As powerful new forces pick up speed, the risks are real, but so are the potential investment opportunities. These ideas could help you stay on track.
By the Chief Investment Office, Merrill and Bank of America Private Bank
“Sound economic fundamentals are enabling markets to see past today’s turbulence to potentially transformative growth ahead.”
WITH THE FIRST HALF OF 2026 delivering one geopolitical and economic jolt after another, investment markets have been notable mainly for their resilience, rebounding from sharp volatility to reach new highs.1
Investors absorbing nonstop news on the Middle East, oil prices, U.S.-China tensions, tariffs and more may wonder what’s holding markets up and whether a big letdown is inevitable. “While it feels like a disconnect, markets aren’t ignoring bad news,” Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, believes. “Instead, sound economic fundamentals are enabling markets to see past today’s turbulence to potentially transformative growth ahead.”
Here, Hyzy and other leading analysts from the Chief Investment Office (CIO) answer key questions heard from investors about what’s next for the rest of 2026. You’ll find actionable insights to help you keep pace with changes poised to transform the markets. Then, test your market knowledge with our midyear-market quiz questions, and be sure to watch the 2026 midyear webcast: “Shifting gears: New drivers of potential market expansion.” For a deeper dive, read “The era of transformation: Part 1, R you ready?” and “The era of transformation: Part 2, R you ready?”
“At a time of elevated risk, investors should expect volatility, choppy trading and a potential slowdown in economic growth moving through the summer to the end of the year,” Hyzy says. Yet three “Rs” that have buoyed markets through recent disruptions remain in place:
“We see periodic weakness as a potential buying opportunity as markets focus on long-term growth themes such as AI innovation, infrastructure replacement and re-industrialization,” Hyzy says. Another potential long-term theme for investors: the defense supercycle, as Europe raises military spending and the U.S. and China enhance traditional defense systems with AI and robotics.
Risks to consider: Geopolitics is inherently unpredictable, Hyzy says. “A sharp setback in an existing situation or a new crisis could change the short-term market outlook without notice.”
“While the spike in energy prices will likely show up in higher inflation in the next few months, longer-term inflation expectations remain anchored and are expected to improve on AI-related productivity gains.”
The conflict-related spike in oil prices, combined with a soft hiring market, has raised fears of 1970s-style stagflation, when prices stay high even as the economy slows. “Those factors, while concerning, don’t point to stagflation, in our view,” says Joe Quinlan, head of Market Strategy for the CIO.
As a net exporter of oil, the U.S. is energy self-sufficient and less vulnerable than other countries to supply disruptions, Quinlan notes. “While the spike in energy prices will likely show up in higher inflation in the next few months, longer-term inflation expectations remain anchored and are expected to improve on AI-related productivity gains,” he adds. “And when the Iran conflict ends, oil prices could quickly drop to below prewar levels.”
Another clue may be found in credit spreads — the difference in yield between bonds of similar maturity but different credit ratings (for instance, U.S. Treasurys versus corporate bonds) — which tend to widen when markets anticipate a slowdown. “Spreads remain at the low end of their historical range,” says Matthew Diczok, head of Cross-Asset Market Strategy for the CIO. “If stagflation were around the corner, they would be well above their normal levels.”
Risks to consider: Stagflation risks would rise if the Iran conflict lasts well into 2027. Higher energy prices could eventually reignite inflation, prompting the Fed to maintain or raise interest rates even as business costs rise and consumer spending stalls. BofA Global Research recently revised its expectation for two rate cuts later this year; it now expects that the Fed will not cut rates before the second half of 2027, notes Diczok.
Excitement about AI has given way to questions of whether the massive capital investment (expected to surpass $1 trillion in 2027)2 will truly pay off. “It’s a classic part of the cycle for any major innovation,” Hyzy says. “People want to know when AI will be monetized.”
While such concerns may contribute to short-term volatility, “AI is already starting to drive profound advances across the economic landscape,” Hyzy says. “Companies early to embrace its labor-saving potential are realizing greater cash flow per employee.” Physical AI promises a next leap forward in commercialization, moving beyond the digital world of software into real-world machines such as robots, drones and automobiles. With $41 billion invested in 2025, physical AI can automate dangerous tasks in areas like warehousing and manufacturing and ultimately assume more complex operations.3 As these technologies advance, we expect productivity gains across industries to accelerate over the next two to six years,” Hyzy says.
