Insights Sticking to Fundamentals

By: Joseph R. Gaffoglio, CFA
Date: 8/21/2026

The first half of 2026 tested investors’ resolve as daily headlines around geopolitics and the “AI trade” created significant volatility in markets. However, even with all the movement under the surface, equity markets continued to shrug off any potential bad news and hit all-time highs, driven by strong corporate earnings, enthusiasm around spending for artificial intelligence and a relatively strong economy. Still, Middle East tensions prompted swings in energy prices that affected businesses and consumers, and inflation topped 4% for the first time since April 2023.1 Kevin Warsh’s appointment as Federal Reserve Chairman also marked a pivotal moment as market participants had to start navigating how his leadership would differ from his predecessor, including the potential path for interest rates.

Notwithstanding war in the Middle East, higher energy prices and rising inflation, the economy remained resilient. Real GDP grew at an annualized rate of 2.1% in the first quarter, and consumer spending and business fundamentals remained strong.2 Outside of certain pockets, like younger employees, the labor market broadly held up well, with unemployment steady around 4.3%.3

AI Leads the Way

We believe the markets’ biggest debate continues to revolve around AI and deciding who the winners and losers will be. A small group of leading tech companies (the “hyperscalers”) continue pouring billions into AI infrastructure, benefiting the semiconductor space and companies connected to data centers and electricity infrastructure. Investors started 2026 questioning if AI spenders would eventually earn an adequate return on their investments. As mid-year approached, the narrative changed to the durability of cashflows on AI-spend beneficiaries and how long the insatiable demand for chips and memory could continue. The focus in navigating this environment should remain on company fundamentals— staying diversified4 and managing risk. Investors should also be cognizant that even broad-based index funds are currently not as diversified as they used to be given the extreme concentration in the markets’ largest stocks.

The Fed and Inflation Concerns

As Kevin Warsh took the helm of the Federal Reserve in May, he faced inflation levels that had remained sticky above the Fed’s target of 2%, with numbers heading higher instead of lower. Futures markets anticipated cuts heading into 2026, but pivoted as inflation exceeded 4.0%,5 leaving some to project rate hikes instead. Warsh’s “hawkish” rhetoric also factored into markets resetting interest rate expectations for the remainder of the year. For businesses already dealing with high commodity prices, particularly oil, hopes of lower interest rates bringing some relief for financing their operations and growth were quickly snuffed out. For consumers, the sting from higher prices across goods and services has led many to borrow more on credit cards and for automobile purchases, and now they face mortgage rates that have risen again.

Outlook

Looking ahead, investment in AI shows no signs of slowing down (for now) and, thus far, has propelled a historic market rally across parts of the market while helping to support the economy. Still, investors could expect ongoing volatility due to fluctuating energy prices, elevated inflation, interest rate uncertainty and an extremely concentrated equity market that often responds quickly and meaningfully to changing headlines. With this in mind, maintaining a diversified portfolio and an appropriate asset allocation, given investment time horizon and risk tolerance, may help investors to better navigate bouts of volatility. 

1

June 2026 CPI Data Consumer Price Index (as of June 10, 2026)

2

Q1 2026 Advance GDP Data Advance Gross Domestic Product (as of April 30, 2026)

3

Jobs Reports April-June U.S. Bureau of Labor Statistics (Jobs Report Data, April 2026-June 2026)

4

Diversification does not protect against losses.

5

Q1 PCE Data Consumer Price Index (Q1 2026)

Joseph Gaffoglio, CFA, CPA, is the President and CEO of Mutual of America Capital Management LLC.

Past performance is no guarantee of future results. The index returns discussed above are for illustrative purposes only and do not represent the performance of any investment or group of investments. Indexes are unmanaged and not subject to fees or expenses. The index returns above reflect the reinvestment of distributions. It is not possible to invest directly in an index.

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