July 2026 GW&K Market Insights

Market Insights | July 2026

Hear GW&K’s Harold Kotler, Bill Sterling, and Dan Fasciano discuss the economy, AI, inflation, diversification, and why long-term investors should look beyond today’s headlines.

Edited transcript

Dan: Welcome to the Third Quarter Client Conference Call for GW&K Investment Management. This call represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance.

To our friends listening in, I hope you’re having a great summer. My name is Dan Fasciano, Director of Private Wealth. Joining me on today’s call is Harold Kotler, our firm’s Founder-Chairman and Chief Investment Officer, as well as Bill Sterling, our Global Strategist.

Harold, I’m going to start with you. In your quarterly letter from just a few weeks ago, you made the case that despite all of today’s political noise and uncertainty, America’s enduring advantages, our entrepreneurial culture, our ability to attract talent, and a willingness to fund innovation remain firmly intact. As you step back from the day-to-day headlines, what gives you the confidence that these long-term strengths are still the dominant story for investors?

Harold: The key word in your question is, or in my answer is, enduring. I believe just in that, that our willingness and ability to be entrepreneurial, the advantages of letting people rise to the top without often education or the right schooling, and America stands so separate from any place else in the world, and that creates this energy that is so important, especially when you get to new worlds of thinking, of application, how to address worlds that haven’t been ever addressed before. You really need the free-thinking ability of people who have the willingness and the opportunity to think differently. And that’s the enduring factor for America and I’m sure, through my life — I suspect through all of our lives — that will never change.

Dan: Well, you say that Harold, but when you look back over the last 12 to 18 months, has that challenged your optimism or is it just reinforcing what you already believed?

Harold: Totally reinforced it. There is too much happening that is so exciting. Not in the world of entrepreneurship and development and AI research, and the ability to try to figure out where the world is going. It just doesn’t change or stop the opportunity that we have. And I think when people don’t understand that the stock market is a discounting factor for capitalism and all its intricacies, you can get bogged down in a lot of stuff. My God, there’s so much to think about, worry about, and be critical of and wish this and wish that. Behind all that is capitalism and entrepreneurship and business people trying to make a difference and having the incentive just to do that and that will not and does not change.

Dan: Bill, let me kind of land that plane on 2026. Consensus coming into the year was for slower growth, lower inflation, and multiple Fed cuts, and instead we’re seeing a surprising amount of resilience here both along the economy, inflation is sticky, but we’ve got a market that continues to push new highs. When you think back coming into the year, how or where did investors underestimate the strength, and do you think that is still the case?

Bill: Two factors stand out to me. First is that I think the economy has become much less sensitive to interest rates than it used to be. So, for example, residential investment has fallen from about 6% of GDP 20 years ago to just about 2% today. So even a 5% decline in housing investment over the past year subtracts only one tenth of one percentage point from GDP growth. That’s become a rounding error. And in the meantime, investment in computer-equipment software has risen from about 2% of GDP 20 years ago to nearly 7%, and is growing close to 20% year over year, which of course has been fueled by the AI boom. So, in effect, technology has replaced housing as a major growth engine, and it’s much less dependent on Fed policy than housing.

The second big factor is that consumer spending has been more resilient to higher energy prices than I think many had expected. The US now uses about 70% less oil per unit of GDP than it did in the 1970s, but also, household balance sheets are quite healthy overall, with the household debt relative to GDP ratio near a 25-year low.

Then finally, I mentioned there’s a major intergenerational wealth transfer that’s going on. Baby boomers and their parents hold roughly $110 trillion in assets, which is nearly 60% of total wealth. And that is despite the fact that they represent only about a quarter of the population. So even if just 1% of that wealth is transferred each year through gifts and inheritances, which I think is about the right number, it would provide meaningful support to younger households and to consumer spending.

So overall, I think investors have been underestimating and are still underestimating how much the changing composition of investment and strong household finances can cushion the economy against high interest rates.

