What began as a framework organized around four familiar themes has become something considerably more urgent. When Meketa Investment Group's Global Macroeconomic Investment Committee published its year-ahead outlook in January, the conversation centered on US economic momentum, the Federal Reserve's policy path, diverging global central bank cycles, and AI-driven concentration in US equities. Six months later, Faith Daigneau and her colleagues return with a sobering correction to that picture. The conversation, they write, has shifted1: "a geopolitical shock in the Middle East has reintroduced inflation risk, the rate-cut narrative has been all but unwound, equity and bond markets are telling very different stories, and the AI rally has resumed with the conversation shifting from infrastructure spending to software disruption and debt financing." The four themes still hold. The analysis beneath them has been fundamentally reordered.
A Strait That Carries the World
The defining macro event of the first half of 2026 has been the conflict disrupting the Strait of Hormuz. The numbers are stark. The Strait channels roughly 20% of global oil and a comparable share of liquefied natural gas. In the days following the outbreak of hostilities in late February, daily tanker traffic collapsed from approximately 135 vessels to fewer than ten. War-risk insurance premiums surged from historical levels of around 0.25% of vessel value to between 3% and 8%, adding $3 to $8 million in cost per large tanker transit. Even after a US-Iran agreement was announced June 14 and memorialized June 17, the committee is measured. "A return to normal flow," they state plainly, "is a process, not a switch." Infrastructure damage across Gulf LNG facilities may take years to restore. Unresolved issues including Iran's nuclear program and the Israel-Lebanon track leave disruption risk elevated. "The speed and durability of the reopening," the committee writes, "is the single most important variable we are watching into the back half of 2026."
The burden has not landed evenly. The US, as a net energy exporter, has been relatively insulated. Europe, South Korea, China, and Japan face more direct pass-through. The IMF lowered its global GDP growth forecast from 3.3% in January to 3.1% in April. The consumer tailwind in the US, the committee observes, "while still present, is becoming more selective," as energy price pressures weigh disproportionately on lower-income households and the savings rate declines as spending outpaces income growth.
Three scenarios frame the back half: a base case of gradual normalization with residual inflation pressure; a bull case where the agreement holds firmly and energy markets normalize quickly over the summer; and a bear case involving agreement breakdown, sustained oil price pressure, broader demand destruction, and what the committee describes as "a stagflationary mix that constrains policy options."
A New Chair, an Uncertain Reaction Function
Kevin Warsh was confirmed as the 17th Fed Chair in mid-May, chairing his first FOMC meeting on June 17. Warsh has signaled a preference for what he himself has described as "regime change" at the Fed, including a smaller balance sheet that he argues should allow for a lower policy rate. The committee notes a critical constraint: "Warsh is one vote on a twelve-member committee, and the pace of any shift will depend as much on his ability to build consensus surrounding his own convictions, a constraint markets may be underweighting as they price the transition."
Recent FOMC meetings have featured dual-direction dissent, a rare dynamic where members publicly disagree on whether the next move is a cut or a hike, "underscoring how genuinely uncertain the path forward has become." From a post-election peak where futures priced roughly ten cuts through end-2026, expectations have swung to pricing a rate hike by early 2027. The committee's warning is direct: "if growth slows because of inflation pressure, a rate-driven rescue is less likely this cycle."
The Global Tightening Has Arrived
The policy divergence anticipated entering 2026 has been superseded. What the committee describes as "a story of gradual desynchronization has shifted into one where the dominant policy question is no longer whether to cut, but how much to hike and how quickly." The ECB raised rates by 25 basis points at its June 11 meeting, its first hike since 2023, revising its 2026 inflation forecast to 3.0% while trimming growth to 0.8%. The Bank of England, previously expected to cut, has held steady. The Bank of Japan continues normalizing from, as the committee notes, "a very different starting point."
AI: From Capex to Commoditization
The AI narrative has undergone a meaningful evolution. The capex-led framing that dominated entering the year has given way to a more unsettling question. "Which businesses does AI take over?" the committee asks directly. Recent model releases from leading labs triggered notable selloffs in software companies as markets began pricing faster-than-expected commoditization of capabilities once protected by data and distribution moats. "The disruption dynamic is self-reinforcing," they write, "as each new release raises the capability ceiling, the window for incumbents to adapt narrows, compressing monetization timelines and making the earnings outlook for AI-exposed software increasingly binary."
AI-related companies have since reasserted leadership, driven by hyperscaler earnings and enterprise adoption evidence. But a third dynamic now warrants attention. "The AI buildout is increasingly debt-financed rather than funded from free cash flow," the committee observes, marking "a structural shift from the early phase of this cycle." The days of hyperscalers self-funding infrastructure entirely from operations, they argue, "appear to be giving way to a more leveraged model with different implications for risk pricing across the capital structure."
Two Markets, One Calendar
The divergence between equity and bond markets is the most striking feature of the first half. Equity markets recovered from a sharp March drawdown, supported by resilient earnings and the continued AI narrative. The recovery, the committee notes, "is notable as investors have demonstrated a willingness to look through sustained geopolitical uncertainty once the acute phase of the shock passed." Market breadth, however, "remains unusually narrow," with the ten largest S&P 500 companies accounting for roughly 37% of total index weight against about 32% of earnings. The committee argues this concentration "rests more heavily on realized profitability and cash flow than in prior episodes such as the Dot-Com peak," making it better understood as a feature of current market structure than an automatic fragility signal, "though it does widen the range of potential outcomes."
Bond markets tell a different story entirely. G7 sovereign yields are near two-decade highs, reflecting what the committee describes as "a combination of an inflation scare reignited by oil, expanding fiscal deficits, the gradual unwind of quantitative easing, and in the case of the US waning foreign demand for Treasuries." Stagflation concerns, they note, "rather than just recession concerns, now sit at the center of investor conversations."
The November midterm elections add another layer. Since World War II, the S&P 500 has experienced average intra-year drawdowns of 18% to 19% in midterm years, with post-election performance averaging gains of more than 16% in the subsequent twelve months. The committee is not predicting that pattern repeats, but notes it is "one more reason to expect the second half to look different from the first."
Five Key Takeaways for Advisors and Investors
- The rate-cut narrative is effectively over for this cycle. Position portfolios for a potential rate hike by early 2027, not the cuts markets were pricing a year ago.
- Energy price normalization will be slower than markets may assume. Insurance dynamics, infrastructure damage, and unresolved geopolitical issues mean Strait of Hormuz risk premiums persist even in the base case.
- AI's shift to debt financing introduces a new risk transmission channel connecting AI capital spending directly to fixed income markets, raising valuation sensitivity across the capital structure.
- Market concentration demands deliberate positioning, not passive acceptance. The weight-versus-earnings gap in the S&P 500 widens the range of outcomes and argues for intentional exposure management.
- Own assets that can absorb a range of outcomes. The combination of a new Fed chair with an uncalibrated reaction function, persistent geopolitical uncertainty, and elevated equity valuations argues for strategic positioning breadth over concentration in any single scenario.
Footnote:
1 Daigneau, Faith, et al. "What We Are Watching: Mid-Year Update -- Revisiting Our Four Themes Against a More Volatile Backdrop." Global Macroeconomic Newsletter, Meketa Investment Group, June 2026.