Risks to consider: “Regulation, stock overvaluation, supply chain disruptions, geopolitics and a backup in yields may cause temporary pauses in AI enthusiasm,” Hyzy says. “We suggest a broad-based, long-term approach to this potential opportunity, as opposed to investing in individual stocks in the hopes of quick returns.”
In a year of surprises, the 2026 midterms offer one predictable source of market disruption. “Historically, volatility rises during the summer as campaigning intensifies,” says Lauren Sanfilippo, senior investment strategist for the CIO.
Yet while the stakes are high, with control over the Senate and House of Representatives influencing everything from taxes and regulations to geopolitics, election-related volatility tends to fade quickly once the results are in, Sanfilippo says. Since 1938, the S&P 500 index has never declined in the 12 months following a midterm election.4 “Any short-term dips related to the approaching election could provide potential buying opportunities for long-term investors,” she adds.
Risks to consider: “As the media heat rises, keeping things in perspective may be easier said than done,” Sanfilippo says. “Investors may need extra diligence to stick to long-term strategies and avoid sudden reactions to headlines.”
TIP: “With higher volatility expected through the balance of the year, staying diversified across and within asset classes can help to minimize possible losses.”
“We continue to emphasize stocks over bonds, and U.S. equities in particular,” says Marci McGregor, head of Portfolio Strategy for the CIO. “But with higher volatility expected through the balance of the year, staying diversified across and within asset classes can help to minimize possible losses.”
Within stocks, potential long-term opportunities may be found in cyclical industries such as industrials, which includes aerospace, and financials, as well as small- and mid-cap companies, which may outperform more defensive stocks such as utilities and consumer staples once the Iran situation settles. Outside of the U.S., emerging markets offer attractive valuations and a growing consumer base, and they have outperformed through the first half of 2026, McGregor says.
Diversifying with bonds remains an essential strategy for weathering volatility, Diczok says. “Global capital continues to flow into the U.S., and real yields remain meaningfully higher than other large economies,” he adds.
With countries vying for precious metals to power the new economy, investors also may want to explore gold and other commodities. And qualified investors might consider diversifying with hedging strategies, private equity or other alternative investments. “But be sure any decisions align with your long-term goals and risk tolerance,” McGregor says.
Risks to consider: Choppy markets can throw even carefully built portfolios off kilter, leaving you over- or under-exposed to various asset classes. Rebalance regularly, especially after periods of volatility, McGregor suggests.
While the crosscurrents running through the economy and markets these days can feel confusing, things get clearer when you step back and think of investing in terms of your personal goals and what you’re hoping to achieve, Hyzy says. “If you work with an advisor, they can help you keep volatility in perspective, adjust your portfolio as necessary, and stay invested so that you don’t miss out on the period of potentially transformative long-term growth that could lie ahead.”
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1 CNBC, “S&P 500 closes at a fresh record as stocks catch a tailwind from falling oil prices,” May 5, 2026.
2 CNBC, “AI boom: Big Tech capital expenditures now seen topping $1 trillion in 2027,” April 30, 2026.
3 Bank of America Institute, “Physical AI, part 1: The basics,” Feb. 26, 2026.
4 Strategas Research, Chief Investment Office, “Uncertainty now, better foundation later,” April 2026.
5 Federal Reserve Bank of Boston, “Why has consumer spending remained so resilient? Evidence from credit card data,” Aug. 13, 2025.
6 International Monetary Fund; United Nations as of October 2025.
7 Federal Reserve Bank of Cleveland, “Infographic on Inflation: Stagflation,” Nov. 17, 2025.
8 The Wall Street Journal, “Inflation Soared to 3.8% in April, Driven by Gasline Prices,” May 12, 2026.
9 Bureau of Labor Statistics, “The Employment Situation – April 2026,” May 8, 2026.
10 Congress.gov, “Data centers and their energy consumption: Frequently asked questions,” Jan. 23, 2026.
11 Chief Investment Office, “Equity Spotlight: The silver lining to market grinding,” February 2026.
12 Chief Investment Office, “Uncertainty now, better foundation later,” April 2026.
The opinions expressed are as of May 28, 2026 and are subject to change.
Investing involves risk, including the possible loss of principal.
Past performance is no guarantee of future results.
Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Stocks of small-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration. Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice-versa. Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets.
Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential.
This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).
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