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Twice a year, in January and July, we record a portfolio update that walks through the markets, how we build portfolios, and where we think things are headed. This is the mid-year 2026 edition.
The economy: good, not great
The U.S. economy is still expanding. Growth ran about 2.1% in the first quarter, and the second-quarter reading is due at the end of July. Inflation ticked back up, with headline CPI near 3.5% and core inflation, which strips out food and energy, around 2.6%. The unemployment rate sits at 4.2%, down from 4.4% at the end of last year.
That drop looks good on the surface. A fair amount of it comes from people leaving the workforce rather than finding new jobs, so we read it as a labor market that is slowly softening rather than one that is heating up.
U.S./Iran war and the oil shock
The biggest driver of markets right now is the war between the U.S. and Iran. A U.S. and Israeli air campaign against Iran began in late February, and the conflict has continued since. Oil climbed toward $120 a barrel at the peak, though it eased after a Pakistan-mediated ceasefire framework, then turned unsettled again once that framework broke down. The Strait of Hormuz, which normally carries roughly a fifth of the world’s oil, has been effectively closed to traffic.
Iran’s allied groups across the region have widened the fight, and the piece we are watching most closely is the Red Sea. When the Strait of Hormuz closed, Saudi Arabia and others rerouted oil through Red Sea ports to get around it. That backup route is now the target. The Houthis in Yemen have moved to disrupt shipping there, and the Red Sea and the Bab el-Mandeb Strait carry a large share of the world’s shipping containers. When vessels avoid the Red Sea, they sail around Africa instead, which adds about two weeks to a voyage.
The concern here is that higher oil prices and higher shipping costs both push inflation up.
The Fed under a new chair
Coming into the year, the expectation was that the Federal Reserve would keep cutting interest rates. The Middle East has complicated that.
The new Fed chair, Kevin Warsh, has taken a firm line on inflation. With oil and shipping costs adding price pressure, the Fed’s own projections have shifted, and a rate increase later this year is now on the table if tensions and oil prices stay high. That is a meaningful change from where the year started.
How we approach a market like this
Our approach does not change with the headlines. A few principles guide how we build portfolios in any environment:
We stay weighted toward the U.S., which has been the strongest asset class over the long run. We tilt part of the portfolio toward momentum, the tendency for leading stocks to keep leading. We diversify across U.S. and international stocks, high-quality bonds, and select alternatives. We deliberately avoid areas we view as poorly compensated for their risk, including Chinese and Russian stocks, high-yield “junk” bonds, and ultra-high-yield dividend traps.
On the bond side, we have kept quality high and maturities short, which has held up well while longer-dated bonds have struggled. We also keep dry powder for real market weakness, so we can buy when prices are beaten down. We are not in that environment today, but we stay ready for it.
Outlook for the rest of the year
Nobody knows how this plays out, and anyone who says otherwise is guessing. However, here is how we are thinking about it.
The Middle East, oil, and global shipping look like the primary drivers for the rest of the year. Inflation stays a concern, and the Fed may have to adjust. The AI buildout continues and should keep supporting corporate earnings, which is a genuine bright spot. And the labor market is worth watching as it slowly softens.
Let’s talk
If you would like to talk through how any of this applies to your own situation, we would be glad to hear from you.
