a big winner of the AI and energy story as the MSCI Emerging Market Index has gained nearly 24 % year to date.

4:58The Long Term Investor:Now, when we zoom in on this index, it has more than 41 % in information technology with Taiwan and South Korea together making up almost half of that index. So like the U.S., earnings are going to be driven by a small group of companies here in emerging markets. In fact, it's really just a small group of semiconductors that are tied to the global AI capital spending. You have the Taiwan Semiconductor Manufacturing, Samsung Electronics, SK Hynix representing slightly more than a quarter of the index, but they also account for half of the 2026 expected earnings growth. So that's the AI part of the story for emerging markets, but energy and materials have also been important.

5:41The Long Term Investor:You have the higher commodity prices tied to the Iran war and the infrastructure buildout, and those are expected to support earnings growth for materials and energy companies. So you really have the perfect storm for emerging markets here. And for long-term investors, the lesson is not to chase emerging markets after a strong run. I mean, global diversification still matters. And I think it's important to maintain a strategic long-term allocation, but you just don't want to chase the markets or chase the headlines. In the bond market, so far, we've seen interest rates generally increased this year, but fixed income returns have been positive.

6:18The Long Term Investor:I think for the past few years, it really seems like people are waiting around for the Fed to cut rates, but inflation remains sticky and it appears that the Fed is going to remain patient. So what I'm reading in many forecasts is that the benchmark 10-year Treasury yield is going to remain range-bound in that 4 % to 4.5 % in the near term, with more risk to the upside than the downside. Now, for long-term investors, the role bonds play is the portfolio ballast. That being said, to me, this feels like the best fixed income has looked since before the financial crisis. And that's in part because of current yields, but it's also because of the tremendous improvement in the types of products available for accessing fixed income markets.

7:03The Long Term Investor:And I've done episodes in the past on fixed income, and I will link to those in the show notes. But I just want to say that if you are holding individual bonds rather than bond funds, or utilizing index funds in your fixed income portfolio, then I really think it is beyond time to better familiarize yourself with the research and the product landscape, or honestly just consider hiring an advisor because there is so much to be gained in the bond market at this point. So let's wrap it up. What should long-term investors expect from here? As you might expect, I'm not really one for making predictions.

7:39The Long Term Investor:I personally believe in building a diversified portfolio based on a financial plan that accounts for thousands of possible scenarios. But as someone that enjoys watching markets, there are a few things I'm interested in seeing how they play out. For example, does earnings growth broaden beyond AI and energy-linked sectors? Does AI spending turn into durable returns? Will energy prices keep inflation elevated? And how high can bond yields move before pressuring stock valuations? Of course, for long-term investors, my takeaway is always going to be to stay disciplined. And that means maintaining a diversified portfolio across sectors, regions, and asset classes.

8:21The Long Term Investor:It means rebalancing the portfolio when it becomes too concentrated. And it means letting your financial plan dictate the mix of stocks, bonds, and cash that will keep short-term market swings from forcing long-term decisions. As a reminder, you can sign up for my newsletter using the link at the top of the episode description. And two weeks from now, I'll be sending out a link to a recorded webinar where I go into greater detail on the ideas discussed in this episode. But just remember, for long-term investors, the job is not to predict every headline. The job is to participate in growth, manage concentration, stay diversified globally and avoid letting short-term volatility derail a long-term plan.

9:04The Long Term Investor:As always, thanks for listening and until next time to long-term investing. Thanks for listening to the Long-Term Investor podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and Bright All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.