Host: We are now halfway through 2026. How will recent events affect overall positioning for the remainder of the year? Coming up, we share some thoughts.  

From Thrivent Asset Management, welcome to Advisor’s Market360^TM, a podcast for you, the driven financial advisor. 

This episode includes audio from a recent event where our experts discussed their mid-year market outlook. This discussion features three Thrivent Asset Management experts: Steve Lowe, Chief Investment Strategist; David Spangler, Head of Model and Mixed Asset Portfolios; and Kent White, Head of Fixed Income Mutual Funds. 

Topics they’ll be discussing include: the U.S. Federal Reserve and interest rates, consumer health and geopolitical risk —and how those factors may change their overall positioning.  

Let’s listen in and hear what they have to say... 

Steve Lowe: Welcome to our Mid-year Outlook. In today's webinar, we’ll take a closer look at key market themes, discuss what’s driving performance and what it could mean for portfolio positioning in the months ahead.

I'm Steve Lowe, chief investment strategist and joining me is Kent White, head of fixed income and David Spangler, who heads up our mixed asset funds and products, which are a mix of fixed income and equities.

So, what we’re going to start off right now are just kind of market themes and concerns. It's been a very active year in terms of the economy, in terms of markets and in terms of the geopolitical landscape in particular. But let's talk briefly about what we are most focused on.  

I’ll start off. I’m watching the ability of the artificial intelligence leaders to monetize their investments and in other words, increase earnings enough to grow into the rich valuations that they have.

There’s no doubt, AI is very useful, it’s a good product and it is increasing productivity. But the growth rates embedded in earnings are very, very high. ChatGPT, the creator of OpenAI, which is expected to go public very soon, forecasted 108 compound sales growth through 2029, which is a extremely high rate. And some companies have already pulled back in using AI cause their employees were running up huge bills and they didn’t find it a very effective because the cost of tokens or the unit of computing has been very expensive. Others have not realized the productivity gains that they expected the see. I do think AI will be revolutionary, but I'm not convinced AI companies will meet the lofty expectations that have been embedded in earnings expectations. We’ve seen those concerns bubble up in the market the past few days.

Kent White: I definitely agree, Steve, the failure of AI to live up to expectations and justify the trillions of dollars being spent would be a negative for just about every market. So, aside from AI, we’re really focused on the incoming inflation data and how that is likely to impact the Fed’s decision making. If we see inflation surprise the upside, a hike or even multiple hikes might become much more likely before the end of the year.

Lowe: And the Fed is very focused on inflation right now.

White: Yeah, definitely.

Lowe: David?

David Spangler: Yeah, so the area that I’ve been concentrated on is more on the consumer. Which is to say, the consumer has been relatively resilient and strong. But there's been a very strong disconnect between what the consumer says and what the consumer is doing. Economic data has been steadily improving. Labor manufacturing, GDP, retail sales, they’ve all shown steady gains, and yet, while the economic trends have been relatively positive, consumer outlook has been at historic lows. As low as it's been in 50 years, and that’s really saying something. Lower than the dot-com bust, lower than the great financial crisis, lower than even the pandemic and COVID, and yet the consumer remains resilient. So, is it a measurement issue, with how it’s being measured -- for example, with the University of Michigan? Is it political? Is there something else that is driving it? Or, is are something that we should be looking at that lies beneath the surface? For example, our average hourly earnings have turned negative, housing affordability is an issue. Or consumer credit delinquencies are getting up to levels that are as high as we have seen. So, it's really I think, one of the things we have to look at is, what's the consumer doing versus what the consumer is saying and is there something there?

Lowe: Yeah, and those have been very different for a while. As you mentioned, part of that is very political, you can see that when the presidency changed. Some people get less optimistic, some people get more optimistic, and then inflation, just price levels are still a huge concern for them.

