At the start of the year, we made four probabilistic predictions. Here’s how they’ve played out in the first half of 2026:
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New Frontier 2026 Predictions |
2026 Mid-Year Market Outcomes |
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1 |
Inflation would rise a bit |
Inflation rose, though the war did more of the work than the tariff pass-through we named |
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2 |
The economy would slow without recession |
The economy slowed slightly |
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3 |
Signs of capital misallocation in AI would emerge late in the year |
The misallocation arguably exhibited as volatility over the scale of infrastructure spending and a reallocation from AI software to hardware |
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4 |
Global markets would rise |
Markets rose narrowly |
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Not bad, but not entirely for the reasons given. Playing probabilities means probably being right for imperfect reasons and wrong for good ones.
For the second half of the year, we state what structure already implies rather than predict:
• Stocks should rise over time because investors price them with a risk premium; high valuations shrink that premium but do not eliminate it.
• Bonds have reasonable coupons in real terms.
• Tariffs should have minimal market impact now that markets understand trade policy.
• Inflation will fall more slowly than it rose and long rates will not fall much despite policy pressure.
• Concentration will eventually resolve: either the future economy grows into its prices, or prices come back to economic reality. The diversified investor will survive both scenarios.x
Most worries can be sorted. The real question is whether AI proves an asset bubble or an economic disruptor, and diversification is the only useful response while it stays open. Worries to set aside: Fed meddling (Warsh is taking the job seriously), Iran headlines, and month-to-month inflation prints. AI valuations will keep downplaying current events until a major counterexample arrives.
We do not know the future for the middle east, the Fed, or AI – no one does, and prices already reflect that. But we can hold portfolios that do not require any of these questions to resolve favorably.