Aquarian Midyear Outlook 2026

Volatility was the defining feature of the first half of 2026, as markets priced for perfection bowed under repeated shocks, but remained surprisingly resilient overall – even as widening cracks below the surface threatened to pierce the increasingly fragile veil of exuberance. This seemingly untamable elation has undoubtedly paralyzed those who follow the value-investing ethos of Benjamin Graham as record valuations and spreads render the notion of a ‘margin of safety’ nonexistent across asset classes. Of course, only time will tell whether centuries of financial theory and mean reversion will prevail once again or if the investing herd will finally celebrate a victory in proving that “this time is different.”

The first half of the year showcased a widening rift between resilient macro indicators and shaky underlying conditions. The economic environment remained strong overall but grew increasingly reliant upon upper-income consumption and corporate earnings from a narrow cohort of companies which, in turn, depended heavily upon debt-fueled capital spending on Artificial Intelligence (“AI”) infrastructure from an equally narrow cohort of companies financed, in many cases, by the very companies selling that AI infrastructure. At the same time, structural pressures are building beneath the surface, including rising financial strain among lower-income consumers, mounting concentration in equity markets exacerbated by the AI boom, emerging stress in corporate credit markets linked to asset-light Software and Services exposures, rate uncertainty driven by both policy and fiscal dynamics, and persistent geopolitical risk.

Against this backdrop, consumer resilience remains a stabilizing force in the aggregate, but that stability is becoming progressively more concentrated – and, therefore, more fragile. Aggregate consumption continues to hold above trend, supported primarily by higher-income households benefiting from sustained asset appreciation courtesy of a historic equity rally. In contrast, lower-income consumers – already contending with unsustainable debt loads and rising delinquencies – now face further inflationary headwinds for basic necessities from energy supply chain disruptions and rising electricity bills courtesy of the AI buildout.

Sticky inflation seems poised to cement a weakening of the lower-end consumer going forward. For now, though, tax refund-related liquidity is likely offsetting pronounced deterioration in consumer credit metrics. Higher tax refunds stemming from the One Big Beautiful Bill Act (“OBBBA”) are providing a buffer against inflationary pressures felt most immediately in the recent rise in gas prices. This support is inevitably transient and looks set to fade just as inflationary pressures remain resilient. At the same time, other consumer liquidity buffers like credit cards look increasingly tapped out, particularly as subprime consumers show record-high utilization.