So, let’s start off with the economy, which has outperformed expectations pretty significantly. Data has been surprising to the upside and growth has been very solid. And one key driver is the high level of capital spending on AI. Investments in datacenters and computing. Estimates vary for the amount of that level of spending, but it's hundreds of billions annually right now and some forward estimates go above a trillion dollars a year within a couple years. Tax law changes helped spark investment more broadly than AI in manufacturing and other areas. As you mentioned, consumer spending has been very resilient. The impact of tariffs is lower, there have been tax cuts, inflation is slowing and gas prices are up, which is something consumers watch very closely. And then, the job market is starting to improve. I think broadly and very importantly, productivity is a good story. It's improving. That will help boost growth and it will help boost growth without a lot of inflation pressure.

So, inflation is our next topic, and that’s been above the Fed’s 2% target since 2021. So, a very long time that they’ve missed that target. Supply disruption to the war had an impact. Energy prices are falling now, but inflation remains very sticky. So, what are the implications of persistently high inflation on the economy and consumers?

White: The real danger of persistent inflation is that people and businesses then begin to expect it to continue into the future and they begin to factor it into future decisions and then it becomes really kind of self-reinforcing. So, so far the recent spike in inflation has not shown up in longer term inflation expectations, but that is definitely something that the Fed keeps a very close eye on. And in terms of the effect of persistent inflation on consumers it can really begin to erode their purchasing power especially if wages aren’t keeping up with those increases. So, this would in turn impact consumer spending and become a potential drag on economic growth in the future.

Lowe: For a change it would be as we saw this in the 70’s. Consumers would try to buy now and frontload demand, which will only push prices up more. So, what are your expectations on inflation? Do you expect it to recede, stay elevated?

White: You know obviously the path of inflation depends largely on a resolution to the conflict in Iran. So, we're all ready seeing some evidence of energy pass through into inflation measures and longer, the longer oil prices remain elevated the greater the risk of second order of facts on inflation. The good news right now is we’re already starting to see that reverse a little bit in terms of energy prices and as long as the Strait of Hormuz remains open it should begin to flow through the main measures of inflation and it should begin to come down. Over the medium term though, we still expect inflation to remain someone elevated and above the Fed’s 2% target. The Fed’s own projections still show that inflation is likely to be 2.5% percent by year end 2027, so still an issue.

Lowe: Yeah, and the longer it stays above their target, the less credibility the Fed has overtime.

White: Exactly

Lowe: We have a new Fed chair, Kevin Warsh. He has sounded quite hawkish on inflation, and the market is pricing about one to two hikes this year. Does that sound right to you?

White: Speaking of Fed credibility, our new Fed chair, Kevin Warsh, definitely sounded quite bit more hawkish than the market was expecting at the last Fed meeting. It wasn’t just Warsh though, nine of 18 members projected rate hikes by the end of the year and six of those projected more than one hike. The market immediately moved to price one to two rate hikes in before the end of the year. I think the next move by the Fed is likely to be a hike, but I don’t want to say it’s a given, just given some of the reversal in energy prices that we’ve seen. But since we’re expecting inflation to remain a bit elevated in the near term, then it will likely put some pressure on the Fed to do a precautionary hike. And the Fed could hike as soon as the September meeting. The Fed could also remain on hold, but I think, if inflation does remain somewhat elevated over the next few months and economy holds up, Warsh is going to lean towards building his credentials as an inflation hawk and hike at least one time.

Lowe: Yeah, I think he wants to do exactly that. He needs to establish inflation-fighting credibility for the Fed, reestablish that really.

White: I was going to say, what would you think looks different under the new Warsh Fed?

Lowe: Yeah, a lot. He’s very different than J. Powell was. I think there’s going to be a lot less communication. You saw that in a very short press release at the last Fed meeting and there’s going to be a lot less context on why they made the decision and forward-looking. And you saw fewer comments from Warsh during his opening statement before the press conference, and I think most importantly is that they’re going to pull back in forward guidance. In other words, they’re not going to tell the market necessarily where they expect the path of Fed funds to be or giving such a clear roadmap as they have in the past and markets are just have to figure this out themselves. Which I don't think is necessarily a bad thing, because the Fed is never right on where they’re gonna be anyway. I also think the Fed will be a lot less consensus-oriented with more of the same. We’ve already seen that.

So, if the Fed does hike as Kent expects, how do you expect markets to react?

