As we celebrate the 250th anniversary of our country’s founding, we remember the companies and generations of workers upon whose backs the world’s largest economy was built, while also looking forward to where and how our country will continue to grow. Midway through 2026, investors are grappling with economic forces that reflect America’s past and present. Oil has been in the spotlight this year, alongside a new technology that could change our world in ways yet to be understood: Artificial Intelligence, also known as “AI.” Significant economic and market changes we’ve seen this quarter lead us to wonder, Is AI the new oil?
During the second quarter, rapid swings in Middle East geopolitics pushed oil prices higher—then back down as quickly as they rose, while the AI buildout continued to power ahead. This quarterly letter will focus on short-cycle changes underway in energy and inflation, the longer-cycle evolution of AI, and implications for markets and portfolio positioning.
Cooling tensions and falling commodity prices
The security situation in the Middle East has shifted rapidly this year but many investors now expect a gradual de-escalation to continue, which should increase the flow of oil moving through the Persian Gulf. That expectation has driven oil prices down from a high of over $110 a barrel in early April to approximately $70 by the end of June—in line with prices last summer. While the worst of the conflict and the oil price spike appear to be behind us, we continue to watch for developments that could reverse this favorable trend.
Although oil prices have retreated, the temporary spike in prices this spring is still working its way through the economy and markets, as seen in the latest 4% inflation data that also included changes in food and energy prices. Elevated home prices, a bull market in stocks, and low unemployment have helped consumers maintain resilience in the face of higher gas prices. However, we’re seeing some “belt-tightening” including more swaps for lower-cost goods and reduced spending within discretionary categories such as dining.
Bond market yields suggest that inflation will linger, as seen in a modest rise in Treasury yields since the Iran conflict began. While higher bond yields may be attractive to some extent for retirees, elevated inflation reduces some of that appeal. Still, if inflation fades as we currently expect, locking in today’s yields should support portfolio performance.
Speaking of interest rates, incoming Fed Chair Kevin Warsh has already made taming inflation his top priority. Fortunately, Warsh takes over at a time when the job market is in fairly good shape, allowing the Fed to focus on avoiding the out-of-control inflation that dogged Warsh’s predecessor Jay Powell in the years just after the Covid pandemic. Warsh’s challenge will be to cool the economy and inflation through interest rate hikes without triggering a wave of layoffs or a recession.
AI: A new growth engine
While the Fed focuses on relatively short-term dynamics with inflation, the technology sector continues to invest heavily in a multi-year AI buildout. Mega-cap cloud computing companies are spending hundreds of billions of dollars on data centers and semiconductors that power AI models such as Chat GPT, Google Gemini, and Anthropic’s Claude.
We continue to hear about excess demand for AI tools along with supply constraints for energy, data centers, and hardware, suggesting that the AI buildout may still have room to run.
Rapidly changing dynamics for tech and energy sectors were on display in the first half of 2026. As the Iran conflict worsened in the first quarter, oil prices and energy stocks surged ahead of the broader market, while AI and tech stocks stumbled on a more “risk-off” tone. That trend fully reversed in the second quarter, as de-escalation pushed oil prices and energy shares lower and AI-driven demand for semiconductors boosted tech shares. As we wrestle with the AI growth opportunity, we are seeing massive AI-related IPOs, including a record-setting offering from SpaceX, which has a long-term plan to put AI data centers in orbit. Additional stock offerings from Anthropic and OpenAI later this year could offer further tests of investor sentiment.
Positioning and market outlook
Beyond AI headlines, corporate profit growth has broadened across most sectors. We expect profits to grow in the mid to high teens over the 2025-2027 timeframe, suggesting that continued upside is possible after a 10% gain in the broader market during the first half of the year. A broadening out of profit growth may be supporting favorable performance across a wide range of companies and geographies, including US small cap, international developed, and emerging markets. Notably, one of the better performers in the emerging markets index is Taiwan Semiconductor, which we view as a compelling way to own the global AI build-out.
We continue to favor a “fully invested” approach across equities and bonds—meaning, that we prefer owning a full allocation to both asset classes. Our sense is de-escalation in the Middle East, modest Fed pressure on inflation, and steady profit growth may support equities, and we continue to favor equity investment within the United States where we have observed profits continuing to grow faster than in most other regions. For bonds, we view rising U.S. yields favorably for bond acquisitions. We continue to rebalance into bonds as equities march higher.
Short-term reversals of fortune for energy and tech stocks this quarter led us to question whether AI is the new oil. The massive investment in AI, coupled with the recent surge in market value for AI-related companies, suggests that AI could become even more essential to economic growth than commodities such as oil. However, as these industry transitions continue, we remain committed to diversifying across sectors and asset classes as a way of balancing risk and return. We continue to favor fully invested portfolios of high-quality companies with durable growth as a way to compound wealth, ever mindful of your long-term goals and objectives.
We wish you all the best this summer.
Michael Bailey, CFA
Director of Research
Jane DeLashmutt O’Mara, CFP®
Senior Portfolio Manager
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