Boring is still beautiful for the second half of 2026

The financial markets exist for capital formation. Investors take ownership positions in companies or lend to companies, which lowers those companies' cost of capital and fuels capital investment and employment. The betting markets serve no similar value-added purpose to the broader economy; participants simply wager on an outcome.

Figure 1 suggests that total options volume reflects the increasingly speculative nature of the financial markets. The embedded leverage within options provides investors with a higher-risk/higher-return method to potentially increase stock returns. Despite the increased risk of using options, trading volume has more than tripled in the last five years.

Given the speculative backdrop, our investment outlook remains focused on dividend-paying stocks, non-US stocks, shorter-term higher-quality fixed income, and gold.

Figure 1: Spiralling options volumes illustrate the increasingly speculative nature of markets

Source: Janus Henderson

Investors are reassessing the Fed

One of our primary assumptions at the beginning of the year was that the US Federal Reserve (Fed) would not be able to cut rates as rapidly or as demonstrably as was consensus. In fact, we thought there was a probability that the Fed would need to shift course and increase rates.

That out-of-consensus view is apparently becoming more mainstream. Figure 2 shows the futures market's forecast for the federal funds rate. At the end of 2025 (amber line) the markets were predicting the fed funds rate would be lowered during 2026 and would not get back to current levels until 2030. The current view (white line) anticipates much higher rates, with only a small rate cut anticipated this summer and rates following a decidedly upward trajectory over the next five years.

Figure 2: A markedly different interest-rate path compared to the beginning of the year

Source: Janus Henderson

The near-term optimism regarding a potential rate cut might still be too optimistic. Figure 3 shows our simple real-time measure of Nominal Gross Domestic Product (GDP) (real GDP plus inflation) incorporating the Atlanta Fed's GDPNow forecast and one-year inflation breakevens. The bars in the chart represent actual Nominal GDP as was reported.

The nominal US economic growth has been extraordinarily strong. Nominal GDP in the third quarter of 2025 was over 8%, which was, when excluding the pandemic and post-pandemic period, the first 8% nominal GDP quarter in roughly 20 years.

The fourth quarter was slower because of the government shutdown, but first-quarter 2026 nominal GDP was greater than 5.5%, and the current quarter is so far tracking back above 7%.

We continue to believe that such strong nominal growth will limit the Fed's flexibility, that they will gradually shift toward a tightening bias, and that they could actually raise rates.

Figure 3. US economic growth remains extraordinarily strong

Source: Janus Henderson