Spangler: I think that if there is a hike that comes later in the in the year perhaps in December, I think it would be broadly expected by the market or anticipated by the market, right? So the Fed’s going to do a lot of work to socialize it. If that is the case, then I think that generally speaking, with the economic data and earnings remaining relatively solid, that a hike would be moderately, it would moderately impair equity’s ability to make gains, but I think that particularly it would be in the early stages and I think that as long as the economy stays relatively sound that would be well, it would be well tolerated.

I also think that context matters, which is to say that the framing. If the story is to say that we’re just taking back a couple of the insurance cuts that we had earlier let’s say, in 2005. We’re just getting back to neutral, it’s not a new major rate hiking cycle, then it will be tolerated.

Giving an example, like the last six hiking cycles, there was an initial weakness of about 6 to 15%. After the initial weakness, the markets generally recovered and managed to make good gains by the end of the cycle. An example is 2004 through 2006, where we had 17 hikes, 25 basis points apiece. 1% to 5.25%. Initially there was market weakness, but over the cycle, which was about two years the markets wore up relatively well. So initial reaction can be negative, but if the economic foundation is sound and if the consumer continues to spend, and company earnings remain strong -- which is what I would expect -- then I think ultimately equities are supported.

If it’s a new more significant rate hiking cycle, then that would be a negative emotion for the market.

Lowe: What markets don't like is surprises. And maybe we get a little bit more of that going forward with less forward guidance, but you know, they generally price it in very quickly.

So, Fed funds, which we've been talking about, is very short term rate. What do you expect for Treasury rates, you know, longer term rates from let's say 2 year to 30 year?

White: So I, I think in the short term, we're likely to see some continued upward pressure on interest rates across the curve, but especially in the short end, which is the two to five year part of the curve where rates are a lot more sensitive to the Fed rate expectation expectations. We're likely to see, as I said, a few more inflation prints that remain elevated, before they begin to come down. And the economy to show some continued strength, which should keep yields near the higher end of the recent trading range.

So that upward pressure on the front end translates into a bit more flattening of the yield curve, which means that short dated yields are increasing more than longer dated maturity yields. And we've seen this already. It's been a, we've seen it all year really. But we've seen it, especially in the last since the Fed meeting, with rate hike expectations getting priced in the front end. And actually 30 year maturities holding steady or even declining. So 30 year yields have actually benefited from the hawkish inflation tone at the recent Open Market Committee.

Lowe: Thank you. Turning to equities now. You know they they've held up pretty well despite volatility from from the war. You know what are the key factors benefiting equities?

Spangler: Yeah. Well, economic conditions have been positive. Consumer spending has been positive despite the higher energy costs. Labor market has been positive. The last three months of payrolls have been about 188,000 on average. While prime age workers overall participation rate has declined. Within the key prime age workers, you know, 25 to 54 years of age, that's actually improved, particularly for men with a lot of the onshoring and a lot of construction spending, with AI, you know. A lot more jobs in construction, manufacturing, mining, goods producers. Initial claims have actually hit a 60 year low or lowest since 1960s. I should say.

Lowe: They're incredibly low, particularly if you adjust them for the population, they're at record lows.

Spangler: Yeah. There's a lot of fiscal supports as well, right? So, we have strong, you know, lower taxes, higher tax refunds, lower withholding, accelerated depreciation, lower tariffs than were announced or anticipated as well. And I think the cumulative effects of all of that have dwarfed the higher energy costs. And obviously, there have been parts of the, you know, the consumers that have been hurt by the higher energy costs. But in aggregate and in total, the consumer, it's been very resilient and held up.

There are very strong wealth effects as well, right? Stock markets have been hitting all time highs. There's also, you know good equity still in, in homes and that's been holding, holding up consumer spending as well. So, I think that that all feeds into robust corporate earnings. They've been supported by exceptional cap-ex and high RD spending. So bring it all together. Yes, it's been a a shock in terms of energy cost, but I think it's been overwhelmed by a lot of the positive effects that are in the economy.

