• The CAPE Ratio suggests stocks remain richly valued, which may weigh on future returns and leave the market more vulnerable to corrections

• A performance-based measure, however, indicates that investor enthusiasm remains below levels historically associated with extreme speculative excess

• Taken together, the signals suggest a market that appears expensive by historical standards, but not unusually euphoric.

A lot has changed in financial markets and the economy over the past six months, but our Excess Return Oscillator (ERO) for the S&P 500 Index continues to tell a broadly similar story. Despite a rebound in equity prices since the April low, shifting expectations for Federal Reserve policy, and ongoing debate over the outlook for growth and inflation, the ERO remains in the neutral zone and close to the level that prevailed when we last reviewed the indicator in late April.

Although stocks appear richly valued by measures such as the Shiller Cyclically Adjusted Price-Earnings (CAPE) Ratio, there’s a case for arguing that speculative excess hasn’t surged. While elevated valuations may leave equities more vulnerable to bouts of volatility or correction, the ERO suggests that market sentiment has yet to reach the degree of irrational exuberance that has sometimes accompanied major market peaks in the past.

Valuation is not a single concept, and different measures can paint very different pictures of market risk. The current environment is a good example. Traditional metrics such as the CAPE Ratio continue to indicate that U.S. equities are trading at historically elevated valuations. From that perspective, future S&P 500 returns may be constrained, and the market could remain vulnerable to periodic corrections and extended stretches of below-average performance.

TMC Research’s ERO offers a different perspective. Rather than focusing solely on valuation, the indicator evaluates market performance relative to longer-term trends. Specifically, ERO compares the S&P 500’s rolling five-year return with its rolling five-year median and expresses the result as a z-score, indicating how many standard deviations returns are above or below their historical average.

Despite the strong rebound in share prices since April and improving sentiment about the economic outlook, ERO remains within its neutral range, as shown by the gray zone in the top chart above—essentially unchanged from April’s update. Although CAPE and similar metrics suggest that equities continue to trade at elevated valuations, ERO indicates that investor enthusiasm remains below levels that have historically been associated with the most speculative market environments. From that perspective, the indicator points to a market that may be fully valued, but not necessarily one characterized by the degree of optimism that has often preceded major market tops.

A possible reason that ERO is not signaling speculative excess is that investors continue to tie elevated valuations to expectations for stronger earnings growth, particularly from the optimism tied to the adoption of artificial intelligence (AI). To the extent that stock prices are being supported by anticipated improvements in profitability rather than purely by investor enthusiasm, the market may appear expensive without exhibiting the hallmarks of a speculative mania.

Regardless of the reasons, the divergence between the two indicators largely reflects what each is designed to measure. CAPE evaluates valuation through the lens of fundamentals, comparing current prices with a decade of inflation-adjusted earnings. By that measure, today’s market appears expensive relative to history. ERO, by contrast, measures the extent to which market performance has diverged from its longer-term trend.

In effect, CAPE asks whether stocks are richly priced relative to earnings, while ERO asks whether investor enthusiasm has pushed returns to unusually elevated levels in relative terms vs. history.

Neither measure should be viewed as a timing tool, and both have notable limitations when forecasting short-term market movements. Even so, ERO’s historical record suggests that it can provide useful context for evaluating sentiment-related risks. Periods in which the indicator has approached or exceeded a reading of +1 have sometimes coincided with unusually optimistic market environments and, in some cases, have been followed by significant market peaks.

The fact that ERO remains comfortably below that threshold today suggests that, despite elevated valuations and the possibility of more modest returns going forward, market psychology may not yet have reached the speculative extremes seen at some previous market highs.

For investors, the takeaway is less a warning of imminent danger and more a reminder that elevated valuations and subdued speculative sentiment can coexist for extended periods. In such an environment, maintaining realistic return expectations, focusing on rebalancing asset allocation weights, and monitoring changes in investor behavior may be more informative than attempting to anticipate the timing of the next major market turning point.

• The yield curve has steepened, but the reasons matter more than the shape itself

• The curve suggests recession fears have eased, but uncertainty around growth and inflation persists

• Elevated long-term yields argue for caution on duration with bond strategies

The Treasury yield curve has been one of the most closely watched indicators in finance over the past several years. First it flattened, then it inverted, and now it has begun to steepen again. For many investors, a steeper yield curve signals better economic times ahead. The reality is more nuanced.

The yield curve measures the gap between short- and long-term Treasury yields. Under normal circumstances, long-term yields are higher than short-term yields, reflecting expectations for economic growth and inflation. When the curve inverts, with short-term yields exceeding long-term yields, it often signals a forecast for slower growth and future Federal Reserve rate cuts.

While the curve’s shape can provide valuable clues about investor sentiment, the forces driving changes in the curve matter just as much. The return of an upward-sloping curve over the past year suggests that the bond market has moved away from pricing weaker growth (if not outright recession) and Fed rate cuts. Instead, investors appear to be assigning greater odds to firmer growth, more persistent inflation, and higher long-term borrowing costs.

While it is clear that the curve has steepened, much of the debate today centers on whether the move reflects a “bull steepener” or a “bear steepener.”

A bull steepener typically occurs when short-term yields fall faster than long-term yields, often because investors expect the Federal Reserve to cut interest rates in response to slowing economic growth. Historically, yield-curve inversions have often unwound through this pattern as markets begin pricing easier monetary policy. In many cases, the curve steepens not because the economic outlook is improving, but because investors anticipate weaker growth and lower policy rates — a scenario that favors bonds.

A bear steepener, by contrast, occurs when long-term yields rise faster than short-term yields. This can reflect stronger growth expectations, persistent inflation concerns, rising Treasury issuance, or an increase in the term premium investors demand to hold longer-dated bonds. In that scenario, a steeper curve may signal a reassessment of inflation, fiscal, or long-term interest-rate risks rather than concern about an approaching downturn. For bond investors, the result can be renewed pressure on longer-duration bonds as yields move higher.

The challenge for investors is that today’s market appears to contain elements of both scenarios. On one hand, investors still expect the Federal Reserve to cut rates eventually, particularly if the conflict with Iran de-escalates and energy prices ease. Expectations for rate cuts have shifted with developments in the conflict, in part because oil prices can influence the inflation outlook. Meanwhile, long-term yields have remained elevated as economic growth has proven resilient, energy-related inflation risks persist, and concerns about large federal deficits and rising Treasury issuance have increased the compensation investors require to hold longer-term bonds.

For now, the recent yield-curve steepening appears to reflect elevated long-term yields. The bond market today appears less focused on an imminent recession and more concerned about the possibility that economic growth, inflation, interest rates, and government borrowing costs could remain higher than many investors previously anticipated.

The broader lesson is that the yield curve should not be viewed as a standalone forecast. It is better understood as a reflection of competing forces shaping the economy and financial markets. The same curve shape can emerge for very different reasons, and those differences can have important implications for stocks, bonds, and portfolio strategy.

For fixed-income investors, today’s steeper yield curve may argue for caution on duration. Short- and intermediate-term bonds currently offer relatively attractive yields compared with long-term rates. For example, the 10-year yield traded at just 10 basis points above the 5-year maturity on Oct. 19 — a relatively thin premium.

Unless investors have strong conviction that growth and inflation will slow meaningfully, extending maturities may not provide sufficient compensation for the additional interest-rate risk. But if growth weakens or the Fed cuts more than expected at some point, longer-dated bonds would benefit, and investors who favor shorter maturities will face reinvestment risk when yields fall.

Current estimates do not point to a sharp slowdown in economic activity in the immediate future. The Atlanta Fed’s GDPNow model, for example, projects that third-quarter GDP growth will run at a 3.5% annualized pace, up from 2.2% in the second quarter (as of Oct. 20).

The yield curve’s recession signal has faded over the past year, but neither is it signaling an all-clear. Instead, it reflects a market wrestling with the possibility that economic growth, inflation, and interest rates may remain higher than previously forecast.

For investors, understanding what is driving the curve may be more important than the curve’s shape alone.

• Five of six trend indicators continue to support a bullish outlook for U.S. stocks

• Technology shares remain a key source of market strength and leadership

• One caution flag is growing investor preference for value stocks, which may signal a more defensive tone

History suggests that lofty valuations should weigh on future returns, yet that warning has persisted in recent years while the bull market has continued to push higher. That doesn’t mean market cycles have been repealed, only that predicting when they will peak remains as difficult as ever. Given the inherent uncertainty of the future, a more practical approach is to track market behavior in real time and watch for early signs that leadership or risk appetite is weakening.

Rather than relying on forecasts, we can evaluate the bull market through several lenses to gauge whether the underlying trend is showing signs of deterioration. Because no single indicator tells the whole story, the following charts examine a range of trend measures that collectively provide context for judging the market’s underlying health.

Based on the trend measures reviewed below, the bull market appears to remain on solid footing. That is no guarantee of future performance, but the balance of the evidence for now still suggests that upward momentum continues to dominate. One of the six indicators is beginning to flash a cautionary signal that could prove significant, but for now it remains an outlier within an otherwise constructive set of market trends.

The charts below use ETFs to evaluate market conditions, focusing on a set of ratios that profile investor sentiment. In all cases, rising values suggest a bullish bias, and vice versa.

Let’s start with the elephant on Wall Street: technology stocks. A crucial driver of the market’s gains in recent years has been the enthusiasm surrounding artificial intelligence (AI), which has lit a fire under technology shares (XLK). As a result, the sector has significantly outperformed the broader market benchmark (SPY). Conventional wisdom holds that as long as tech momentum remains positive, it may continue to provide a tailwind for the market overall. By that measure, the upside bias for tech still appears quite strong.

