Schwab Market Perspective

It seems to be the end of the Great Moderation Era for the U.S. economy. The Great Moderation Era—which marked most of the two decades leading up to the COVID-19 pandemic—is drifting away into what we call the new Temperamental Era. This new era resembles the original Temperamental Era from the 1960s to the 1990s, when inflation was more volatile, the geopolitical landscape was more unstable, and supply shocks were more frequent and powerful. That doesn't mean the investing backdrop is worse—just different, and potentially more volatile.

On the global front, strong corporate earnings may continue to support stocks, but concentration risks remain. What's unusual about the recent earnings strength is that it is occurring outside a typical early-cycle recovery period.

In our fixed income report, we note the factors that might keep the dollar supported in the near term—such as elevated U.S. bond yields, a hawkish pivot by the Federal Reserve, and relatively resilient U.S. economic growth. We also address how geopolitical instability could affect dollar demand in either direction.

• The Great Moderation has given way to a more "temperamental" backdrop marked by higher macro volatility, more frequent supply shocks, and greater geopolitical instability.
• Inflation volatility—not just the level of inflation—is likely to remain a key market driver, complicating the Federal Reserve's job and keeping stock-bond relationships less reliable.
• This new era may create a more volatile, dispersion-heavy environment that may favor diversification, flexibility, and factor-based investing rather than relying on the old playbook of broad index gains and a dependable Fed backstop.

• Corporate earnings have surged in recent quarters, handily beating estimates and providing fundamental support for global equity markets. However, this earnings boom has been unusually concentrated while consensus expectations about future growth have increased sharply, to levels typically only seen in early-cycle recovery periods.
• Capital spending (capex) linked to the artificial intelligence (AI) buildout in the U.S. has been the big driver of the recent earnings acceleration with the largest technology firms planning to spend over $750 billion in aggregate in 2026 and close to $1 trillion in 2027, according to Bloomberg. This spending has boosted earnings in a select group of industries tied to AI infrastructure, including technology hardware, communications equipment, construction, and semiconductors.
• The Information Technology sector currently represents 31% of the MSCI All Country World Index (MSCI ACWI) by weight but is forecast to contribute 55% of total projected 2026 earnings growth. Most of this growth is coming from a handful of stocks in the U.S., Japan, and emerging markets. In short, an exceptionally narrow group of stocks is fueling the strong global profit growth expected this year and next.
• This investment wave presents both opportunities and risks for investors. A key challenge is navigating the AI investment cycle in a way that enables participation in potential market gains associated with these fast-growing industries, while guarding against the risks associated with high earnings expectations and hyper-concentrated growth.
• We continue to advocate for broad diversification in equity portfolios, including across regions, sectors, and themes. With expectations of continued strong AI-focused capex trends through next year, we do not foresee an imminent end to this profit cycle. However, we believe active diversification can help investors to participate in rapid growth areas while supporting portfolio resilience.

• Elevated U.S. bond yields, the hawkish Fed pivot, and the relatively resilient U.S. economy may keep the dollar supported in the near term.
• While many other central banks have also pivoted to a hawkish bias, U.S. yields have generally increased more than other developed market government bond yields.
• The resilient U.S. economy should continue to attract capital, helping to support the dollar.
• Geopolitical risk remains a wild card. The recent re-escalation of the Iran war should support the dollar, while any de-escalation could reduce dollar demand.