Lowe: Yeah, I agree. I mean, if you look at earnings, as you said they’ve been very strong and earnings are a key driver of markets, particularly over the long run. Second quarter earnings are expected to grow about 22%, which is a very healthy growth rate and sales are going up about 12% and you're seeing profit margins expand pretty significantly. And for all of this year, earnings are expected to grow about the same pace, 23%. And I think importantly, if you look at analyst estimates of, you know, their companies. They've been raising earnings estimates, particularly for, you know, areas like semiconductors, you know, and a lot of this is driven by the AI companies and the mega cap technology companies. You know, for example, in Mag 7 earnings group about 63% last quarter versus you know 17% for the other 493 companies. So, there is a concern over this concentration of earnings, but we're starting to see broadening of earnings into other areas of the market like small caps. And outside of, you know, kind of the large cap tech leaders. And that's very positive because, ultimately it’s earnings that drive markets because that's what you're really buying in in a stock.

You know, another area that has gotten a lot of tension recently is the IPO market. We've gotten questions on this. You know, SpaceX is, people know, in early June executed the largest IPO in market history. It sold about $75 billion of stock for an implied valuation of $1.7 trillion. So, very, you know, healthy valuation. The stock shot up with the IPO with strong demand and now it's well off, well off the peak but still above its offering price as of today. And, you know, there are more, you know, kind of large IPOs coming. Two artificial intelligence pioneers, OpenAI, which created ChatGPT and then Anthropic, which has the Claude AI models. They both filed paperwork to the SEC with the intention of going public this year and both are expected to be trillion dollar companies.

Yeah, but one concern I have and I think the market has is that, you know, large IPOs historically occurred, occurred near market tops. You know why is that? It's because companies go public when valuations are rich. They want a healthy valuation for their company. You can look at examples from the past, you know, Facebook stock. It fell very sharply after their IPO in 2012. Alibaba, the Chinese e-commerce and now tech firm, had a very large successful IPO in 2014, kind of at the height of Chinese, China's tech boom. And then there's a very sharp correction right after that in Chinese equities.

So there are parallels, too, between the IPO market now and the tech bubble, but a lot of differences, you know, in the, in the tech poll, the valuations are very high and there's a lot of hype about all things Internet as there has been about AI and a lot of IPOs, you know, failed. You know, pets.com is the classic example of the dot-com era. But the big difference is that a lot of the dot-coms were unprofitable. They were speculative. And today's AI rally, these are real companies, large revenue bases, strong profits and robust balance sheets.

You know, that's, AI valuations are very high and really dependent on AI working out and the company's ability to monetize it over time.

So, we talked a little bit about broadening markets, you know, AI leaders have dominated markets, you know, is that sustainable and are you seeing other area markets start to do better?

Spangler: Well, I mean. I do think they could be sustainable. We did see broadening late last year into this year and it was really across mid-cap, small-caps, value, international, all performed relatively well. They were AI beneficiaries in general. One example would be, for example Caterpillar. Caterpillar obviously doesn't have a large language model, nor does it have silicon chips, but it's very much benefiting from the AI build out and over the last year has had triple digit returns. Uh, the broadening was, was, uh, a good with what was happening earlier in the year, however, the conflict with Iran sort of reversed that trend very much.

And then by the time we got to the market bottom on March 30th, now it's a much more narrow type of a rally. It's really in strong AI themes, small caps, EM, but EM again related to the to the AI themes in a couple of countries, South Korea, Taiwan and semiconductors. Mag 7 has lagged. In fact, it's a negative on the year-end. Mid caps  have lagged, the developed international has lagged.

So it's a more narrow rally and if you actually look at it in terms like factors, it's really a FOMO rally. So fear of missing out -- very much led by momentum and very high beta. And the thing about that is that it's hard to not participate. You want to participate, but it can also end very badly as soon as the theme breaks, and it can be very spectacular and very painful.

As you're going into, you know, getting longer into that type of rally, you want to think about taking some of the risk off as hard as that can be.

But in general, I do think that we can have a return to broadening. But the broadening I think with this time would be a little bit more contained within the area of technology because that area is where we see the most robust and superior earnings growth and earnings revisions.

Lowe: Thank you. So given what we've talked about, how are you positioned in equities and why?

Spangler: Yeah. All through we've been overweight equity, been overweight risk assets. We're overweight both public and private equity. And within equity, we're overweight domestic. In domestic, we're overweight on the large caps on and on technology. Now these are relatively modest, but they are overweights that have been beneficial in our portfolio performance.