Another way to analyze the influence of technology, whether positive or negative, is to compare the market benchmark (SPY), which is market-cap weighted and heavily influenced by large-cap tech shares, with the same benchmark excluding technology stocks (SPXT). As the next chart shows, this ratio continues to reflect a strong upside bias, offering further evidence that the bullish influence of tech remains intact, at least for now.

Looking for signs of distress through the lens of consumer staples stocks (XLP) also fails to uncover meaningful warning signs. The market benchmark (SPY) continues to outperform this defensive bucket, suggesting investors remain comfortable favoring economically sensitive sectors over more traditionally defensive corners of the market. When this ratio starts to trend lower on a persistent basis, that would signal a shift in sentiment.

A similarly upbeat trend appears when comparing U.S. stocks (SPY) with a portfolio of low-volatility shares (SPLV), another traditionally defensive segment of the equity market.

One potential warning sign: the recent weakness in growth stocks (VUG) relative to value shares (VTV). The downturn in the trend shown in the chart below suggests that demand for value stocks, often viewed as a lower-risk equity refuge, is increasing, as reflected by the decline in the VUG:VTV ratio. If this downside trend continues to strengthen, it may indicate that investors are becoming more cautious about the market outlook, which could start to weigh on the ratios listed above.

Despite the relative strength of value stocks, bullish sentiment still appears to have the upper hand. How long that lasts is anyone’s guess. Forecasting the next turning point is difficult, if not impossible. A reasonable alternative is to monitor the market’s trend profile from multiple perspectives and let the weight of the evidence guide expectations. For now, that evidence continues to favor the bulls, although the shift toward value stocks is a reminder that investors should remain alert for signs that the market’s leadership and risk appetite may be starting to change.

• Weak payrolls reflect slower labor-force growth, not necessarily weaker demand

• Atlanta and Dallas Fed data point to firmer economic growth

• Higher yields are a risk, but economic momentum remains strong

U.S. Treasury yields continue to trade at or near multi-decade highs, and economists cite several reasons, including inflation concerns tied to elevated energy prices and the federal government’s mounting debt burden. Another factor is the so-called crowding-out effect from stronger private-sector credit demand, fueled by AI-related debt issuance to finance the rush to build data centers. The recent pickup in economic growth is likely contributing as well, although that factor may be overlooked.

Last week’s payrolls report, at first glance, appears to challenge the narrative of economic strength. The number of new jobs added in September rose far less than analysts expected, increasing by just 29,000. That’s near the low end of monthly gains posted so far in 2026 and, by historical standards, suggests elevated recession risk.

But weak payroll growth is less alarming than it would have been in the past because the labor force is expanding at a slower rate. With immigration running well below the surge seen in recent years and demographic trends limiting workforce growth, the economy needs fewer new jobs each month to keep unemployment stable. As a result, payroll gains that might once have signaled weakening labor demand can now be consistent with a labor market that remains broadly in balance.

Indeed, the unemployment rate ticked up to 4.2% last month, but that remains close to the lowest level in decades. Weekly jobless claims are also signaling limited labor-market stress. New filings for unemployment benefits dipped below 200,000 in late September, near the lowest levels in decades.

Meanwhile, the economy is showing signs of robust growth. The Atlanta Fed’s nowcast for the third-quarter GDP report due on Oct. 29 projects real (inflation-adjusted) growth of 3.7% (as of Oct. 1) at an annualized rate, a solid improvement from Q2’s 2.2% increase. If correct, the increase will mark the strongest pace in a year.

The Dallas Fed’s Weekly Economic Index (WEI) is also pointing to stronger growth. The latest estimate indicates year-over-year GDP growth of 2.9% as of Sept. 26, comfortably above the 2.2% expansion recorded through Q2.

Viewed through the lens of historical payroll benchmarks, by contrast, the economy appears to be slowing. But some economists argue that labor-supply constraints, rather than weakening demand, may be driving the softer job gains.

By some estimates, the breakeven for payrolls has fallen to as low as 10,000 per month, a fraction of the 150,000-200,000 range that several analysts estimated in the years immediately following the pandemic. By that measure, September’s 29,000 increase in jobs appears sufficient to keep the labor market on stable footing.

TMC Research’s Recession Probability Indicator (RPI) continues to signal low recession risk for the U.S. Consistent with our previous update in early September, the estimated probability of a downturn remains below 5%, based on data through Oct. 1. (RPI aggregates and processes data from three business-cycle indicators published by regional Federal Reserve banks — see here for details.)

A number of risks could challenge the economy in the months ahead, including the possibility of further increases in interest rates. The U.S. 10-year Treasury yield, a widely watched benchmark, closed at 5.31% on Monday, marking a new multi-decade high.

Higher rates raise borrowing costs for households and businesses, which can weigh on consumer spending, investment, and hiring. They also increase debt-service costs for governments (a non-trivial factor as federal debt balloons) and can tighten financial conditions.

The main concern is that the effects of higher rates build over time and the Federal Reserve decides that it needs to continue raising rates to tame inflation that’s still running well above the central bank’s 2% target. Economic growth has remained resilient so far, but monetary policy works with a lag. If rates push higher and remain elevated for an extended period, the cumulative impact could gradually slow spending and investment, raising the risk of a broader economic slowdown.

For now, the economy appears resilient in the face of higher borrowing costs. In that respect, rising Treasury yields may be signaling a stronger growth outlook as much as concern about inflation and government debt.

• Rising Treasury yields are increasing competition for stocks and raising the market’s hurdle rate

• Investors seem to remain focused on strong earnings growth, with AI viewed as a key driver of future profits

• Elevated equity-market valuations and high expectations for earnings growth leave the market with little room for negative surprises

The U.S. stock market has remained resilient this year despite a series of headwinds. More recently, rising interest rates and renewed inflation concerns have come to the forefront, setting the stage for another test of the bull market’s durability.

The U.S. 10-year Treasury yield is trading at 5.24%, the highest level since 2007, increasing the relative attractiveness of bonds and potentially drawing capital away from equities at the margin. So far, however, the stock market has remained steady, trading in a relatively tight range over the past two months and holding near a record high, based on the S&P 500 Index.

Stock market optimists remain focused on the economy’s resilience, the prospect that inflation will stay contained enough to prevent a sustained rise in interest rates, and continued growth in corporate profits. They also see artificial intelligence as a powerful long-term catalyst for growth, arguing that AI-driven gains in productivity, efficiency, and new revenue opportunities could drive earnings higher and help justify elevated equity valuations despite a more challenging interest-rate environment.

FactSet provides support for the optimists in its latest analysis of the outlook for corporate earnings: “For Q3 2026, the estimated (year-over-year) earnings growth rate for the S&P 500 is 29.1%. If 29.1% is the actual growth rate for the quarter, it will mark the third-straight quarter of earnings growth above 25% for the index.”

The market appears to be pricing in a near-best-case scenario. If so, the margin for disappointment may be slim. Consider, for instance, the rolling 10-year annualized return for the S&P 500, which is roughly 13.6%, based on month-end data. That’s close to the strongest reading in decades. Although strong performance can persist for extended periods, the stock market’s cyclical history suggests that vulnerability to disappointment may be higher than usual.

The list of potential trouble spots for market sentiment is lengthy, ranging from the possibility of weaker-than-expected earnings results to inflation that proves hotter and more persistent than currently expected, prompting the Federal Reserve to continue raising interest rates.

For another perspective on the stock market’s sensitivity to adverse developments, consider current trailing performance across a range of investment horizons. As the chart below highlights, the S&P 500’s current return is well above the historical “normal” range for most rolling periods since 1970.

TMC Research's current estimate of a 5.6% annualized return for the S&P 500 over the next 10 years remains well below the market's trailing 10-year performance, based on the average forecast from five models (defined below).

Our current 10-year market forecast is unchanged from the previous estimate in July. The S&P 500 has moved modestly higher since that update.

None of this necessarily implies that the current bull market is nearing an end. Momentum, strong earnings growth, and enthusiasm surrounding artificial intelligence could continue to support equities. But with valuations elevated, Treasury yields near multi-year highs, and investor expectations broadly optimistic, the balance of risks appears somewhat less favorable than it has been in recent years. As a result, future returns may depend less on expanding valuations and more on the market’s ability to deliver the robust earnings growth that investors currently expect.

With so much good news already reflected in prices, merely meeting expectations may no longer be enough. Beating them may be required at this stage. Even modest disappointments could prove more consequential than usual given current valuations.

A related risk factor that could play a role in raising market sensitivity to weaker-than-expecting earnings news: valuations are already near historically elevated levels. The Shiller P-E Ratio, for example, is currently 41, just below its peak of 44 in late 1999, which marked the highest reading in the indicator’s history dating to the late-19th century.

In a market priced for exceptional outcomes, anything less than exceptional may be a problem.

Here’s a quick review of each of the five models used to generate the average forecast above:

CAPE Ratio Model: this stock market valuation indicator, maintained by Professor Robert Shiller, is calculated using real earnings per share for the S&P 500 based on a rolling 10-year window. TMC Research uses the CAPE ratio to generate an implied return for the stock market.

Earnings Yield Model: the stock market’s implied ex ante performance is derived from the S&P 500’s earning yield, defined as the inverse of the price-to-earnings ratio.

ARIMA Model: In contrast with the two models above, which use valuation to infer future return, this estimate uses statistical analysis to generate a forecast. An autoregressive integrated moving average (ARIMA) model is a type of regression analysis that’s run on rolling window of the market’s return history to estimate future results.

Bayesian Model: This statistical model uses lags as a basis for updating so-called “prior beliefs” on a rolling basis to estimate the effects of previous effects on the S&P 500 to forecast return.

Average Historical Return Model: This naïve estimate is a simple average of all the rolling 10-year returns since 1960.

• The Fed’s first rate hike in three years signals a shift toward tighter policy, but monetary conditions remain modestly accommodative

• Strong GDP, payrolls, and retail sales data suggest the economy currently requires little, if any, additional policy support while inflation runs above Fed’s target

• Fed funds futures, Treasury yields, and TMC Research’s Fed Funds Model all indicate that additional rate hikes remain likely

The Federal Reserve raised its target interest rate last week for the first time in three years in reaction to heightened concerns about the inflation outlook. The quarter-point increase is a small step toward taming pricing pressure. TMC Research’s Fed Funds Model continues to estimate that monetary policy has a modestly dovish bias, which implies that additional rounds of tightening are coming.

Our model indicated that policy was moderately hawkish for nearly three years before shifting to an accommodative bias in late spring. This change suggested that the Fed’s stance had become overly stimulative, especially as the conflict with Iran lifted energy prices and put upward pressure on inflation.

The model is currently estimating that the effective fed funds rate is more than a half-percentage point below a neutral level. The reading suggests that policy is still providing stimulus to the economy and providing little, if any, headwind for lowering inflation.

Nowcasts for the upcoming third-quarter GDP report (due in late October) suggest that accommodative monetary policy is unnecessary. The Atlanta Fed’s GDPNow model, for example, is estimating that Q3 output will rise 5.1% at a seasonally adjusted real (inflation-adjusted) pace, a sharp acceleration from Q2’s modest 1.5% increase.

Recent economic updates based on actual data also paint an upbeat picture. Payrolls roared higher in August, rising 162,000, the strongest monthly gain since March. Retail sales also picked up in August, rising 1.2%, marking the sharpest increase in five months.

While recent economic data have been upbeat, inflation is still well above the Fed’s 2% target. The Personal Consumption Expenditures (PCE) Price Index for August, the Fed’s preferred inflation yardstick, was running above 3% in year-over-year terms for both headline and core measures.

Federal Reserve Chairman Kevin Warsh called out the mismatch, noting: “The plain fact is that inflation is too high and has been for too long,” he told reporters after last week’s rate hike announcement. “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”

It is no surprise, then, that the market is expecting one or more additional rate hikes in the near future. Fed funds futures are pricing in high odds that the central bank will announce at least one additional hike by the end of the year.

Similarly, the policy-sensitive U.S. 2-year yield, trading at 4.75% yesterday, continues to signal that the Fed’s substantially lower 3.75% to 4.0% target range is on track to rise.

Short-term yields in the days since the Fed hike seem to agree. Consider the 1-month Treasury rate, a useful market-based estimate of pending Fed policy changes. When the 50-day average yield on this cash proxy decisively rose above the 200-day trend in early September, shortly ahead of the Fed meeting, that was another probabilistic signal that a rate hike appeared imminent. Similarly, when the 50-day trend reverses and falls below its longer-term counterpart, the flip will be viewed in some corners as an indication that the market is looking for a dovish pivot, or at least an end to hikes.

Taken together, the Fed Funds Model, fed funds futures pricing, and the behavior of Treasury yields continue to suggest a central bank that is not yet finished tightening. While last week’s quarter-point increase marked a shift toward less accommodative policy, financial conditions remain relatively supportive of economic growth and, by extension, inflation risk.

The key question now is whether incoming inflation data will show sufficient moderation to alter that outlook. If inflation pressures begin to ease decisively, market expectations for additional tightening could quickly retreat. At the moment, both policymakers and market-based indicators appear skeptical that inflation is on a sustainable path back toward the Fed’s target, based on PCE data.

A key takeaway may be not that the Fed has begun raising rates, but that policy still doesn’t appear restrictive. Despite the latest hike, TMC Research’s Fed Funds Model continues to indicate that monetary conditions remain modestly accommodative. Unless inflation slows more dramatically than current trends suggest, that assessment implies the Fed may have further work to do before policy reaches a genuinely neutral, let alone restrictive, stance.

• Personal experiences may influence economic expectations as much as new information

• Stress and memory may shape how investors perceive inflation and market risks

• A disciplined investment process generally helps separate emotions from financial decisions

Investors spend a lot of time monitoring market volatility, interest rates, and inflation. And for good reason: those variables directly impact financial markets in the near term. But new research reveals that one underappreciated behavioral challenge can arise from a far less obvious source: our own memories and personal stress.

In a study titled “The Psychology of Macroeconomic Expectations”, a team of researchers from several institutions, including Oxford and Harvard universities, challenge the traditional belief that people form economic views purely by analyzing data. Instead, the authors demonstrate that emotions, recent personal experiences, and selective memory often influence how people forecast inflation, housing prices, and broader economic conditions.

The research echoes what economist John Maynard Keynes observed in his 1921 book A Treatise on Probability, which argues that when the facts are murky, people tend to piece together beliefs from imperfect and shifting evidence rather than strictly applying the laws of probability. Keynes expanded on the idea in The General Theory (1936), coining the phrase “animal spirits” to describe the impulses and emotions that drive human behavior.

The new study tests this mechanism by asking participants to recall recent personal financial or health-related hardships before reporting their economic outlook. The results are striking: respondents who were prompted to recall personal adversities reported different inflation and housing-market expectations, despite receiving no new economic information.

Confusing Personal Stress with Market Risk

This research, which draws on results from a survey of more than 4,000 households, suggests why two intelligent, well-informed investors may interpret the same economic information in different ways. Their expectations are shaped not just by market fundamentals, but by the personal experiences that come most readily to mind.

As an example, the authors observe: “The feeling of personal financial distress helps imagine high future inflation.” In other words, personal stress can influence how people perceive future economic conditions.

One implication is that during periods of life changes or business challenges, emotional context can cue associative memories that influence how investors interpret economic and market conditions and expectations.

The paper highlights a reason people may arrive at different assessments of economic risks. Even when an investor is trying to make a rational forecast, emotional context can activate emotionally charged memories.

Note, too, that behavioral risk rarely stays isolated. The authors also describe a “confidence multiplier,” in which the behavior of some individuals influences the economic outlook of others through shared context and narratives. This raises the possibility that when media outlets and market participants react to emotional cues, their actions may reinforce prevailing narratives and amplify shifts in sentiment.

The researchers used word clouds to visualize how people explain their economic outlook. Responses reflecting personal hardships and negative experiences feature more references to money, hardship, and making ends meet (left side of graphic below), while more neutral responses focus on broader economic factors such as interest rates, supply, and demand (right side). The findings suggest that personal experiences can influence how people interpret economic conditions and form expectations about the future.

Why This Matters for Investors

Although the paper doesn’t formally address investing or portfolio strategy, the findings tend to suggest a possible behavioral channel through which personal experiences may influence investment decisions.

On that basis, the research highlights a core challenge for long-term investors: unexamined personal experiences may quietly hijack financial decisions in ways that have nothing to do with market reality.

After a financial setback, an investor may become excessively cautious. Following a period of strong gains, another investor may become overly optimistic. Neither response is necessarily driven by objective analysis. Instead, recent experiences may be influencing how future outcomes are perceived.

The research suggests that beliefs and economic narratives are often shaped by context and memory, not just statistics.

The Value of a Disciplined Process

This is where professional wealth management can provide meaningful value.

A thoughtful advisory relationship is about more than portfolio construction. It is also a framework for maintaining perspective during periods of market uncertainty. By creating a disciplined investment process and focusing decisions on long-term goals, investors may be better positioned to avoid making significant changes based solely on short-term fears or recent experiences.

The goal is not to eliminate emotions, which is impossible. The objective is to ensure that important financial decisions are guided by a well-designed plan rather than by whatever experience happens to be most salient at the moment.

Building a More Resilient Wealth Strategy

Successful investing requires more than identifying attractive opportunities. It also requires a framework that helps investors:

• Focus on long-term objectives rather than short-term market noise

• Distinguish between changing market fundamentals and changing emotions

• Maintain discipline during periods of uncertainty

• Avoid reactionary decisions that can undermine long-term compounding

A sound wealth-management strategy recognizes that financial success depends on both portfolio management and investor behavior.

The Bottom Line

Markets will always be uncertain. But one of the most important lessons from behavioral research is that our perceptions of the future are often shaped by experiences from the past.

The most effective wealth-management relationships help investors navigate both challenges: managing portfolios and managing their decision-making. Because over the long run, building wealth is not just about understanding the markets. It’s also about understanding ourselves.

• The upcoming consumer inflation report for August could influence the Fed’s interest-rate decision at next week’s policy meeting

• Most forecasts point to steady inflation, but rising services-sector costs raise the risk of an upside surprise

• Persistent inflation and mounting fiscal concerns suggest price pressures may remain higher for longer

This Friday’s consumer inflation report will be closely watched on Wall Street for clues about whether the Federal Reserve will raise interest rates at next week’s policy meeting. Although inflation is no longer accelerating, it remains relatively sticky and still well above the Fed’s 2% target, a gap that suggests the central bank may soon resume tightening monetary policy.

Several forecasts indicate that both headline and core measures of the Consumer Price Index (CPI) will remain essentially unchanged. Meanwhile, survey data on prices paid in the services sector – the dominant driver of US economic activity -- suggest that the report could come in hotter than expected.

Here’s a quick rundown of some of the metrics informing expectations for this week’s CPI release:

Cleveland Fed’s CPI nowcast: The regional Fed bank estimates that pricing pressures will remain sticky at current levels, meaning inflation will stay above the Fed’s 2% target. Friday’s August CPI report is projected to hold steady at roughly a 3.4% year-over-year pace, while core CPI is expected to tick down to 2.4%. September nowcasts point to more of the same.

Market-based inflation estimates: A pair of forecasts derived from market data suggests that the headline pace of CPI (red line in the chart below) will decelerate from the mid-3% year-over-year range and move closer to the low-to-mid-2% range in the near term. A similar outlook is implied for core CPI, which excludes volatile food and energy prices. The rationale for using core CPI as a benchmark is that it provides a more reliable measure of the underlying trend, and on that basis these forecasts suggest that the recent gap between headline and core inflation will narrow in the months ahead.

The 5-Year / 5-Year Forward Inflation Expectation Rate reflects investors’ expectations for average inflation over the five-year period that begins five years from now. The indicator currently stands near 2.3%, suggesting that financial markets generally expect long-term inflation to remain relatively close to the Federal Reserve’s 2% target despite ongoing near-term inflation concerns.

The 5-Year Breakeven Inflation Rate is considered a proxy for investors’ expectations for average inflation over the next five years, based on the yield spread between conventional Treasury securities and Treasury Inflation-Protected Securities (TIPS). Currently near 2.4%, the estimate suggests that markets expect inflation to remain above the Fed’s 2% target in the medium term, though well below the elevated inflation rates experienced in recent years.

ISM Services Index – Prices Paid: One sign that Friday’s CPI data could surprise to the upside is the recent upswing in this survey-based measure (blue line in the chart below), which tracks whether firms in the services sector are paying higher or lower prices for goods and services. The index is considered a leading indicator of inflation, and the recent increase points to the possibility that inflation may stay elevated for longer. The August reading of 72.6 marks the highest level in more than three years, well above the neutral 50 threshold, implying an above-average risk that incoming CPI data could come in hotter than expected and perhaps rise further relative to the recent trend.

There are several additional factors that could potentially influence inflation in the months ahead, including the ongoing Iran conflict. A durable peace agreement, if achieved, could provide a meaningful disinflationary impulse by increasing energy exports and lowering oil prices, a key driver of headline inflation metrics. The escalation in fighting this week, however, suggests that peace will remain elusive in the near term.

Even if tensions in the Middle East ease, the bond market is becoming increasingly sensitive to U.S. fiscal risks, which is adding to inflation concerns. The prospects for the federal government to meaningfully address its debt burden remain limited, as political incentives continue to favor higher spending and lower taxes over long-term fiscal restraint. Despite growing concern about rising deficits and debt, there is little evidence that policymakers are prepared to make the difficult fiscal adjustments necessary to materially improve the nation’s long-run outlook.

For now, that leaves investors balancing competing forces: inflation that has stabilized but remains stubbornly above target, and a fiscal backdrop that risks keeping long-term inflation expectations elevated. Friday’s CPI report is unlikely to settle that debate, but it could provide an important signal about whether the economy is moving closer to price stability or entering a period of renewed inflation pressures.

• U.S. recession risk remains low, according to TMC Research’s business‑cycle indicator

• Consumer spending and hiring have cooled, but have not broadly deteriorated

• The hiring slowdown likely reflects labor‑force constraints, not rising business‑cycle risk

Despite a year packed with geopolitical flare‑ups, market tremors, and policy whiplash, a surprising constant has endured: the U.S. economy keeps powering forward. That’s not to say all is well. Several recent developments could turn problematic in the months ahead. Even so, TMC Research’s Recession Probability Indicator (RPI) continues to show low odds that an NBER‑defined contraction is imminent — let alone already underway.

Today’s update echoes RPI’s low‑risk estimates in previous reports this year — in early March (just a few days into the war with Iran) and in mid‑June. With the benefit of hindsight, it’s clear that both estimates were spot‑on. That’s no assurance that today’s low‑risk reading will prevail, but the data suggest that a growth bias continued through late‑August. (RPI aggregates and processes data from three business‑cycle indicators published by regional Fed banks — see here for details.)

Recent economic news has been mixed, highlighting areas to monitor in the months ahead for possible warning signs, including rising Treasury yields, which reflects a mix of concerns, including inflation and the unchecked rise in US government debt.

The recent slowdown in consumer spending also deserves close attention. After accelerating earlier in the year, month‑to‑month growth in personal consumption expenditures downshifted in June and July, rising 0.2% last month — the slowest since January. The softer growth in spending has eased to the lower end of the range for the past year, which suggests that if the deceleration continues it could mark a warning sign for the consumer sector.

Hiring at U.S. companies has also slowed in recent months. Private nonfarm payrolls rose by a modest 30,000 in July, matching the gain in June. The increase marks the slowest pace of job creation since February. Today’s estimate for private payrolls in August via ADP suggests that hiring remained sluggish through last month.

Economists are split on what the recent slowdown in payroll growth actually signals. One camp sees softer job gains as a possible warning for the business cycle, noting that weaker monthly payrolls have historically preceded downturns. But a growing body of research points to a different explanation: labor‑force growth has declined due to sharply lower immigration and an aging population, pushing the breakeven employment growth rate — the number of jobs needed to keep unemployment steady — down, closer to zero. In this view, slower payrolls aren’t necessarily evidence of weakening labor demand but rather a reflection of demographic and immigration‑driven constraints on labor supply.

The bottom line: recession risk remains low, but the margin for error may be narrowing. The next few months won’t just test the expansion — they’ll reveal whether the economy’s resilience still has room to run. If and when economic risks begin to rise, early signs of the shift could potentially show up in the Recession Probability Indicator. For now, at least, business‑cycle risk appears low.

• Warsh’s Jackson Hole debut on Friday approaches as bond‑market anxiety climbs

• Treasury Department comments on market-intervention plans have offered only limited relief for long‑term yields so far

• Markets are watching to see whether Warsh shifts his low‑guidance communication strategy

Federal Reserve Chairman Kevin Warsh has made it clear that he wants to say less about monetary policy compared with his predecessors. He also favors curtailing the Fed’s so-called forward guidance efforts – offering clues about future policy decisions. But at a time of elevated anxiety in the bond market, fueled by concerns about fiscal risk and inflation, investors are wondering if Warsh will be forced to revise his communication preferences.

The question — and the tensions behind it — will be in sharp focus on Friday when Warsh delivers what some observers are billing as his first significant public address at the Fed’s annual Jackson Hole meeting. Although he’s only been leading the central bank for a few months, his speech at the end of this week could be a defining moment for his tenure and cast a long shadow over the bond market.

Expectations for what he may, or may not, say are all over the map. By some accounts, this could be a major event that sets the tone for equities and fixed income for the near term or longer. Other Fed watchers are expecting little if anything new in terms of guidance or insight into Fed policy.

What is clear is that the macro backdrop going into Friday’s speech has become more complex. The US Treasury last week announced a plan to raise buybacks of long-term bonds in an effort to cap if not lower rising Treasury yields. The bond market wasn’t impressed and yields continued to rise by Friday’s close.

As a follow-up, two senior Treasury officials on Monday told CNBC that the nearly $1 trillion Treasury General Account could be used to dramatically ramp up bond purchases.

A few weeks earlier, Treasury took joint action with Japan to raise the value of the yen vs. the dollar in a separate bid to minimize upward pressure on US yields.

Debate rages about whether the government’s interventions in markets will be successful in stabilizing if not lowering long-term yields. There are hints of success as of Tuesday. The 30-year yield, for instance, has pulled back to 5.17% after briefly jumping to nearly 5.34% in intraday trading last week, marking a 19-year high.

The question is how the market will price in the risks that have lifted yields – risks that may not be going away any time soon. Iran-related inflation vis-à-vis energy is one source of concern. Another is ballooning US government debt, which topped $40 trillion this month for the first time. Debt as a percentage of the economy appears to be less stark, but only relative to the spike during Covid.

The main challenge is that government efforts to address the deepening pool of red ink – curtailing spending, raising taxes, or both – remain politically unlikely these days in Washington.

A key issue in the near term is whether Treasury yields at the long end of the curve continue to rise. In that scenario, the Fed may be forced to raise interest rates to persuade the bond market that it’s committed to lowering inflation, which has been running above the 2% target for more than five years. Consumer inflation is running at 3.4% a year through July.

Fed funds futures are still pricing in modest odds in favor of no change for the September 16 policy decision, although the market is expecting at least one hike by the end of the year.

Meanwhile, the one-month Treasury yield has turned up recently, moving out of its recent range, which may signal that bond traders are preparing for policy tightening.

The main event this week is what Warsh says, or doesn’t say, on Friday. Markets will be keenly focused on learning if the Fed chairman uses the annual gathering in Jackson Hole to refine and perhaps update his communications strategy, which had a rocky start in his first two press conferences at the June and July FOMC meetings. Offering minimal insight on his economic and interest rate views, he reasoned that less is more for central bank messaging to markets.

Will he use Friday’s speech to revise that view? Or try to soothe market sentiment with a clear plan to reduce inflation (rather than simply making a general comment that the Fed is committed to price stability, as he has said so far as chairman)?

Alternatively, Warsh may dig in further on his campaign to remove forward guidance and emphasize that markets should price in inflation and economic risks without interference from central bankers. In that case, does the chairman think that bond investors should do the heavy lifting for the Fed and raise yields in reaction to elevated inflation? If so, does the Treasury Department’s latest plans to take a more interventionist approach in markets to lower yields conflict with Warsh’s view of policy framing?

Lots of questions. Perhaps there’ll be some answers on Friday, or not. Either way, the bond market will be watching and reacting.

• Expecting an inheritance tends to change behavior long before the money arrives, new research shows

• Younger adults generally react with the strongest shifts in saving, risk taking, and work habits

• Expecting an inheritance can potentially promote riskier financial choices

No one complains about inheriting money, but new research shows that the prospect of a windfall tends to meaningfully reshape behavior long before any assets arrive. As the authors of “How Inheritance Expectations Shape Financial, Employment, and Family Decisions” explain in an intriguing working paper:

Individuals who expect to receive an inheritance save less, take more financial risks, work fewer hours, put more effort toward personal over career goals, and express greater investment in familial relationships.

The research finds that the effects can be significant even when the expected inheritance is years away. The authors report that expectations alone “can shape economic and social decision-making long before any assets change hands.”

The analysis arrives at a pivotal moment for personal finance. Citing a Cerulli Associates study, the paper notes that the U.S. is on the cusp of the largest intergenerational wealth transfer in history: an estimated $72.6 trillion in inheritances by 2045, including $53 trillion expected to pass from Baby Boomers to their heirs. A key caveat, however, is that longevity, rising healthcare and long-term-care costs, and higher retirement spending may substantially reduce the amount ultimately transferred to heirs. Recent estimates from Visa suggest the net transfer could be closer to $36 trillion after such outflows.

Whatever the final amount, the coming wave of asset transfers is hardly a secret and is already influencing behavior. In new surveys, the paper’s authors report that roughly 18% of respondents have already received an inheritance, and more than half expect one in the future. The chart below, taken from the study, shows a median expected inheritance of $100,000 and an average of $280,000.

Most inheritances may not be enough to dramatically transform long‑term lifestyles. But the anticipation of that money can still reshape financial habits well before the check clears.

The behavioral effects tend to be most pronounced among younger adults, creating concerns for long‑term financial planning. Some may be undersaving on the assumption that future wealth will bail them out. Expectations can create a false sense of security, even though the timing and size of an inheritance are often uncertain.

The study also finds that people expecting an inheritance are generally more willing to borrow, invest aggressively, or take financial risks. Outside of a disciplined investment plan, that shift can be problematic. Believing that a future windfall will cushion mistakes can make risky choices feel safer than they truly are.

Whether or not an inheritance ever arrives, beliefs about future money can quietly—and immediately—shape financial life today. Expectations influence saving habits, risk tolerance, career decisions, and even family relationships.

The paper’s key takeaway for investors: Optimistic or inaccurate expectations about future inheritances can potentially distort financial behavior by reducing saving, encouraging excess risk‑taking, and weakening labor effort, leaving individuals more economically vulnerable.

The authors argue that clearer information on end‑of‑life and long‑term‑care costs, stronger financial literacy programs, improved retirement disclosures, and broader eldercare insurance coverage could help align expectations with reality. Such interventions matter not only for older adults planning their estates, but also for younger people whose financial decisions are already shaped by anticipated wealth.

The inheritance that changes you the most, in short, may be the one you haven’t received yet.

• Consumer inflation cools again, but the bond market isn’t impressed

• Energy prices continue to ease, yet headline inflation stays above 3%

• The Fed’s next move may determine if markets shift their inflation outlook

Consumer inflation ticked lower in July, providing the Federal Reserve with a bit more support for keeping interest rates steady at the upcoming policy meeting in September.

The government’s latest report suggests that the war‑driven surge of inflation is reversing. The drop in the energy component of the Consumer Price Index (CPI) was again a significant source of moderation. But the disinflationary impulse over the past two months remains gradual overall, while the outlook is still uncertain due to the Iran war and ambiguity about prospects for a return to normal for energy exports from the Gulf.

Despite the marginally lower inflation data, the news doesn’t materially change the outlook since the June CPI report. Perhaps that explains why the bond market isn’t particularly impressed with the modestly softer inflation numbers—at least not yet. Meanwhile, Fed funds futures are still pricing in one or more rate hikes by the end of the year.

The market’s reservations aside, a second month of slightly lower year‑over‑year gains for headline and core CPI suggests that the war‑related rise in inflation has peaked and is moving closer to the pre-war trend. Assuming the Middle East crisis remains relatively tame, further declines in inflation are plausible in the months ahead. Whether the bond market is persuaded that the risk has passed, however, remains a work in progress.

The U.S. 30‑year Treasury yield rose in trading yesterday following the release of the CPI data. The long bond, the most inflation‑sensitive maturity, was essentially increased to 5.26%, close to a two‑decade high. The benchmark 10‑year rate also advanced, near its highest level since early 2025.

Fed funds futures are now pricing in a 68% probability that the Fed will leave its target rate unchanged at the September 16 FOMC meeting. For the October and December meetings, by contrast, this market is still anticipating one or two hikes.

Even after a second month of disinflation, TMC Research’s Fed Funds Model continues to estimate that monetary policy has recently shifted to a dovish bias. The model uses several economic and financial factors to estimate a neutral rate. The current profile suggests that a quarter‑point increase is appropriate to remove the passive dovish pivot that emerged after the model’s neutral‑rate estimate rose in late May while the target rate was unchanged.

The Fed’s policymakers have been debating whether inflation will ease without tightening monetary policy. At the July 29 meeting, three of the twelve voting members of the Federal Open Market Committee voted for a rate hike, marking a rare dissent from the majority’s decision to leave rates steady.

The July CPI report offers a bit more support for standing pat, but the debate will likely continue as long as the Iran crisis simmers and headline inflation runs above 3%, which is well above the Fed’s 2% target—a gap that’s prevailed for more than five years.

Several other variables could influence upcoming decisions. One is the strength of the economy, the labor market in particular. U.S. payrolls posted an unexpected drop in July due to cuts in government jobs, although companies continued to hire, albeit at a slow pace. The news boosted confidence that the Fed would forgo rate hikes next month.

Another question is whether the bond market is paying attention to the ongoing rise in the federal budget deficit, which some analysts predict could be a factor that keeps inflation and interest rates higher than they otherwise would be if the fiscal gap were stable or narrowing.

Whatever the logic driving yields, the bond market has yet to embrace the view that inflation risk has peaked and is now on a sustainable course to ease. A key variable that will shape market expectations is the Fed’s upcoming policy decisions, which remain central to determining whether investors should anticipate a prolonged pause in policy, renewed tightening, or a shift toward eventual rate cuts.

• Behavioral biases follow demographic patterns rather than appearing randomly

• Overconfidence and herding are among the most influential drivers of suboptimal investor behavior

• Financial habits formed early in life can leave lasting psychological imprints that shape risk perception well into adulthood

Behavioral risk has been on the financial industry’s radar for decades, but ongoing empirical research continues to refine our understanding of how these biases emerge, who is most susceptible, and why they matter for investors.

A recently published paper in Journal of Risk and Financial Management conducted a systematic review of nearly five dozen studies (published during 2010–2025) and finds that behavioral biases aren’t random or evenly distributed. Instead, they follow clear demographic patterns shaped by age, gender, financial literacy, income, and experience.

It’s not unlike analyzing health risks—such as heart disease or high blood pressure—which are shaped by age, diet, and lifestyle. Similarly, financial “blind spots” tend to follow predictable patterns based on who you are, how much market experience you have, and the early financial habits and security you grew up with.

If you were raised in a household where money was tight or financial hardship was constant, you may be far more likely to carry a strong loss‑aversion bias into adulthood. Even when you have plenty of savings, the instinct to protect capital at all costs can sometimes keep you from taking reasonable risks needed for long‑term growth.

The paper’s efforts to synthesize evidence from several dozen empirical studies don’t just restate the behavioral‑risk challenge—they sharpen it. By pooling results across multiple countries, methodologies, and investor groups, the review confirms that these biases consistently appear in patterned ways, revealing who is most vulnerable and under what conditions.

As the authors note, “overconfidence (31 studies) and herding (26) are the most prevalent biases,” but their intensity and impact vary sharply across investor types. (One of the paper’s tables, partially shown below, highlights the biases associated with the highest numbers of studies used in the analysis.)

A key takeaway is that behavioral tendencies are predictable, profile‑specific, and ultimately manageable—provided investors recognize how these patterns shape their decisions.

A closer review of the paper’s key findings highlights the following points:

Overconfidence and herding dominate investor behavior. Younger, male, and less experienced investors show the strongest tendency toward overconfidence and socially driven herding—patterns that often lead to overtrading, poor diversification, and momentum chasing.

Financial literacy is among the most significant moderators—when it’s high. High literacy reduces most biases. By comparison, moderate literacy increases overconfidence, echoing the Dunning–Kruger effect (a cognitive bias in which people with low or moderate skill in a domain overestimate their ability). Meanwhile, low literacy amplifies availability bias (focusing on the most recent information and data), anchoring (fixating on initial values), and impulsive trading.

Gender and age effects are real—but often disappear once literacy and income are controlled. Women and older investors exhibit more loss aversion and risk aversion, but these differences shrink substantially when financial literacy and socioeconomic factors are included. Behavioral risk appears to be more environmental than innate.

Experience helps—until it doesn’t. Low experience is associated with overconfidence and herding. Moderate experience corresponds to the strongest decision quality. High experience tends to reinforce the disposition effect (selling winning investments too early and holding losers too long) and confirmation bias (favoring information that supports existing beliefs). In short, experience doesn’t eliminate behavioral tendencies—it changes their form, not their likelihood.

Perhaps the most striking finding in the research is the view that behavioral risk is not a universal phenomenon—it’s a demographic pattern. That means advisors may be better positioned to improve outcomes for investors by tailoring communication, coaching, and portfolio design to investor profiles rather than relying on one‑size‑fits‑all behavioral guidance.

The emerging research makes one lesson unmistakably clear: behavioral risk is not a monolithic challenge but a patterned, measurable, and manageable one. Investors bring distinct psychological profiles to the table, and those profiles shape how they perceive risk, process information, and respond to market conditions.

To manage behavioral risk, the solution may not be generic behavioral coaching but targeted interventions—communication calibrated to literacy levels, guidance tailored to experience, and portfolio structures aligned with each investor’s psychological tendencies.

• Investors routinely underperform their own portfolios because behavior, not market returns, drives results

• Strengthening financial literacy is a highly reliable way to shrink the behavior gap

• Professional guidance can help investors stay disciplined when emotions threaten long‑term performance

Predicting financial markets is tough, especially in the short term, but the behavioral habits of the average investor are remarkably consistent in reducing performance. Fortunately, there’s a straightforward fix for some of the biggest behavioral-risk challenges: strengthen investment literacy.

Identifying the problem is relatively straightforward: reacting emotionally to market volatility, for example, can lead investors to panic and make poor decisions. Where things get tricky is adjusting behavior in ways that actually support long‑term financial objectives.

But there’s no debate about the underlying issue. Numerous studies over the years point to an ongoing and uncomfortable truth: investors consistently underperform the very investments they hold.

The issue isn’t flawed portfolio design, which is relatively easy to resolve, particularly for the most-misguided investors. But even the best‑constructed investment strategy will suffer if erratic and ill-advised behavior creates a gap between a portfolio’s return and the lower performance investors actually earn due to poor decisions.

DALBAR, Inc. has been quantifying this so‑called behavior gap for decades. Although the investor penalty rises and falls in any given year, it’s reliably persistent. For 2024, the consultancy reports the “second largest performance gap of the past decade,” with the average equity investor trailing the S&P 500 by more than eight percentage points. The gap narrowed sharply to 72 basis points in 2025, but the average investor still lagged the market.

The behavior gap is also conspicuous for fixed‑income investors, widening to nearly five percentage points in 2025.

Morningstar’s research finds similar results. A recent review of the data reports: “Over the past 10 years, the average dollar invested in US mutual funds and exchange‑traded funds earned 1.2% less per year than what those funds returned during the same period.”

Closing the gap — if not outperforming — is the goal, and the first step is recognizing that behavior is usually far more important than investment selection on average. A recent study by an independent financial researcher underscores how costly emotional decision‑making can be.

“The typical investor suffered a loss of more than 50% of their investment potential because of their own emotional choices rather than market downturns or high costs or wrong investment choices,” advises “Beyond Alpha: Why Financial Education and Behavioral Discipline Outperform Investment Selection in Long‑Term Wealth Management.”

Using DALBAR data, the author adds: “This is not an anomaly. It is the norm.”

Another study a few years ago found that financial literacy is the lowest among the young, based on testing on three questions related to interest, inflation, and risk. “Only 14% of those under age 35 answered all three questions correctly,” according to the FINRA Foundation’s 2021 National Financial Capability Study. “Young people’s financial literacy knowledge lags that of older adults. Nevertheless, less than half of those 66 and older were able to correctly answer the Big Three.”

Focusing on financial education as a solution should be the new norm, the “Beyond Alpha” paper concludes. While this advice has always been true, it matters more than ever for several reasons. One is the surge in the Great Wealth Transfer — an estimated $84 trillion moving from Baby Boomers to younger generations in the years ahead.

Three additional factors raise the stakes for developing financial literacy, according to the study:

• Investor demographics are shifting: Women, Millennials, Gen Z, and growing numbers of minority investors are accumulating more wealth, yet many still face gaps in financial knowledge and access to quality guidance.

• Traditional portfolio management is increasingly commoditized: Low‑cost index funds and other innovations have erased cost and access advantages, making behavioral coaching and client education the true differentiators.

• Regulations are raising the bar: Fiduciary standards increasingly emphasize delivering maximum client value, and evidence suggests behavioral coaching can help meet that requirement — meaning advisors who ignore it may risk falling short of evolving regulatory expectations.

Changing human behavior may be challenging, but the benefits of enhancing financial literacy have been shown to improve investment outcomes. A 2014 study in the Journal of Economic Literature found that taking the time to improve financial savvy leads to smarter long‑term decisions and stronger returns.

Not every investor has the time or inclination to self‑educate on the finer points of managing behavioral risk — and that’s exactly where professional guidance becomes invaluable. A skilled advisor can help an investor bridge the gap between good intentions and disciplined execution, potentially turning financial knowledge into lasting financial results.

One of the best financial moves you can make isn’t outsmarting Wall Street—it’s using financial literacy to outsmart your own instincts.

• The 10‑year yield is near the top of its recent range, raising pressure for stocks

• Relatively elevated “risk‑free” Treasury yields are tougher competition for equities

• The latest rise in rates tilts the near‑term risk outlook for stocks toward caution

The 10‑year Treasury has rebounded to the upper edge of its recent range, keeping rate pressure front and center for equity sentiment. Stocks remain steady near record highs, driven by expectations that investment in artificial intelligence and tech will continue to provide earnings support. Yet the benchmark Treasury yield’s elevated level leaves the market waiting for the next catalyst—whether fresh inflation data, a shift in Fed expectations, or a geopolitical jolt—to determine if rates continue to move higher or begin to ease and give risk assets some breathing room.

Treasury yields are one of many factors that shape how Wall Street weighs the near‑term outlook for stocks versus bonds, but relatively extreme levels in bond‑market rates vs. the recent past can resonate. When the 10‑year rises, “risk‑free” income looks more attractive, making bonds a stronger competitor to equities. When yields fall, the allure eases, arguably pushing investors toward stocks. In effect, the 10‑year can act as a signal for when conditions appear attractive for leaning into growth (equities) or shifting toward safety (bonds).

The relationship isn’t perfect, but it does tend to rhyme through time. One way to monitor the link between the asset classes is to track the 10‑year yield in terms of its current level vs. its trailing 200‑day window. History suggests that when the benchmark rate’s relative valuation is elevated, the increase implies that the potential for equity volatility may rise. That dynamic was highlighted by TMC Research in previous updates – in mid-February 2025, for example, which showed the indicator approaching levels that have historically aligned with a more cautious equity backdrop.

On that basis, the recent run‑up in the 10‑year yield, in both absolute and relative terms, could be a new headwind for stocks. Equities tend to outperform bonds by a wide margin in the long run. But the periodic opportunity in Treasuries to earn a relatively high share of the long‑term return that stocks typically deliver—while taking far less risk—creates robust competition. When investors can lock in a strong, “risk‑free” payout, the appeal of taking on stock‑market volatility diminishes, if only on the margins.

Bonds are never a replacement for stocks, especially when designing an asset‑allocation strategy for medium‑ to long‑term horizons. But as the chart above suggests, the expected risk for stocks in the near term is not static; it ebbs and flows for a variety of reasons.

One is the degree of influence the bond market exerts through current yield, which can be “locked in” by buying and holding an individual fixed‑income security to maturity. Based on the chart above, the case for viewing the latest rise in the 10‑year as a meaningful, if still debatable, challenge to equity sentiment appears to be strengthening.

• The Federal Reserve faces crosscurrents as geopolitical shocks and fiscal strain threaten to reignite inflation

• Diverging inflation gauges blur the policy signal just as decisions grow more consequential

• Markets are split, with some hinting at tightening while others still reflect caution

The outlook for the Federal Reserve’s mandate to control inflation isn’t getting any easier.

The Middle East conflict is escalating again, creating new shipping bottlenecks for energy exports from the region, which could delay—and possibly reverse—the recent disinflationary impulse in the U.S. economy that had appeared set to soften pressure on the Fed to raise interest rates.

Another source of uncertainty is the government’s persistently large fiscal deficit, which risks becoming inflationary as heavy borrowing keeps upward pressure on demand, interest rates, and the overall price level.

Adding complexity to the outlook is the government’s plan to revise how the Personal Consumption Expenditures (PCE) Price Index—the Fed’s preferred inflation gauge—is calculated starting with the September report. The upcoming methodology change reflects the reasonable view that spending patterns and the structure of the modern economy have shifted enough that the index needs updated weights and improved measurement to give policymakers a clearer read on underlying inflation pressures. Nonetheless, the adjustment could be viewed as controversial at a time when current inflation readings remain well above the Fed’s target and rate hikes may be near.

Fed funds futures continue to price in high odds that the central bank will leave its target rate unchanged at next week’s policy meeting (July 29). By year-end, however, futures anticipate one or more hikes.

TMC Research’s Fed Funds Model suggests that policy has recently shifted to a modestly dovish stance, crossing into that terrain in May for the first time in more than three years. The switch implies a case for lifting the current 3.50%–3.75% target range to maintain a neutral stance that balances the Fed’s goal of keeping inflation steady or pushing it lower while providing the economy with sufficient liquidity to sustain a growth bias.

Achieving the central bank’s dual mandate—minimizing inflation and maximizing employment—is always tricky, and may be particularly difficult for the remainder of the year. Inflation is being pushed around by forces largely beyond the influence of monetary policy—renewed Middle East conflict, energy‑supply risks, shipping disruptions, and persistent fiscal deficits—while the labor market remains firm enough to resist cooling. That combination leaves the Fed trying to restrain price pressures without derailing employment, a balancing act made tougher by shocks that policy can’t easily offset.