Dan: So when I take the two points around the complexion of this economy and then the wealth transfer dynamic, do you think that the resilience is kind of our new baseline, or would it be safe to say your inclination is we’re towards the latter stages of the cycle, and maybe some caution is warranted?
Bill: Well, I think the resilience of consumers and businesses has been pretty impressive and probably represents some kind of new normal. I think much is going to depend on inflation. So, you know, most economists expect inflation to ease and that would allow the Fed to avoid another major tightening cycle anytime soon. But one encouraging sign is that wage growth remains pretty moderate in the mid 3% range, while productivity is growing at roughly 2%. So that combination implies that unit labor costs are growing broadly consistent with the Fed’s 2% inflation target. And it suggests to me that wages are not a major source of inflationary pressure.

And of course, if you get AI productivity growth going above 2%, it could further strengthen the economy’s ability to grow without generating additional inflation. So I think this resilience could be a new normal.

Harold: I think that’s a key point. I think the fact that we have not seen the AI productivity growth, where everybody’s worried about the amount of money being spent and the balance sheets, and what is being invested, but we haven’t begun to see the return on those investments. And that’s over the next three, five, and 10 years. So, there’s a world of difference happening out there. And we’re just in the second or third inning.

Dan: Well, Harold, you and I were talking earlier today and, we’re painting a kind of fairly positive backdrop here, but you also recently wrote and I want to hold you accountable for this since I’ve got you. I think the quote was “the key is the willingness of investors to lose,” end quote. I don’t think that’s how most people think about successful investing. What do you mean by that? And why is that mindset especially important given a period of transformational change?

Harold: The interesting thing is, when I have clients who are scientists, they know A plus B equals C. And that may be true in science, but it’s not true in investing. In investing, you have to have an open mind and willingness to not be 100% right. And if you think you’re going to be 100% right, you’re not investing. And the attitude of investing is the willingness to be creative and hope that 60% – 70% of your decisions are smart and good. If you do that, you’ll be very successful.

But anybody who’s unwilling to take a loss, or fears losses — there’s no way you can hide. Even if you put all your money in cash. Inflation will eat you up alive. People think they can hide, you can’t hide. You have to be part of the world, you have to be willing to invest, to take risks, and be creative in the way you see things, and that’s our job. Our job is to help people understand that it’s not simple. No, it’s not simple, nor should it be simple, but it’s not brain surgery either.

Dan: Bill, we’re kind of using a lot of words here, like technology and innovation. You in particular have been fairly prolific this year with some of the pieces that you’ve been putting out and are available on our site. One of them was the opportunities created by AI. As I am having this conversation with the two of you I also feel like it’s safe to say that investor attention has been shifting more towards profitability and cash flow, over just rewarding companies for spending aggressively on AI. What’s your thinking around whether we’re entering a new phase of the AI story or not?

Bill: Well, I think it’s a new phase in the sense that I think you’re right about investor attention shifting now more towards the return on capital issue as the massive AI-related data center buildout has been gathering steam. So we’ve seen greater selectivity among both stock and bond investors, resulting in a somewhat higher cost of capital for tech companies in the form of lower multiples on their equity and wider credit spreads this year. So as a result, the mega cap tech companies have lagged the broader market this year, with the magnificent seven tech names down about 3% year to date, while the S&P 500 is up nearly 10%.

But thanks to strong earnings outside of tech, we’ve seen a very constructive broadening of the market with small caps and the Russell 1000 value stocks both up about 20%, even while the equally weighted S&P 500 Index, and that’s the index that by definition is less weighted towards the mega cap tech names, that’s up about 15%. So, diversification has clearly paid off for investors this year.

But I don’t believe this means that it’s all over for the tech sector by any means. I agree with Harold that the AI story still is probably in early innings, but with the top 10 names accounting for nearly 40% of the S&P 500 Index, it’s still a good time for investors to be asking whether they’re sufficiently diversified into areas like small caps, value, and international.

