Earlier this year, we laid out three themes we believed would shape portfolios this year. Those were the AI infrastructure buildout, fixed income opportunities as policy eases, and diversification in a market that keeps getting more concentrated. Now well into 2026, let’s check in on how those themes have held up, what's changed, and what we're watching heading into year end.
At the onset of the year, we noted the buildout of AI data centers and technology infrastructure was still in its early stages and would likely be a multi-year story for portfolios. The summer months gave us good evidence that's still the case. The largest cloud and technology companies posted some of their strongest earnings growth in years, and they're showing a much clearer connection between the money they've poured into AI infrastructure and the returns they're now seeing from it.
Chart: BlackRock, Fall 2026 Investment Directions
We also got a reminder of the volatility we flagged. A sharp selloff hit semiconductor and AI-related stocks in late June and July. Much of it traced back to leveraged investors unwinding their positions quickly, while the earnings picture underneath those stocks stayed intact. It was a rough few weeks for that corner of the market, and we expect more swings like it as this buildout continues.
Dividend-paying stocks and higher-quality companies held up well during the pullback, providing the cushion we've been building into portfolios. We're keeping our exposure to AI infrastructure and continuing to pair it with holdings that can hold steady when that piece of the market has a hard week.
Chart: BlackRock, Fall 2026 Investment Directions
In Q1, we talked about how falling rates on cash and money market funds would likely push income-seeking investors to look elsewhere, and we pointed to bonds as one of those potential places. Leadership at the Federal Reserve changed hands this year, and the new approach to policy has been less predictable than what markets were used to. We saw that play out last week, when the Fed raised rates by 25 basis points, its first increase since 2023, citing persistent inflation as the reason.
We're still favoring bonds in the three-to-seven-year range and staying selective within corporate bonds. The extra yield they pay over Treasuries remains historically tight, which doesn't leave much room for error if a company runs into trouble. A single rate increase doesn't change that approach for now, though we're watching closely for signs of further moves. Inflation-protected Treasury bonds are now yielding levels we haven't seen since the 2008 financial crisis, a timely one to raise with your advisor given this week's hike was aimed squarely at inflation.
Back in February, we pointed out that a handful of large technology companies made up an unusually large share of the S&P 500, and we talked about the need to diversify beyond that group. Concentration risk has only grown since then. AI-related companies now make up a larger share of major indexes than they did earlier this year, adding to the opportunity but also to the risk.
Strength has also kept spreading beyond the largest tech names. Earnings growth outside the AI theme has continued to improve, and we've seen strong momentum internationally, particularly in Asian markets tied to the semiconductor and technology supply chain. We've also been leaning further into strategies that don't move in lockstep with stocks and bonds, since a market this dependent on a single theme calls for return sources that aren't tied to that same story.
Chart: BlackRock, Fall 2026 Investment Directions
The foundation of our approach hasn't shifted since February. We've simply adjusted how we're applying it based on what's played out this year. We're staying invested in AI infrastructure while building more resilience around it, finding income opportunities in fixed income now that the policy backdrop has shifted from cuts to a hike, and continuing to widen our diversification net beyond traditional stocks and bonds.
Markets will likely stay noisy through the fall, between ongoing questions in Washington, geopolitical headlines, and the usual volatility that comes with a busy news cycle heading toward the midterms. Our focus remains the same as it's been all year. We're staying disciplined, staying diversified, and keeping your long-term goals at the center of every decision we make.
Chart: BlackRock, Fall 2026 Investment Directions
As always, we welcome your questions about your portfolio or our outlook. Thank you for your continued trust in our firm.