As we head into the second half of the year, the U.S. economy is navigating a complex landscape where “resilient growth” clashes with a sudden resurgence of inflation, driven in large part by the war in Iran. The impact of tariffs that were first introduced in April of last year has remained relatively muted. However, inflation has climbed to 4.2 % in May, up 0.4% from the prior month.1 This will lower the probability of a rate cut in the second half of the year. However, we expect individual tax refunds (including tax relief on overtime and tips), tax reform permitting the immediate expensing of capital spending and other regulatory reforms will work to offset some of the negative impacts of the war in Iran.
Outlook
| MID-YEAR HIGHLIGHTS |
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Historical Trends and Economic Woes Give Democrats Midterm Edge
A key issue heading into the November 3rd midterm elections will be the affordability crisis, which has been exacerbated by the war in Iran. This could cost the Republicans, who currently hold a slim majority in Congress. Recent polls indicate that the Democrats have gained a modest advantage over the Republicans.2 Historical trends also favour the Democrats. In 18 of 20 midterm elections since World War 2, the party that holds the White House loses seats in the House of Representatives in the subsequent midterms.3
The New Space Economy: From Public Exploration to Private Digital Utility
With the recent SpaceX IPO, a new spotlight is shone on the space economy and its evolution from a public endeavour to a mature, private sector industry. As we discussed in our recently published commentary, “The Orbital Industrial Revolution: Redefining Earth’s Digital Frontier”, we will continue to monitor initiatives to create space-based data centres that will offer a solution to Earth’s energy crisis. Some of the themes we will be monitoring include the FCC application filed by SpaceX for a “million satellite” mega-constellation that is currently undergoing regulatory review, the deployment of “space clouds” to process data directly in orbit and disaster recovery data centres on the lunar surface. Most of these are driven by companies based in the U.S.
Global Reliance on U.S. Energy Deepens
According to the U.S. Energy Information Administration (EIA) April 2026 report, net exports of natural gas are projected to grow by 18% this year, reaching 18.7 billion cubic feet per day (Bcf/d).4 This growth is fueled by the operational start of several major projects, including Corpus Christi Stage 3 and Golden Pass LNG, which are critical as disruptions in the Middle East increase global reliance on American energy. The U.S. is already seeing increased oil and refined products exports caused by the conflict in Iran, and we could see longer-term tailwinds for not only natural gas, but also for U.S. oil producers and refiners.
AI Infrastructure Spending Eclipses Global Oil and Gas Investment
The capital expenditures of five technology companies are now larger than global investment in oil and natural gas production. Hyperscaler spending is expected to continue to grow in the second half of the year and is expected to reach over $800bn by the end of 2026.5 This surge is led by Alphabet, Amazon, Meta, Microsoft and Oracle.
Source: Company data, Morgan Stanley Research estimates. See Internet: GOOGL, AMZN, and META Surprises and Learnings (30 April 2026)
We expect the continued growth in spending to be an important tailwind for U.S. equities heading into the second half of the year.
Download the full Empire Life 2026 Semi-Annual Market Outlook (PDF).
1 U.S. Bureau of Labor Statistics, Personal Consumption Expenditures Price Index
2 DLCC, “POLITICO: Democrats are Trouncing Republicans in State Elections Since Trump Took Office”, March 13, 2026
3 RBC Insights & Analysis
4 U.S. Energy Information Administration, “U.S. natural gas exports to grow nearly 30% by 2027 as LNG facilities ramp up”
5 Morgan Stanley Research, “What’s Next in Global Macro”, May 3, 2026
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June 2026
