Weekly Investment Update (09/11/2026)

At times like this, separating signal from noise becomes especially important. Investors are being asked to process an unusually long list of competing variables: escalating geopolitical tensions, rising oil prices, higher interest rates, persistent inflation, the possibility of another Fed hike, the approaching midterm elections, and a seasonally more difficult period for markets. Recent developments in the Middle East have only added to that uncertainty, pushing oil and borrowing costs higher.

Any one of these issues could create volatility, and taken together, they make a choppier near-term market entirely plausible. But volatility and a deterioration in fundamentals are two very different things. Beneath the headlines, economic growth remains resilient, consumer spending is holding up, and demand across important areas of the economy, including AI infrastructure, remains strong. Even a potential Fed hike does not necessarily signal the beginning of a materially more restrictive cycle, particularly if policymakers conclude that the recent rise in market interest rates has already done some of the tightening for them.

That distinction matters. We would not dismiss the growing list of risks, and markets may well become more volatile as investors navigate them. But unless those risks begin to significantly undermine growth, earnings, or credit conditions, we believe the more important signal remains a fundamentally resilient economy rather than the increasingly loud day-to-day noise surrounding it.

Key Inflation Data Prices in a September Rate Hike

What is happening: In what was a highly anticipated release, August CPI came in slightly above consensus expectations, rising 0.4% month-over-month in the headline index and 0.3% month-over-month in the core CPI (excluding food and energy). That left headline inflation running at 3.4% year-over-year and core inflation at 2.4%. 

Sources of inflationary pressure beyond gasoline prices were concentrated in services, led by outsized increases in airfares, hotels, and wireless telephone services. Vehicle prices also increased sharply, but excluding that category, goods prices rose just 0.1%. Shelter inflation, including rents and owners’ equivalent rent, remained tame. 

The breadth of inflation — as measured by the share of CPI components where month-on-month price increases were above 3% on an annualized basis — edged up in August. Federal Reserve Chair Kevin Warsh has singled out this metric as one way to assess whether inflation is broadening. Measures of inflation diffusion had improved since earlier this year, but that progress stalled in in August. 

Why it matters: The August CPI report was a key data point, with Fed officials, including Fed Governor Waller, signaling that the appropriate stance of policy will be “heavily influenced” by the August inflation data. All told, the release comes after two relatively weak monthly prints, leaving the three-month annualized change in the core CPI at 2.0%. But in the context of policy, the Fed is looking for further progress on inflation, and with this single data point, that progress appeared fleeting.

Limited forward guidance under Warsh means Fed policy is highly data dependent. With labor market conditions consistent with full employment, with neither being a source of inflationary pressure nor indicative of a slowing economy, incoming inflation data are likely to determine the Fed’s next move. Following today’s release, markets now price an 85% chance of a 25-basis-point hike in September. 

The market is currently pricing in three rate hikes over the next year, but we continue to believe the Fed will not embark on an extended rate-hike cycle. Under Warsh, the Fed is likely to take a measured, data-dependent approach to policy, not a reactive one. As such, we incrementally increased duration in our fixed income portfolios following the recent backup in bond yields. Importantly, key underlying drivers of inflationary pressure — wages, unit labor costs, and rents — along with fleeting sources of upward pressure such as tariffs all remain consistent with further disinflation ahead. 

Midterm Elections Not Expected to Result in Major Policy Changes

What is happening: The U.S. midterm elections on November 3, 2026, will involve all 435 House seats, 35 Senate seats, and 36 state governorships. The outlook for House control has moved considerably in Democrats’ favor, with a growing number of Republican-held districts becoming competitive as President Trump’s approval rating declines. The Cook Political Report, a longstanding nonpartisan election newsletter, currently lists 21 House races as Toss Ups, 16 of which are Republican held, leaving Democrats with multiple potential paths to gaining seats.

With the House already tilted toward a possible change in control, the more contested question is whether Democrats can also flip the Senate. Cook's recent revisions moved the Texas and Iowa Senate races from Lean Republican to Toss Up, expanding the number of competitive races as Democrats seek the four-seat net gain needed for control. Michigan is another important battleground, where the open Senate race is unfolding against an escalation in U.S.-Canada trade tensions. Canada's retaliatory tariffs target products including steel and other manufactured goods, leaving Michigan particularly exposed given its highly integrated automotive and manufacturing supply chains with Canada. The issue could therefore add another economic dimension to a Senate race already central to the fight for control of the chamber.

Why it matters: Our base case remains a Democratic-controlled House and Republican-controlled Senate. Markets tend to react favorably to a divided U.S. government because it tends to limit each party’s ability to pass significant policy changes that materially affect markets. Attention around the Senate race has picked up as the battlefield has become increasingly competitive. However, we believe the legislative differences among the most plausible outcomes would be relatively modest. The primary scope of a Democratic-led House would be to constrain the administration’s ability to advance new Republican-led fiscal legislation, such as reconciliation packages. A Democratic sweep could matter more in areas where the administration needs congressional support, including oversight of certain industries, notably the data center buildout and utilities underpinning the growth of AI companies. Even so, the scale and momentum of AI investment appear well positioned to absorb greater congressional scrutiny, with potential federal action more likely to take the form of messaging bills or incremental restrictions rather than measures that would materially disrupt the current pipeline of planned projects.

Trade policy presents a different dynamic, as the president has authority that is largely independent from the legislative branch. While tariffs could have a strong hold on voter sentiment in trade-exposed swing states such as Michigan, many have been implemented through executive authority, meaning a shift in congressional control is unlikely to change the existing tariff backdrop. 

Subsequently, we do not expect the midterm outcome to dictate developments on this front. This fits within our broader base case that we do not expect the election outcome alone to materially alter the near-term economic or corporate earnings outlook. In this scenario, above-trend GDP growth and strong earnings should continue to provide a constructive backdrop for equities.