Capital Market Outlook

Summary

• Real U.S. GDP growth was revised up to 2.2% annualized in Q2 2026, with Q1 revised to 2.5%, while 2024 and 2025 estimates were also raised slightly.
• Productivity growth is expected to strengthen further due to modestly higher labor input, benefiting corporate profits alongside high operating leverage.
• Core personal consumption expenditures (PCE) inflation momentum declined over the past three months, with August core PCE at 3% year-over-year following methodological changes.
• Cyclical inflation sensitive to labor market conditions eased to 3% year-over-year, but acyclical inflation remains under pressure from diesel shortages, rising freight costs, and the U.S.-Iran conflict.
• The 10-year Treasury yield climbed above 5%, driven by stronger growth, higher inflation premiums, government debt funding pressures, and capital repatriation from Japan.
• A record $98.7 billion coordinated intervention by the U.S. and Japan in late July 2026 helped the yen appreciate roughly 4%, though the Bank of Japan raised rates only 25 basis points to 1.25% in September.
• Geopolitical tensions regarding the Strait of Hormuz and disruptions to Russian refining capacity have kept energy markets tight, with Brent crude up over 60% year-to-date and U.S. diesel prices surpassing $6.50 per gallon.
• Global investors purchased $942 billion in net U.S. equities in the 12 months to July 2026, the highest rolling 12-month total on record, with Q2 net purchases reaching $426 billion.
• Foreign direct investment (FDI) inflows totaled $240 billion in the first six months of 2026, a 103% increase from the prior year, with full-year inflows estimated at $480 billion.
• Pre-tax nonfinancial corporate profits rose 21% year-over-year in Q2 2026, while total after-tax corporate profits increased 18.2%, supported by surging revenues and contained unit labor costs.
• The MOVE Index, measuring Treasury market volatility, jumped to 104 in late September 2026, its highest level since the early days of the Iran war.
• The Chief Investment Office favors diversified equity exposure including value, small- and mid-caps, non-U.S. equities, and dividend-focused strategies, alongside longer-duration high-quality bonds.
• Portfolio considerations include broader diversification into industrial metals, energy, real assets, hedge funds, private markets, and global strategies to capture themes like AI, reindustrialization, and infrastructure growth.