2026 Mid-Year Market Outlook | Baird Strategas

What is Baird Strategas’ stock market outlook for the back half of 2026?

Despite geopolitical volatility in the first half of the year, the stock market was resilient, and we expect that resilience to continue through the balance of 2026. Investors remain focused on oil flows through the Strait of Hormuz and while the market has become accustomed to uncertainty about whether the Strait is open or disrupted, it has so far digested the conflict and looked beyond some of its broader economic implications. Still, even as oil prices have eased from early-war levels and brought inflation expectations down with them, investors should be mindful of the impact that dislocation in the Gulf could have on global supply chains. The inflation picture looks better but the debate is not over.

On the positive side, corporate profits remain strong. U.S. companies delivered earnings growth of more than 20% in each of the first two quarters, and the outlook for the rest of 2026 points to double-digit growth. Investment tied to AI also remains encouraging. AI-related capital spending has become a catalyst for continued economic expansion, particularly with depreciation provisions now in place. We believe momentum can continue, if not always in a straight line. Finally, our optimism is supported by the resilience of the U.S. consumer. The list of risks remains long, but we believe the list of things going right is longer and stronger.

What are you watching to gauge whether the A.I. trade is becoming a bubble?

It’s not enough to look only at the price of AI-related shares or their prevailing valuations. Capital spending across AI remains strong, but we are watching three key developments.

1. The physical world limits what technology can achieve. Supply chains, power demand and local permitting or community considerations could slow the pace of AI-related growth.
2. Second, the industry is still working to define the business case and implementation standards that would allow AI to reach enterprise-grade scale. In other words, non-technology companies will need to determine whether broad adoption is worth the cost and complexity, particularly if around-the-clock availability is expected
3. Third, the application development cycle is maturing. Token usage and pricing, along with hiring trends among small and mid-sized companies looking to use AI as a dynamic platform

How does a new Fed chair impact your outlook for interest rates and inflation?

Fed Chair Kevin Warsh seems well suited for his new role. The hawkish tone of his first press conference may establish credibility early, and the blue-ribbon commissions examining the Federal Reserve may give him time to assess the path ahead. We think inflation is likely to remain near the upper end of the Fed’s comfort zone. Still, we are cautious that markets may be pricing in too many rate hikes this year.

Although the long end of the global sovereign bond curve has sold off, credit markets have generally remained orderly, apart from some pockets of private credit. Overall, our outlook has not changed meaningfully, but we are paying close attention to the shift in tone and to market perception of the new Fed leadership.

What are a few of your highest conviction themes going forward?

We continue to view the broader investment landscape through a thematic lens, looking for pockets of opportunity where long-term trends may create durable growth. As we look toward the balance of 2026, our five highest-conviction themes are artificial intelligence, the industrial power renaissance, cash flow aristocrats, deglobalization and AI resilience.

• Artificial intelligence remains central to that work, not only as an investment theme but as an important part of the global growth narrative.
• Related to that, particularly in the United States, the industrial power renaissance continues to command significant attention. Demand for power remains substantial as companies look to support the infrastructure needed for continued technological advancement and broader economic activity.
• We also remain focused on cash flow aristocrats, which are companies with the ability to generate enough cash flow to self-fund through periods of uncertainty and a higher cost of capital. In an environment shaped by uneven global growth and interest rate uncertainty, that type of financial flexibility remains valuable.
• Deglobalization is another important theme. As we have seen over the last several years, and especially at the beginning of this year, shifts in global trade, supply chains and geopolitics continue to matter for both corporate operators and investors.
• More recently, we have added a fifth theme: AI resilience. Regardless of how quickly artificial intelligence is adopted, how clearly its business case develops or how fully the power infrastructure buildout meets its needs, there will likely be a group of companies that remain relatively resilient to AI implementation. That group is becoming increasingly interesting to us.