Nine months into 2026, RiverFront Investment Group's Chris Konstantinos, CFA, revisits the firm's December 2025 outlook with the kind of rigour that separates disciplined strategists from optimists. The full report is available here.1 The verdict is instructive for advisors navigating a market that has delivered on its central promise while quietly concealing a more complicated undercurrent.
The Call That Held
RiverFront's 2026 base case rested on a durable AI spending boom, an equity uptrend, and a preference for US assets. On those counts, the team was right. The S&P 500 is up 11.8% year-to-date and 17.5% over the trailing twelve months. US real GDP growth has held firm, jobs are cooling without cracking, and international equities have surprised to the upside, with EAFE up 11.8% and emerging markets up 23% in USD terms. Most of the bubble indicators the team tracked in December have not been triggered. Margin debt remains reasonable. The Nasdaq 100 is fully profitable. Sentiment is optimistic but not euphoric. As Konstantinos puts it, "that call has aged well."
The Miss That Matters
What the team did not anticipate was the location of the year's most consequential price signal. "One of the year's most consequential prices would be set in the Treasury market rather than the stock market," Konstantinos notes, "and not by the Federal Reserve." The 10-year Treasury yield, forecast at 4.2%, now sits near 5%. The driver is not Fed policy but investor concern over inflation and the growing US debt burden. That distinction matters. It means the rate problem is structural, not cyclical, and it complicates the path forward in ways that Fed pivots alone cannot resolve.
Oil compounds the picture. Iran-related conflict has pushed crude back toward the $90 to $100 range, well above the team's $66 forecast. Konstantinos draws the mechanism plainly: "Oil is the channel through which a distant war reaches a domestic valuation multiple." High energy prices keep headline inflation elevated, constraining the Fed from easing into a slowdown. Calling today's inflation transitory, the team argues, is not a position the Fed can comfortably hold.
The Tech Cash Flow Test
RiverFront's most analytically precise contribution in this piece concerns technology earnings quality. The team has long argued that the key warning signal for a tech bubble is not the pace of cash flow growth but the divergence between reported earnings and free cash flow. "The single most reliable early warning that a technology bubble is deflating is not the slope of the cash flow line," Konstantinos writes. "It is the divergence between reported earnings and free cash flow." In 1999 and 2000, EBIT kept climbing while free cash flow lagged badly. Today, both metrics are running above one trillion dollars annually and tracking closely together.
That said, accelerating hyperscaler capital expenditure is beginning to compress free cash flow at the margin. The team has trimmed semiconductors and broad tech beta accordingly, while rotating into software, where the selloff hit multiples without touching earnings or guidance. "We have resized rather than exited technology," Konstantinos says, a phrase that captures the posture precisely.
The Undertow Beneath the Wave
RiverFront's wave metaphor for 2026 survives, but with a significant addition. The team now warns of an undertow: forces moving beneath a calm surface that swimmers miss precisely because conditions look manageable. "Swimmers get into trouble not because the water is rough," Konstantinos observes, "but because they are watching the wrong thing." With a 4.95% risk-free yield now presenting a genuine alternative to equity valuations, the team has closed its duration underweight by adding long Treasury and investment-grade exposure. The financial repression era from 2008 to 2021, during which stocks were meaningfully undervalued relative to bonds, is, in the team's view, over. "Low visibility is not the same as bad news," Konstantinos notes, "but it does argue for humility in position sizing."
The framing for 2027 is already set: not whether the boom is real, but what valuation to assign booming earnings in a rising-rate environment.
Five Takeaways for Advisors and Investors
- The AI boom is real and earnings are backing it up, but equity overweights should be trimmed after a strong run. The team has moved portfolios closer to long-term benchmarks.
- Bond yields at 5% are no longer a headwind to ignore. They represent a genuine return alternative that changes the equity risk premium calculus.
- Tech is not a bubble, but it is not uniformly positioned for what comes next. Software is preferred over semiconductors and broad tech given current free cash flow dynamics.
- Geopolitical oil price risk feeds directly into inflation persistence. Advisors should revisit assumptions about disinflation timelines.
- "Getting paid to wait" with yield is now a credible strategy. Covered calls and investment-grade fixed income deserve more attention heading into 2027.
Footnote:
1 Konstantinos, Chris. "Riding the Wave...and Minding the Undertow: Revisiting Our 2026 Outlook: What We Got Right and Wrong." RiverFront Investment Group, 15 Sept. 2026, https://www.riverfrontig.com/insights/revisiting-our-2026-outlook/.