Dan: So I suppose, and I don’t want to put you on the spot, but when you draw upon your experience, Bill, and you look at the kind of landscape right now, should this cause an investor to change their approach towards looking at investment opportunities, or is it kind of, keep doing what we’re doing? Do you have any advice or suggestions about how to approach the landscape today?

Bill: Well, I don’t think the current environment warrants any big change, since we believe that prudent diversification is always a cornerstone of a successful investment strategy. I do think it’s important to recognize that the winning stocks of the past few years are not necessarily going to be the winners going forward, and that investors should always keep an eye out for neglected sectors and stocks.

Dan: That’s great. Well, you know, now I want to kind of widen the lens, Harold, and steer this conversation back towards you. You’ve been an investor through the Nifty 50, through Black Monday, the dot com era, the global financial crisis, and now here we are in the midst of an AI revolution. I don’t know if it’s possible, but if you look across those experiences in your career, is there anything that separates investors who successfully navigated through those periods from those who made costly mistakes?

Harold: Well, I’m going to wrap up what Bill said, that there will be successes and failures, which goes back to your earlier comments. And yes, there will be, but the Nifty 50 — many of those companies disappeared, and many of the other companies are today the leaders in their industry. So once again, if the lesson is diversification, diversification, and patience — and patience — anybody who thinks this AI boom is late is crazy. And yes, there’s been pullback and consolidation, but that’s healthy. That’s what should happen in the stock market. People take profit and move on to other investments, but that doesn’t mean the investments themselves are not good, or they won’t recover, or they won’t hit new highs. They will — some will, some won’t. Some will succeed. Some won’t.

But yes, the Nifty 50 was a beautiful example back in the 1960s that “oh my God, the world has come to an end, and now they’re going to disappear,” and if you look at who they were, what they were, you’ll find that some of the finest companies in the world were part of that crowd. And that’s what’s going to happen this time around. You have to stay invested; you can’t be impatient. I mean, this is the beginning of a cycle. We’re so impatient with ourselves, and we can’t just allow ourselves to enjoy the environment. And, of course you can evaluate your investments and whether, statistically, companies are really delivering on what we hope they deliver, but yes, we need to be evaluating everything, but in the end, it’s an amazing time to invest.

Dan: That is great context and parenthetically, I was a product of the 1960s and I’ve lasted, so I am grateful for that. Bill, we’ve done a really good job covering where we are today. But I feel like we can’t exit this call without me pushing you to look out over the next, say, 12 – 24 months just a bit. And when I think about it, there’s a number of variables pulling for our attention here. Things like inflation, the Fed, clearly geopolitical risks, and we talked about AI. All of those come to mind. Is there any theme inside of that or themes inside of that that you think when we look back a year or so from now, would have a greater potential to change our outlook? And if so, why? What’s really kind of making its way to the top of your mindset?

Bill: Sure. Well, you know, of course, geopolitics is always a wild card, but our study of history shows that it’s pretty important for investors not to overreact to geopolitical headlines. But of the other factors you mentioned, it reminds me that a famous MIT economist, Rudi Dornbusch, once said that US business cycles never die in bed of old age. Instead, they’re murdered by the Fed.

So I think the inflation issue, which we talked about earlier, and the Fed’s possible response is what bears close watching. And as I said earlier, there are reasons to be optimistic about inflation settling back to the 2% target level, especially if AI investment yields productivity gains. But it’s our job to keep a close eye on that particular issue.

Harold: Also, I know the Fed Chair is really quite a remarkable person and to have him in the driver’s seat, I think for me at least, it gives me great comfort.

Dan: That’s great. We are doing this during Federal Open Market Committee week so that is a timely statement there. Well, Harold, Bill, I want to thank you both for sharing your thoughts. And to everyone who has been listening in, as always, should you have any follow up or further questions, please do feel free to get in touch with your GW&K advisor. To everyone, please enjoy the balance of your summer. We look forward to reconvening in October.