Schwab Midyear 2026: AI Risk, Bonds, Global Stocks

Schwab's 2026 midyear market outlook identifies AI dependency risk, sticky inflation, and a 4%–4.5% 10-year Treasury range as the half-year's defining forces.

Lead

The Schwab Center for Financial Research released its Schwab outlook 2026 mid-year report in late June, presenting a cautiously constructive view of equities while urging investors to manage concentration risk in artificial intelligence infrastructure and maintain a defensive posture in fixed income. Authored by chief investment strategist Liz Ann Sonders, head of macro research Kevin Gordon, and colleagues Collin Martin, Michelle Gibley, and Chris Ferrarone, the report — the most closely watched Schwab news of the summer investing calendar — identifies the AI investment cycle and sticky inflation as the two structural forces most likely to define market outcomes in the second half of the year.

Economic Backdrop

The U.S. economy entered mid-2026 from a position of momentum. Real GDP grew at a 2.0% annualized rate in the first quarter, rebounding sharply from 0.5% growth in the final quarter of 2025, and second-quarter tracking estimates sit near 3%, supported by resilient consumer spending and strong business capital expenditure.

The improvement carries important caveats. PCE core services excluding housing — a measure the Federal Reserve watches closely — settled into a range above 3% year-over-year and accelerated to 3.5% in April. Import prices, elevated by tariff pass-through, rose nearly 10% year-on-year, placing inflation-driven margin pressure on households already constrained by weak real wage growth and a low personal savings rate. Higher energy costs tied to geopolitical disruption in the Middle East are functioning as an additional supply-side tax on consumer purchasing power.

AI: Primary Growth Driver, Primary Risk

The AI investment cycle is the dominant theme in Schwab's analysis — acknowledged as one of the primary engines of global economic activity in 2026, and simultaneously identified as the equity market's most significant structural vulnerability.

The four largest hyperscalers — Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), and Meta Platforms (META) — collectively spent more than $400 billion on capital expenditures in 2025, nearly 70% more than the prior year. That figure is projected to approach $800 billion in 2026, an increase of more than 80% over the prior year, with 2027 estimates exceeding $900 billion. Hyperscaler capex is now running at roughly 75% of these companies' aggregate cash flows — a ratio reminiscent of late-1990s technology spending patterns.

The structural concern is a widening divergence: while hyperscalers are absorbing a dramatically growing share of total S&P 500 capital expenditure, their share of index-level net income has not kept pace. AI infrastructure stocks have seen 2026 earnings estimates revised upward by more than 50% since December 2024, but the full-year S&P 500 earnings growth estimate of 25% remains concentrated in a handful of names. The S&P 500 excluding AI infrastructure has seen estimates revised downward. The average S&P 500 member's maximum drawdown year-to-date stands near 21%, exposing the narrowness of market leadership beneath headline index performance.

Fixed Income: Selective, Short, and Cautious

Schwab's investment strategy for fixed income centers on a below-benchmark duration stance. The 10-year Treasury yield is expected to hold within a 4% to 4.5% range in the near term, with risks skewed to the upside given persistent inflation and rising Treasury supply. Short- and intermediate-term maturities are favored over long-duration positions.

Within fixed income, three opportunity areas stand out: investment-grade corporate bonds, high-yield bonds, and preferred securities — each offering meaningful income without requiring extended duration exposure. Selectivity remains essential, as credit quality dispersion is widening alongside slowing earnings growth in rate-sensitive sectors.

Global Equities: International Tailwinds

Schwab's global equity view provides a constructive counterweight to domestic concentration concerns. The backdrop for international stocks is supported by solid earnings growth and accelerating business investment, with Europe positioned for relative outperformance. German fiscal expansion and European Central Bank rate reductions have materially improved the eurozone growth trajectory.

A softer U.S. dollar — particularly if Federal Reserve rate-cut expectations rebuild later in the year — provides an additional tailwind for U.S.-based investors in international equities. Schwab's global research team sees this dynamic as a structural reason to maintain deliberate geographic diversification across portfolios.

Geopolitical and Policy Dimensions

Schwab's team treats geopolitical risk as a persistent macroeconomic variable rather than a tail event. Energy price disruptions tied to Middle East tensions and Strait of Hormuz uncertainty are acting as a supply shock, pressuring inflation from outside the domestic monetary policy framework. Trade policy uncertainty — with tariff-driven import cost inflation running near 10% — adds structural friction that neither the Federal Reserve nor corporate pricing power fully absorbs.

The Federal Reserve is expected to remain patient through the second half, given above-target inflation prints, limiting its flexibility to cushion any growth-side deterioration. Policy uncertainty is projected to remain elevated, contributing to more frequent bouts of market volatility even in a no-recession base case.

Outlook

The Schwab takeaways from the 2026 mid-year report converge on three principles: diversify geographically into international equities, reduce bond duration below benchmark, and avoid overconcentration in the narrow cohort of AI infrastructure beneficiaries. The U.S. economy is growing, earnings are expanding, and no immediate recession signals are present in the data. Yet the half-year ahead is defined by the tension between the extraordinary investment cycle powering equity earnings and the inflation, concentration, and geopolitical pressures building around it. Managing that tension — not simply riding the cycle — is the central investment strategy implication of Schwab's mid-year work.