We're overweight mid caps, and  within small caps I've mentioned we're overweight overall. But we're underweight public and we're overweight private. And the reason for that is related to what you were talking about that, Steve, which is companies stay private much longer. When they do go public, they're much, much larger. And so, they kind of skip small and mid at this point. So underweight small public, overweight small private is the way, way we're positioned.

Lowe: There’s not going to be another Nvidia, which started, you know, as a small company, a public company and then grew into one of the largest companies in the world, that valuation.

Spangler: Now within international, it's a bit nuanced, right? So, developed we are underweight, we're underweight Europe, we're underweight, you know, overall in developed. Not as much as we have been in the past, but we are underweight. We're looking for an opportunity. Europe has a lot of headwinds that they have to overcome and their growth rate is restrained. They have much higher regulatory burdens, higher taxes, poor demographics.

Yet they could benefit from, you know, you know, the Iran war coming to an end and energy prices recovering. So there could be a short period of recovery within Europe and they could outperform. We would look at that as an opportunity to try to get more underweight Europe.

We're basically in terms of emerging markets equal weight, maybe it's slightly positive, but a little bit equal weight. It's had a very strong run, but it's been very much very narrow. You know a couple of companies and a couple of countries have been the dominant driver there. So we're equal weight there.

Lowe: Thank you. So valuations that they're very healthy right now if not rich particularly on AI is as a bubble and this is a question that came in to us.

Spangler: Well, valuations in general could be sort of in the eye of the beholder because there are a lot of different measures. So on some measures trailing PE, forward PE, actually they don't look very rich. In some cases, they actually look attractive. But if you look at some other types of measures, for example, earnings yield, earnings yield is the inverse of PE. So what it's measuring is how much earnings are generated per dollar invested. That's that's approximately at or equal to or less than the 10 year Treasury rate. So in other words, you're not being paid for the risk.

If you look at that type of situation, it's pretty rare over the last 25 years. If you look at free cash flow yields, they're at multi decade lows. If you look at the CAPE, cyclically adjusted PE or Shiller PE, that's very high. And ordinarily that pretends over the long term, let's say 10 years or more, poor long term equity returns.

So valuations in general though, they're very poor timing tool. Poor in the short term, relatively poor in the intermediate, a little bit better in the long term. AI spending, I think that you, we have to sort of take that in the context, right? It's been very robust. It's supporting economic growth across the economy. It's supporting very strong earnings and earnings revisions and that's positive as well. So are we in a bubble? I think that if you look at this cycle, this is a cap-ex infrastructure, you know, cycle. And cap-ex as a percent of GDP, this time, you know, thus far is a lot lower than it has in past infrastructure bubbles. So we may be, but I think that there's some, some, some more room though to run through the cycle.

Lowe: Thank you. So we've been talking about AI and equities. What what about the fixed income markets? A lot of these companies are starting to lever up pretty significantly and issue debt. What are you seeing?

White: Yeah. We haven't seen any let up whatsoever issuance in our market to fund cap AI cap-ex has actually accelerated this year. We've already seen $220 billion in AI related supply across multiple currencies and that compares to about $135 billion for the full year in 2025. So a dramatic uptick in supply and we're expecting even more supply in 2027 as the hyperscalers have been increasing their guidance for even greater cap-ex needs next year.

Lowe: And these are companies with very strong balance sheets. Traditionally, but they're starting to lever up a little bit.

White: Yeah, definitely levering up. They’re using their free, any free cash flow that they have for cap-ex and then needing to tap the debt markets or even issue equity like Google did earlier this year. So, they're tapping every source of funding that they can. But in the credit markets so far, the impact has been mostly concentrated in the hyperscalers. Debt from the top five hyperscalers has nearly doubled year over year. And yesterday we had the inaugural issuance from SpaceX issued $25 billion in our market. So it's been a lot of supply for our markets to absorb. We're seeing credit spreads widen nearly 15 basis points here today, which is pretty material for given where spreads are and their starting point and relative to other high quality industrial spreads that are pretty much largely unchanged. So it has had an impact particularly in that part of the market, the hyperscalers.

