The US economy is currently experiencing a robust mid-cycle expansion, bolstered by supportive fiscal policies, a push towards deregulation, sustained demand in the labor market, and a significant surge in capital expenditures fueled by advancements in artificial intelligence. The previous quarter's dominant opposing force, the energy shock, has now receded, paving the way for continued growth.

Our primary forecast indicates that this expansion will persist at an approximate 2% growth rate, accompanied by a steady moderation of inflation. The primary area of uncertainty has shifted from geopolitical tensions to the trajectory of interest rates. We believe this rate path is too unpredictable to base directional investment strategies upon. Although AI infrastructure is undeniably the powerhouse of this market's earnings, contributing roughly 60% of the S&P 500's earnings growth this quarter, its narrow leadership and extended positioning necessitate a more cautious approach to risk. Consequently, we leveraged the market's recent strength to construct a more balanced and diversified portfolio.

We would reconsider our current strategy if inflation were to accelerate once more, leading the Federal Reserve to decisively move towards interest rate hikes. Similarly, a deterioration in spending by hyperscalers, diminishing evidence of return on AI investments, or a significant downturn in labor market data would prompt us to adjust our positioning.

In an ever-evolving economic landscape, vigilance and adaptability are paramount. By carefully monitoring key economic indicators and maintaining a diversified portfolio, investors can navigate uncertainties and capitalize on emerging opportunities, fostering sustainable growth and resilience.