The first half of 2026 has reminded investors that markets can digest more headwinds than many had expected. Geopolitical flare-ups, from the Gulf to Europe, have repeatedly rattled sentiment without fully derailing the cycle. At the same time, a consistent defining feature of H1 has been the AI ramp-up – an investment boom of unusual breadth, stretching from hyperscalers to semiconductors, power utilities, and memory producers.

Is the AI boom a bubble or a demand story?

It is important to agree first on what kind of bubble one means. In our view, the weakest part of the story is not earnings, or even capex, but rather sentiment and positioning. Recent jitters in semiconductors look more like a cleansing of overconfidence, a quarter-end rebalancing, and crowded trades than the end of the story. The capex cycle remains demand-led, i.e. spending is still trying to catch up with a shortage of AI infrastructure rather than the other way around.

The brighter side of this shake-out is that markets are finally rotating. Lagging sectors, such as healthcare, US financials, and small caps, are beginning to move, which reinforces our broader theme of diversification across regions and sectors. That same logic also applies to the conflict in the Middle East: despite the constant back and forth, we still lean towards tit-for-tat activity and eventual pragmatism rather than a renewed escalation.

US resilience despite higher energy costs

Against this backdrop, developments in the US economy provide an important anchor for global expectations.

The US economy remains remarkably strong, even though the significant increase in energy prices in March, April, and May is starting to work its way through the supply chain. Personal consumption expenditure grew stronger than expected, even when adjusted for higher prices. The expected industrial activity measured by the Purchasing Managers’ Survey of S&P Global (PMI) suggests another acceleration, backed by stronger new orders, output, inventory build-up and longer delivery times.

The limited demand destruction caused by higher energy prices poses a non-negligible risk to future inflation, as solid demand enables businesses to pass on higher input costs to consumers. The growing upside risks to inflation and the hawkish shift under the new Fed Chair, Kevin Warsh, are driving expectations that the Fed will need to hike rates in September.

At the same time, however, the current monetary policy stance and a growing amount of underlying economic data suggests that there is no urgency for the Fed to hike rates. Monetary policy is anything but supportive of economic activity, as is most clearly seen in weak housing activity, which is being held back by high mortgage rates. With regard to inflation, the close to 10% drop in gasoline prices in June should allay fears of accelerating inflation, and the underlying trend of core PCE inflation reveals that inflation peaked in April and eased in May.

The surprising resilience of job growth in the past month is also expected to show signs of weakening. Employment was the only component in the June PMI survey to point to contraction despite more new orders and alternative labour market indicators, including quit rates and duration of unemployment, pointing to higher labour market slack than suggested by the official unemployment rate, which remained at 4.3% over the last three months. We see no urgency for rate hikes by the Fed and expect unchanged rates in 2026 and 2027, in contrast to a more hawkish market pricing and a more dovish consensus for 2027.

Outlook for the US Dollar

Currency markets, meanwhile, reflect a confluence of these macro and geopolitical dynamics, particularly in the case of the US dollar.

The USD has regained strength over the past week, trading below but close to the EUR/USD 1.14 level. This renewed robustness is the result of a combination of monetary policy signals, geopolitical developments, and shifts in global risk sentiment. Most importantly, the Fed’s latest “dot plot” signalled a more hawkish stance than previously anticipated. This shift has led markets to reassess the likelihood of further rate hikes, supporting US yields and, by extension, the USD.

This factor has arguably outweighed the increased future uncertainty of US monetary policy due to the changes to communication introduced by incoming Fed Chair Warsh. In parallel, perceptions around Fed governance have evolved, with Warsh appearing to be adopting an orthodox approach, which may have alleviated some of the lasting concerns regarding central bank independence.

Geopolitical factors have also played a role. Renewed tensions surrounding the US-Iran nuclear deal and instability in the Gulf have marginally increased geopolitical risk and oil prices again, reinforcing demand for the USD as a safe haven. At the same time, last week’s sell-off in AI-related equities triggered a short risk-off period, further underpinning USD demand. In particular, the AI boom seems to be a USD win-win, warranting inflows in a boom and safe-haven flows in a bust.

Taken together, these drivers keep the USD well supported in the near term. However, some of the tailwinds also bear risks. The durability of the geopolitical safe-haven bid remains uncertain, particularly if tensions stabilise. 

What investors need to remember

In general, for the remainder of 2026, our outlook is constructive as markets re-enter expansion. Growth is supported by a surge in investment spending in AI infrastructure, among other sectors. Our baseline is not to retreat into cash; we instead capture volatility selectively while maintaining a balanced approach. Discover actionable insights and our top investment strategies for the second half of 2026 in our Market Outlook brochure below.