Lowe: So does credit look rich to you that it's a very tight levels meaning that the credit spread again is the extra yield you get for conversation for risk such as a default from a company. Those are very low levels.

White: Yeah, credit spreads across virtually every asset class have looked historically rich for quite a while now. We're still not being compensated very well for the risks that are out there. We would definitely have even more concerns about valuations though, if we're at these spread levels without the yield cushion that we currently have below us.

Now, all in yields are still near the highest levels we've seen since the great financial crisis.

Lowe: So we're going to address a couple of questions that came in. One is on gold. You know, why is it down despite higher inflation?

Gold has fallen from the peak into earlier this year and part of that is just interest rates are higher and gold tends to underperform when rates are increasing because gold does not produce income. And also I think it was just profit taking gold that run up for for quite a while. And as an inflation hedge, gold's record is a little bit mixed since 1970s outperformed inflation, but there have been, you know, decades where it's underperformed, particularly the 80s and the 1990s. And if you look at it over the last two years, gold’s done better than the, you know, outperformed inflation. So you made money inflation adjusted and it's actually equaled, you know, relatively equal to the return to the S&P 500.

The other question we had is what's the impact of midterm elections on markets? The short answer is not a lot. You know, the S&P kind of underperforms in the months going up to midterms and then rallies afterward and partly largely because uncertainty is reduced and then the market can price in the result. And and that's what we expect this time. Government is expected to be divided and markets like that because it supports the status quo and it minimizes odds of significant changes. It makes it easier to price in the impact.

Another question is, you know, what are you watching for a potential recession trigger?

White: Yeah. So we think that probably a recession is quite low right now, but two potential triggers out there if there were any, one would be obviously, you know, energy. It's got a lower composition in our economy than it used to, but it can still drive the economy. You know, if it were to stay up at levels that we saw earlier this year, even higher, you know, it has a direct impact on inflation and that we could see the Fed get a little bit more aggressive and potentially trigger a recession if that were the case.

The other thing that we've been talking about a little bit is just AI. If there were to be an AI bust, it wasn't panning out the way people expected it to, you could see a cap-ex correction, a market correction and then the wealth effect that David mentioned earlier today too has been supporting the economy. So that could be another potential trigger.

Lowe: Because all that spending supports other areas of economy outside of AI right?

So really quick your view on equities and outlook and then fixed income, Kent.

Spangler: Yeah. So as we know, since the March 30 bottom, it's been a very strong recovery, narrow. And as we talked about momentum and high beta, I think that we need a period of consolidation, a period of digestion here. There may even be some drawdowns. But I think by the time you get closer to the end of the year, the resiliency of the consumer, the resiliency of the economy, jobs, all the fiscal supports … that will encourage the market higher by year end, but I do think that there needs to be a period of digestion here.

Lowe: Consolidation.

Spangler: Yeah.

Lowe: And Kent?

White: Yeah, just to repeat a theme I think we've had for some time now, all-in yields in fixed income remain quite attractive, even though the credit spread component of those yields remains very tight. So, at these yield levels, you know, fixed income provides diversification and a good hedge against any kind of market drawdown that might, we might see. We also continue to like municipal bonds where the after tax yields are very attractive for high quality asset class. So we still like that.

Lowe: Yeah, I agree with you after tax deals are very attractive.

Host: That wraps up our mid-year outlook. Once again, we would like to thank Steve Lowe, David Spangler and Kent White for their insights. What did you think of this episode? Email us at podcast@thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360 and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now. 

All information and representations herein are as of 6/24/2026 unless otherwise noted. 

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. 

This podcast refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com. 

Past performance is not necessarily indicative of future results. 

Investing involves risks, including the possible loss of principal. 

The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan.

Thrivent Distributors, LLC, a registered broker-dealer and member FINRA, is the distributor for Thrivent Mutual Funds. Asset management services provided by Thrivent Asset Management, LLC, an SEC-registered investment adviser. Thrivent Distributors, LLC, and Thrivent Asset Management, LLC are subsidiaries of Thrivent, the marketing name for Thrivent Financial for Lutherans.