07/09/2026
Stock Market Outlook for the Second Half of 2026: Where Investors Should Focus
By Dr. Richard Baker, AIF®
In junior high, our school dances were in the cafeteria. The girls all danced in the middle, and the guys would lean against the walls, hoping a girl would dance with them at the next slow song. Once, my buddy said to me, "Stand up straight and look confident. Girls like confidence.” He somehow thought my posture would score me a dance. Well, right now I’m adjusting my investment posture and hoping for a niche second-half dance.
I still feel good about stocks for the rest of this year. Stocks may not have as strong a second half as they had in the first, but I expect them to slightly outperform other investments. As the economy continues to strengthen, publicly traded companies continue to have strong earnings, and artificial intelligence (AI) buildout spending continues unabated, fueling many parts of the market. We do not know for sure which companies will convert AI spending into strong AI-driven profit, so investors should remain diversified and avoid being tempted to invest heavily in a few popular AI holdings.
I am more in favor of U.S. stocks over international stocks. Though it is important to have some international holdings for diversification, U.S. stocks remain king as long as the U.S. economy stays healthy and U.S. companies continue to be leaders in innovation. A major advantage to the U.S. economy is that it is not as affected by rising oil prices and global energy shortages compared to the rest of the world, because the U.S. still produces more oil than it uses. Although, as I write, President Trump announced that the peace agreement with Iran is over. This might be a negotiating tactic, or it might not; either way, the situation with Iran could still cause market volatility.
In early June, I rebalanced my portfolio to adjust growth stocks from positive to neutral due to the large run-up in technology stocks and because they are looking overpriced. This chip stock rally ran so hot that I think a lot of investors are looking for other opportunities. I expect some gains from the technology sector, but I also expect them to level off somewhat in the second half of the year. It seems like the market is looking beyond the AI investing frenzy and wondering where the next opportunity will come from. I wouldn’t be surprised if value stocks get a bump if AI stocks take a breather or if oil prices go up again.
Smaller companies had a killer first half. The Russell 2000 index, which tracks small companies, gained more than 20% in the first six months of the year, which is the best first-half performance since 1991 according to the Wall Street Journal. The small-cap indexes benefited from this wild chip stock rally in the first half of this year. It was semiconductor, AI hardware, and technology infrastructure stocks that juiced gains in small companies as investors became more willing to take risks. However, I am pulling back some on small-cap stocks to a neutral stance because it seems more likely that interest rates won’t drop and might even rise slightly, and smaller companies are often hit harder in these scenarios.
I continue to favor low-volatility stocks because they are often more stable and hold up better in uncertain markets. These stocks might be a little more boring, but they can still have market gains while helping stabilize a portfolio during periods of volatility. I’m not expecting major volatility, but with the strong gains of the first half, I am going to hold on to some profits and try to force opportunities.
We see two themes that could shape markets in the second half. First, the U.S. midterm elections could shift control of Congress. With the Democratic candidate from Maine expected to drop out of the race, it looks like Republicans will retain control of the Senate. Democrats are expected to take control of the House by a narrow margin, which could change policy direction. Second, a new Federal Reserve chairman adds uncertainty to the markets. If inflation continues to rise and the Iran mess remains tense, the new chair will have little margin for error.
No girl gave me the signal that she wanted to dance. The problem was that there were only twenty-six kids in my class, and the girls already knew I was a goofball, and one night of good posture wasn’t going to change their opinion. Thankfully, I have gotten a lot better at adjusting the posture of investment portfolios and have become a pretty great dance partner in the market. Too bad those junior high girls missed their chance on this goofball.
Have a blessed week.
www.FerventWM.com
This article was written by humans for humans because AI doesn’t have this quality of sarcasm.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri
