Morningstar Economic Outlook

🔷-  Two things that everyone is talking about: AI and the rise in bond yields. We believe the two are intertwined. AI, it the biggest factor in why interest rates are so considerably elevated above prepandemic levels. Within private fixed investment, there’s a crowding out of other spending by AI-related spending via the mechanism of interest rates. High tech investment, up 15% yoy in the 1st half of 2026, but all other private fixed was down 4%. Most other types of fixed investments are weak given high interest rates but the AI factor, which is boosting the demand side of the economy despite the high rates.

🔷-  The macrodynamics are getting pretty ugly. The 10-year, for example, has gone up over a hundred basis points year to date (i.e. 1.00%). We’re at 5.25% with the Fed likely looking to for another rate hike by the end of the year. Inflation has been reignited by two political decisions. Tariffs have been responsible for around 20 basis points to inflation in 2025 and this year. This year, the energy price spike has contributed around 80 basis points to the rate of inflation.

🔷-  At the end of the third quarter on 9/30/26, using our valuations, the US equity market was trading at a price/fair value of 0.9. Essentially, that means the market was trading at a discount to a composite of our fair value estimates. We take a composite of the intrinsic valuation on all of the stocks that are covered by our equity analyst team. That’s over 700 stocks here in the US and we compare that to a composite of the market valuation of where they’re actually trading in the marketplace…truly a bottom-up view of what valuations should be.  

Schwab Market Perspective

🔷-  Since the launch of widely available AI tools, companies across industries have poured capital into the infrastructure behind them. That spending has powered a large share of equity market gains and has become increasingly important contributor to economic growth. Past technology waves eventually raised productivity and created new kinds of work, but the gains arrived unevenly and often with lags. The AI cycle is likely following a similar pattern, with corporate profits accelerating even as hiring has slowed. A large portion of the investment in the buildout (and the hardware associated with it) is sourced via imports from abroad. Taken together, this describes an expansion that looks robust from the vantage point of corporate earnings, but far more muted from the vantage point of workers and the domestic economy. If AI-driven productivity gains don’t eventually spread to hiring, profit growth that rests on capital spending and cost discipline could prove vulnerable.

🔷-  Interest rates on government bonds, corporate debt, mortgages, auto loans, and credit cards have risen across the global economy. Several forces are at work behind the rise: energy and supply shocks, tighter monetary policy, larger government borrowing needs, and strong demand for capital to fund the artificial intelligence (AI) buildout.

What GFP is saying with info from the above:

🔷-  The 2nd bullet from Morningstar mentioned the Fed having raised rates once this year and likely will again by year-end. As a reminder, we came into this year expecting the Fed to cut rates 2-3 times.  While the move from the Fed has been minimal (they impact the short-end of the yield curve), longer term rates have surged. The 30 year mortgage started the year at 6.00% and is now currently 7.50%, making a frozen housing market, more frozen? As the AI buildout slows and hopefully some resolution to the Iran conflict to bring down energy costs, the Fed will then be able to begin their next easing cycle.  

🔷- The 1st bullet from Schwab nicely sums up our current view on AI being a two-edged sword. Tech-related investing is exploding upward, driven the AI buildout, contributing about a percentage point to GDP growth in the first half of 2026. This comes not just from the data center buildout but also from spending on AI services (contributing to software investment) and AI-related R&D.  It has fueled roughly half of the earnings for corporate America in the last several years. The problem is that much of this boom has been debt financed, loaded with incestuous funding to keep the party going. Big booms, tend to lead to big busts…the market is starting to worry about the hangover. We also do worry about AI being the scalpel that it is, not wrecking ball, that impacts distinct fields (engineering, web design, video editing, translation). While new jobs will undoubtedly be created, we are concerned about the time lag to get there.

If you have questions about your portfolio, please contact us anytime.

Turning the Page

 
By: Hung Nguyen, CFP®

It’s not always easy letting go of the things we love to do or that we’re good at. My 16-year-old daughter, a former soccer player, had to give up the game due to numerous ACL knee surgeries. She recently had an assignment in her AP English class to write a sonnet and present it to her class, and she wrote the following:

The field calls my name though I cannot play,

I heard the crowds like waves beyond the gate.

My cleats collect dust, untouched from day to day,

With dreams of scoring fade beneath the weight.

I miss the grass, the sprint, and the burning air.

The ball that once danced as if it knew my feet.

I mourn the rush that was once always there,

The thunder that rises after every victory.

I never thought I’d lose the game I loved,

But time has turned my joy to quiet pain.

My injured knee has taken me away,

For every cheer reminds of the pain.

Yet soccer lives within my heart and soul,

Though I can’t play, its fire still makes me whole.

I’m not typically an emotional guy, but I must admit that I shed a tear every time I read this. I think what’s made it a bit tougher for her of late is that she’s seeing former teammates get committed to colleges like UCI, Clemson, Stanford. The dream of playing at the next level, so close to being realized, is no longer there. There’s a reason I chose to include this in our “This is Life” section because we know as parents, planners, as people that life doesn’t always go according to plan. When life throws you a bender (had to keep with the soccer lingo), what do you do?

Well, I’m pleased to tell you that she’s currently on her third interview/tryout to help train/teach local kids the game of soccer. While she can’t play herself, she’s enjoying the ability to share the love and knowledge of the game with the next generation of players. It might not be the same rush as playing, but it allows her to stay tied to the game she adores.