The Fed is also receiving mixed signals at a challenging moment for policymakers: core PCE’s one‑year rate has been drifting higher, the core Consumer Price Index eased in June, and the 16% Trimmed Mean CPI—a measure Chair Warsh has praised as a cleaner read on underlying inflation—is hovering near the Fed’s 2% target. That divergence muddies the policy picture, forcing officials to decide whether inflation is re‑accelerating or simply settling into a slower, more stable trend.

The bond market has been flirting with the possibility that a Fed rate hike is near. The 2‑year Treasury yield—widely viewed as a market‑based proxy for rate expectations—is trading above 4.2% this week, well above the Fed’s current 3.50%–3.75% target range, implying that investors expect a hike.

Short‑term market rates, however, suggest that tightening isn’t imminent, per the chart below, which highlights several rates that are sensitive to policy‑bias expectations. A decisive move upward in these rates from current levels could be an early sign that liquidity conditions are shifting to accommodate an increase in the Fed’s target rate, proxied by the Effective Fed Funds Rate (red line).

Despite the relative calm in the bond and rates markets, the next several policy meetings could be more complicated than usual to navigate. Part of the challenge is a rising skepticism about the accuracy of economic data—doubt that could be amplified by the government’s planned September change in the PCE inflation methodology.

As former Federal Reserve and White House economist Claudia Sahm wrote last week: “If we do not all agree on the yardstick, then a commitment to price stability is nearly meaningless.”

Fed Chairman Warsh has made several hawkish comments since taking the helm in May. In what may become his signature statement, he emphasized that the Fed would have “no tolerance” for persistently elevated inflation above the 2% target.

Yet some critics charge that he has not outlined how he intends to achieve that goal or whether PCE remains the formal yardstick. The Fed chief has criticized core PCE in Senate testimony as a “rough swag as to what was going on” with prices. “We don’t have to do a rough swag any more.”

His gray‑zone commentary concerns some Fed watchers, who argue that the lack of clarity, intentional or not, may make the central bank’s job tougher as it tries to keep inflation near its target.

Sahm asserts that “Redefining inflation is not the way to achieve price stability.”

The crucial question is whether the bond market will interpret the shifting metrics, mixed signals, and geopolitical shocks as a sign that the Fed’s inflation‑fighting credibility is strengthening—or slipping.

• Investors often flee to safety fast, but crawl back to risk slowly

• Fear tends to drive the trade, not math

• Staying safe too long can cost you the recovery

One of the biggest threats to long‑term investing isn’t a volatile market or high fees, but it can be the way our brain reacts to them.

While we like to think of ourselves as rational, humans are hardwired to react emotionally to financial highs and lows — a vulnerability generally known as behavioral risk. When investors panic-sell during market drops or chase hyped-up trends at their peak, they run the risk of locking in losses and dragging down their returns. Ultimately, managing your own behavior and sticking to a plan can matter far more to your lifetime wealth than trying to outsmart the stock market.

There are various dimensions of behavioral risk, and perhaps the facet with the highest stakes arises during periods of extreme market volatility. A recent study adds crucial insight by demonstrating that investor behavior is itself highly volatile during periods when “safety” is in high demand. The analysis highlights several pitfalls that emerge when market stress is elevated, according to “Risk Perception under Uncertainty: A Behavioral Analysis of Safe-Haven Asset Return Responses,” published last month in the Journal of Research in Economics, Politics & Finance.

One of the study’s main findings is that investor risk is not a static, mathematical formula, but a dynamic, psychological reaction. That contrasts with traditional finance models, which treat risk as a two-way street and assume, for instance, that when market uncertainty rises by 10%, safe-haven prices go up by a matching 10%, and when uncertainty falls, they drop by the same degree. This paper shows that investor behavior is, in fact, highly asymmetric (unequal).

The research finds evidence of what might be called a panic premium, the extra cost added to certain assets during times of widespread fear or uncertainty. Markets can react violently to bad news, causing safe-haven prices to jump quickly. But when the dust settles, those prices don’t come down nearly as fast, because human fear lingers. If you buy during the panic, you may end up locked into an inflated price.

Investors react far more aggressively and persistently to increases in uncertainty — driven by loss aversion and panic — than they do to decreases in uncertainty. When a crisis hits, investors overreact and pile into safe assets, driving prices up rapidly.

The flip side of this behavioral pattern is that the recovery is slow. When the crisis ends and uncertainty falls, investors do not sell off their safe havens at the same speed. Fear lingers, causing safe-haven prices to remain elevated long after the actual danger has passed.

If you buy defensive assets during a crash, you probably aren’t solving a calculated math problem to optimize your expected payoff. Rather, you’re paying a premium for a “psychological anchor” that soothes your anxiety and stops the emotional pain of watching your portfolio drop. Contrast that with the standard financial-textbook assumption that investors are rational and will make logical, cold-blooded decisions, even when a portfolio has quickly lost 20%. In reality, biology takes over.

One lesson is to build a structured portfolio before the storm hits — often a more reliable way to protect yourself from your own inevitable, fear-driven decisions. Putting clear rules in place on how a portfolio will be managed through time — before a crisis strikes — is also prudent.

As the study notes, “The investment decision of an individual can be affected by psychological variables like uncertainty, anxiety, and fear... The helpfulness of the concept of rationality is limited in times of turmoil.”

This research highlights a subtle but consequential risk for investors: the loss-averse instinct that sends capital rushing into safe havens during spikes in market volatility, policy uncertainty, or geopolitical tension does not reverse with equal speed once conditions calm down. In short, investors tend to de-risk fast but re-risk slowly, if at all.

For an investment portfolio, this behavioral lag can translate into a tangible opportunity cost: capital that stays parked defensively out of lingering anxiety, rather than being redeployed once risk genuinely subsides, misses out on the recovery and growth phases of the market cycle. Over time, this pattern of overstaying in “safety” can quietly erode long-run returns relative to a more risk-tolerant, timely reallocation strategy — turning a rational, protective impulse in the moment into a source of underperformance in the long run.

None of this means that periodic adjustments to risk exposure is inherently a mistake. Tilting toward a more defensive asset allocation during periods of genuine stress is often a sound and necessary part of managing a portfolio through time. The problem isn’t the instinct to seek safety; it’s the tendency to stay there long after the original rationale has faded.

The real takeaway is that risk management works best as a deliberate, pre-planned process with well-designed rules rather than a reactive one driven by lingering fear. Investors who build a sound framework in advance — with defined triggers for both scaling into and out of safe havens — are better positioned to manage risk through time without falling into the trap of chronic overcaution.

Done well, risk management remains one of the most valuable tools an investor has; done reactively, it can quietly become one of the costliest.

• Passive tends to work inside an asset class, while customizing may matter more for investing in several markets

• Investors face finite time horizons and various behavioral challenges

• Risk‑tuned asset allocation could potentially deliver steadier, more “livable” outcomes

The case for indexing is well‑established, supported by academic and empirical research. But while there’s a strong case for passive investing within an asset class, in our view the argument weakens—if not breaks down—when the focus turns to multi‑asset‑class portfolio strategies.

There are several reasons why asset allocation may reasonably be customized, which is to say intentionally designed to deviate from a passively managed, market‑value‑weighted strategy. One of the more compelling factors: the time horizon for a passive asset‑allocation strategy is optimal, in theory, only for the average investor with an infinite time horizon. No individual investor matches that profile, which lays the groundwork for customizing asset allocation for a real‑world portfolio.

The apparent contradiction between favoring passive strategies within an asset class vs. customizing strategies that use several asset classes isn’t inconsistent upon closer inspection. Markets are relatively efficient (or at least hard to beat) within a particular asset class. The most compelling example is large‑cap U.S. stocks, as S&P Global’s periodic updates remind. A recent update reports:

Of all active large‑cap U.S. equity funds measured, 79% underperformed the S&P 500 in 2025, worse than the 65% rate observed in 2024 and the fourth‑worst year for active large‑cap managers over the 25‑year history of the SPIVA Scorecards.

Using index funds to capture asset class beta is defensible, if not compelling, but the rationale doesn’t always transfer to asset allocation for reasons related to risk management, particularly for individual investors. Saving for retirement, planning for college expenses, and similar goals are bound up with finite time horizons, even if they run for several decades. That’s a mismatch with a market‑value‑weighted asset‑allocation strategy that, in theory, would hold all investable asset classes and never rebalance.

A passive asset‑allocation strategy may be tough to beat over very long stretches of time, but investors have financial needs in the short term that require liquidating investments. There are also behavioral factors in play that raise the value of “livability” in portfolios. The short‑run volatility that a passively managed asset‑allocation strategy may exhibit could be a bridge too far for some—perhaps many—individuals. The ideal investment plan for the long haul is worthless if market volatility triggers a flight‑to‑safety decision during the depths of a bear market.

Managing risk, in other words, is necessary, but in our view, it tends to work best at the asset‑allocation level. One reason: while markets tend to be efficient within asset classes—which implies indexing is preferable in this context—cross‑asset‑class efficiency is often substantially lower.

Some research hints at the possibility that trading frictions can be higher and capital flows slower between asset classes at certain times compared with transactions within asset classes. One explanatory theory is that most market participants are highly specialized in a given asset class, in contrast to the smaller group of generalists who focus on reallocating capital across markets, such as stocks, bonds, real estate and commodities.

A contributing factor may be related to various behavioral biases and industry constraints. For instance, home bias—a tendency to invest a disproportionately high share of a portfolio in one’s domestic market—may play a role. Consider that U.S. equities in 2024 represented nearly half of global stock‑market capitalization, according to SIFMA, a financial‑industry trade group. Tracking a passive mix of global stocks translates to a 50/50 allocation. Most U.S.‑based investors with international equity exposure are probably holding substantially lower levels of foreign stocks.

