Quarterly Perspectives: Midterms, Inflation, and AI

Five Key Investment Takeaways

1. Election Outcomes Don't Determine Market Performance

Midterm elections often generate uncertainty about potential changes to tax policy, government spending, and regulation. But historical market performance suggests investors should be cautious about drawing conclusions based on election outcomes.

During the webinar, the panel examined historical S&P 500 returns surrounding midterm elections. Over the periods analyzed, average returns were 2.9% in the 12 months preceding midterms and 12.4% in the following 12 months.

While these figures may appear encouraging, the panel emphasized that the historical sample is relatively small and the results are not statistically significant. Economic conditions, inflation, geopolitical events, and other factors can have a much greater influence on market performance.

Rather than repositioning portfolios based on anticipated political outcomes, investors may benefit from maintaining an investment strategy aligned with their financial goals, risk tolerance, and time horizon.

2. Higher Interest Rates Create Challenges and Opportunities for Bond Investors

Persistent inflation has contributed to higher interest rates, creating a challenging environment for fixed-income investors.

When interest rates rise, the market value of existing bonds generally declines. However, higher yields also create opportunities to generate additional income as bonds mature and proceeds are reinvested.

This distinction is particularly relevant for retirees and other investors who rely on fixed-income investments as part of their portfolios.

The panel also discussed how the Federal Reserve primarily influences short-term interest rates, while longer-term yields reflect a broader range of economic forces.

Although rising rates can create short-term pressure on bond portfolios, they may improve longer-term income potential. Investors should evaluate fixed-income allocations in the context of their income needs and broader financial objectives.

3. AI's Investment Boom Presents Both Opportunities and Risks

Artificial intelligence has become an increasingly significant driver of economic activity and stock market performance.

The panel discussed estimates suggesting approximately $1 trillion in AI-related spending during 2026, with investments extending beyond technology companies into data centers, semiconductors, energy infrastructure, and other industries.

Unlike the speculative environment surrounding the dot-com boom, much of today's AI investment is being funded by highly profitable companies and generating revenue for businesses supporting the expansion.

However, substantial spending does not necessarily translate into attractive investment returns. The pace of AI adoption, its economic productivity, and the ability of companies to generate sufficient returns on their investments remain important uncertainties.

AI may create meaningful long-term opportunities, but investors should consider the risks of becoming overly dependent on a single investment theme.

4. Owning the S&P 500 May Not Provide the Diversification Investors Expect

One of the webinar's most notable insights concerned the increasing concentration of the U.S. stock market.

The panel highlighted that the 10 largest companies accounted for approximately 40% of the S&P 500's market capitalization. Many of these businesses also share significant exposure to AI-related investment trends.

Although market concentration does not necessarily indicate a stock market bubble, it raises important questions about portfolio diversification. Investors who primarily hold U.S. large-cap stocks may have more concentrated exposure than they realize, even when investing through broad market indexes.

The panel discussed how international equities, smaller companies, fixed income, and potentially alternative investments can provide exposure to different sources of risk and return.

Effective diversification requires looking beyond the number of investments held to understand the underlying risks and exposures within a portfolio.

5. Long-Term Financial Goals Should Guide Investment Decisions

With so many competing economic and market developments, investors may feel compelled to adjust their portfolios in response to changing headlines. However, the panel cautioned against making significant investment decisions based on short-term uncertainty.

Moving out of the market requires investors to make two difficult decisions: when to exit and when to reinvest. Getting both decisions right consistently can be challenging.

Instead, the discussion emphasized the importance of maintaining a long-term perspective and revisiting investment strategies when personal circumstances change.

Changes in financial goals, spending needs, investment time horizons, or risk tolerance may warrant portfolio adjustments. Market headlines alone may not.

A disciplined, personalized investment strategy can help investors navigate uncertainty while remaining focused on their long-term objectives.

Putting Market Developments Into Perspective

Elections, inflation, and AI will continue to influence financial markets. Understanding their implications for an individual portfolio requires looking beyond the headlines.

As the webinar discussion reinforced, thoughtful diversification, a long-term perspective, and an investment strategy grounded in personal financial goals remain important considerations across changing market environments.

Watch the full Quarterly Perspectives webinar replay to hear additional insights from our investment specialists on the economic landscape, portfolio positioning, and considerations for the year ahead.

For questions about how current market conditions may affect your financial plan, connect with your advisory team or contact us.