Capital bottlenecks could also play a role—capital flows across borders, although streamlined in recent years, are still less efficient than money management within borders.

Another dimension is complex macro dynamics, including geopolitical risk and manipulated foreign‑exchange values, which also reduce cross‑border and cross‑asset allocation efficiency relative to single asset classes within a country. But therein lies a degree of opportunity, since lower market efficiency raises the potential for mining portfolio alpha through tactical asset allocation and related strategies.

Keep in mind that alpha can be defined in terms of risk‑adjusted return. That’s a key point, since individuals don’t have 50‑year investment windows. Retirement dates, college funding, home purchases, and health‑related expenses create fixed deadlines. A deep drawdown close to one of those deadlines can permanently impair outcomes because there isn’t enough time for markets to recover.

An added complication: humans are not rational compounding machines. They are emotional, pattern‑seeking, and loss‑averse. Risk management can reduce the emotional triggers that activate these biases. Shallower drawdowns, for example, mean fewer panic decisions. More stable return paths reduce temptations to chase performance.

Customizing an asset‑allocation strategy using low‑cost index funds tends to be the more effective path for managing risk and designing portfolios that are “livable,” while providing investment solutions that match an investor’s goals, risk tolerance, and other factors. This approach may, over the very long run, trail a true passive asset allocation that holds all investable markets in proportion to their market values. But as a practical compromise for real‑world investing, it’s a reasonable—if not compelling—concession to potentially deliver more stable outcomes for investors who must balance growth with the practical realities of time, behavior, and risk.

• Lofty stock market valuations leave little room for error if AI earnings don’t keep delivering

• The S&P 500’s AI tailwind is strong, but the headwinds may be getting stronger

• AI is still powering the S&P 500, but China’s fast‑moving challengers are tightening the competitive screws

The US stock market has been on a wild ride this year, but the Middle East conflict has yet to dent bullish expectations. A key reason: enthusiasm for artificial intelligence (AI) as a business model. Wall Street projects this tech story will lift earnings at a robust rate well into the future.

The combination of AI‑related infrastructure spending and opportunities for selling AI services to businesses and consumers has fueled expectations that this leading edge of technology development will continue to drive corporate bottom lines to new heights in the near term.

FactSet estimates that that year-over-year earnings growth for S&P 500 companies will rise more than 23% in Q2, which would mark a second-straight quarter of growth at a 20%-plus pace. The forecast also reflects a strong improvement over the roughly 15% earnings growth that was expected when the year began, according to LSEG IBES data.

Despite Wall Street’s cheery outlook, the bull run isn’t without risk. One is the burgeoning threat of Chinese AI firms, which are charging far less than their American competitors. Models maintained by leading US firms, such as Anthropic and OpenAI, reportedly have an edge over systems offered by companies in China, but the gap is expected to narrow. Meantime, demand for China‑based systems is starting to gain traction. That persuades some analysts to argue that it’s just a matter of time before competitive pressures accelerate and potentially create stronger headwinds for AI‑driven earnings growth in the US.

Some analysts are beginning to question whether cash‑flow and earnings forecasts based on AI are too optimistic, given the rise of China‑based competition. Although no one can confidently predict how this business war will evolve, it’s clear that the crucial engine of optimism for the S&P 500 is increasingly bound up with assumptions that AI will do the heavy lifting to keep the earnings train rolling.

Buoyant earnings forecasts that hit the mark may become increasingly necessary at a time of elevated market valuations, which reflect assumptions that a best‑case scenario will prevail. A widely followed measure of price multiples for stocks is close to a record high. The Cyclically Adjusted PE Ratio (CAPE Ratio) is estimated at nearly 42 for July, near the 150‑year peak set during the dot‑com bubble in 1999–2000.

The pushback is that AI is generating earnings, whereas the tech bubble of a quarter century ago was largely driven by expectations—many of which failed to materialize in a timely manner. Fair point. But if the market is fully valued, if not excessively so (as some pundits argue), which implies relatively low expected returns, there’s little wiggle room for disappointment.

On that note, our update of expected return for the S&P 500 for the ten years ahead remains modest. In particular, the TMC Research average estimate for several models is a 5.6% annualized return for stocks – unchanged from our previous update in February, and still far below the market’s current trailing 13%-plus annualized rise over the past decade. As the chart below reminds, performance on a rolling ten-year basis has rarely been stronger.

As always, the standard caveat applies when attempting to divine the future. Accordingly, take this and all forecasts with a grain of salt. However, the hefty gap between expected and actual performance suggests things might soon snap back to reality in some degree. It all comes down to the classic question: Is it really different this time? If so, why?

The future isn’t bound by the past, and perhaps AI is a genuine game-changer. But with the market outperforming so dramatically, the burden of proof is increasingly on the bulls to explain and rationalize why high returns and stellar earnings reports will persist.

Here’s a quick review of each of the five models used to generate the forecasts above:

CAPE Ratio Model: this stock market valuation indicator, maintained by Professor Robert Shiller, is calculated using real earnings per share for the S&P 500 based on a rolling 10-year window. TMC Research uses the CAPE ratio to generate an implied return for the stock market.

Earnings Yield Model: the stock market’s implied ex ante performance is derived from the S&P 500’s earning yield, defined as the inverse of the price-to-earnings ratio.

ARIMA Model: In contrast with the two models above, which use valuation to infer future return, this estimate uses statistical analysis to generate a forecast. An autoregressive integrated moving average (ARIMA) model is a type of regression analysis that’s run on rolling window of the market’s return history to estimate future results.

Bayesian Model: This statistical model uses lags as a basis for updating so-called “prior beliefs” on a rolling basis to estimate the effects of previous effects on the S&P 500 to forecast return.

Average Historical Return Model: This naïve estimate is a simple average of all the rolling 10-year returns since 1960.

• Small caps are outperforming in 2026, fueled by stronger earnings expectations and bargain valuations.

• AI‑linked holdings and a resilient U.S. economy are adding momentum to the rally.

• The Fed tailwind could vanish quickly if the Iran crisis reignites inflation and forces renewed tightening.

Small-cap stocks are outperforming large caps and the broad market this year. Will it last?

It’s a reasonable question, given the multiple false starts in recent years when small caps took the lead only to trail soon after and yield to large caps. Analysts say this time could be different, citing several favorable tailwinds.

One possible driver is implied via performance history, which suggests small caps may be overdue for a run of outperformance after trailing larger firms for much of the past five years.

Investors in lesser-capitalization stocks are hoping for a rotation in leadership comparable to the roughly six-year runs of small-cap dominance in 2000–2006 and 2008–2013, based on the ratio for two ETFs: SPDR S&P 500 (SPY), which is heavily weighted in large caps, vs. iShares Core S&P Small-Cap ETF (IJR). As shown in the chart below, when this ratio is rising, large caps are outperforming; when the ratio falls, small caps are winning.

Keep in mind that outperformance sometimes means losing less. But so far in 2026, the small-cap edge is strong in both relative and absolute terms. The iShares Core S&P Small-Cap ETF (IJR) is up nearly 23% this year through July 6, according to Morningstar.com. That’s more than double the advance for the SPDR S&P 500 ETF (SPY).

Analysts cite several factors for the tailwind in small caps that could keep the party going, starting with a bullish outlook for earnings. Estimates for 2027 for the S&P 600, a small-cap index, have improved sharply relative to this year and 2025, according to Yardeni.com, a research shop. The forecasts also compare favorably vs. the outlook for large cap earnings (S&P 500).

Another driver, which may be underappreciated: small-cap indexes hold semiconductors and other stocks linked to artificial intelligence and the recent surge in related infrastructure spending. As one example, Morningstar reports that the tech sector recently represented around 15% of holdings for the iShares Core S&P Small-Cap ETF (IJR), which includes MaxLinear (MXL), a maker of radio-frequency and mixed-signal chips that has jumped as cloud platforms and semiconductor firms accelerate buildouts for AI-driven connectivity.

Comparatively attractive valuations for small caps are also supportive. In contrast with the big-cap AI- and tech-driven large-cap space, which have posted lofty price-to-earnings ratios, small-cap valuations started the year at a steep bargain by comparison -- approaching the lowest levels relative to large-caps in decades, according to one estimate.

A resilient US economy is also a factor. Strategists at Goldman Sachs advise that the business cycle “is usually the most important macro driver of small-cap US equities,” according to a research note published last week.

The path ahead for inflation could be a risk factor due to conflict with Iran, which has increased pricing pressure through a surge in energy costs. Although stocks generally can come under pressure if inflation heats up and the Federal Reserve responds by raising interest rates, small caps tend fare worse. One reason: Small‑cap firms are generally less profitable and more credit‑dependent, making them especially vulnerable to a surge in borrowing costs because they pay higher rates, face shorter‑term loans, and are exposed to greater interest‑rate volatility, strategists at Charles Schwab observe.

Relative calm in the Middle East, however, suggests inflation may have peaked. The Cleveland Fed’s latest nowcast show the year-over-year change the Consumer Price Index is expected to ease for the first time since the war began. The question is whether the return of military strikes this week threatens to renew inflation’s pulse.

The futures market is pricing in moderately high odds that the Federal Reserve will keep its target interest rate unchanged at the next policy meeting on July 29. A rate hike in September, however, is considered likely.

The recent tailwind from a steady Fed could prove fleeting if the Iran crisis escalates and energy prices surge again, rekindling inflation pressures and potentially forcing policymakers back into a tightening mode. In that scenario, small caps could once again take a back seat to large caps. For now, though, the small‑cap edge remains intact as 2026 enters its second half.