2026 Financial Services State of the Market Mid-Year Report

As we reach the midpoint of 2026, the financial services landscape is being shaped by a mix of macroeconomic pressures, geopolitical disruption, and rapid technological transformation. Four forces defining this environment include geopolitical instability, persistent but uneven inflation combined with interest rate uncertainty, AI-driven disruption, and faster, more volatile market cycles with increasing concentration in returns.

Summary

Recent industry data reinforces these observations. Energy inflation in the U.S. surged to 23.5% for the year, fueled largely by geopolitical disruptions, with gasoline prices increasing 8.6% in May 2026 alone.¹

Markets remain narrow, with leadership (stocks or sectors) heavily tied to a handful of AI companies,² while large U.S. tech firms are projected to exceed $500 billion in annual expenditures tied to AI initiatives.³ Combined, these dynamics are pressuring investors even as equity performance remains strong.

The effects are visible across businesses and households alike. U.S. businesses are navigating declining margins, with 55% planning price increases in the next six months.4 Although financially strained, U.S. employees are largely staying in their current roles, with more than half expecting nationwide layoffs in 2026.5 Meanwhile, 401(k) balances declined 4% in Q1 2026 amid market volatility, a reminder that macroeconomic conditions affect retirement readiness in tangible, measurable ways.6

These developments raise important questions for plan sponsors and participants, successful individuals and families, and institutional investors navigating increased uncertainty and heightened fiduciary responsibility. How are current conditions shaping investment behavior and long-term planning? And what role can advisors play in guiding clients through the remainder of the year?

At The Baldwin Group, we remain focused on delivering clarity, stability, and forward-looking strategies, even as conditions continue to evolve. In this midyear update, we examine key trends across the financial services landscape, consider what they mean for different stakeholders, and explore why they matter.

Market trends

Macro conditions influencing the financial services landscape

At midyear 2026, financial markets are operating in a fundamentally different environment than prior cycles—faster-moving, less predictable, and more responsive to external events. Macroeconomic conditions and geopolitical developments have become primary drivers of market behavior, requiring investors and plan sponsors alike to monitor a broader set of variables than traditional financial indicators alone.

Market dynamics

One of the most consequential forces shaping this environment has been geopolitical instability, particularly the ongoing Iran-U.S. conflict. Disruptions to global energy supply have been significant. According to the International Energy Agency (IEA), global oil supply declined by as much as eight million barrels per day during peak disruption periods, translating directly into higher energy costs across the economy.⁷

The impact extends well beyond fuel prices. Energy increases are filtering through to goods and services broadly, affecting production, transportation, and distribution costs. As a result, overall inflation has accelerated. CPI rose 4.2% year over year in May, the highest level since May 2023, with energy contributing more than 40% of the monthly increase.⁸ Global forecasts reinforce this trend, with the World Bank projecting energy prices to rise sharply throughout 2026, further contributing to broader inflation pressures.⁹

At the same time, inflation remains uneven and sensitive to new developments. Markets continue to react quickly to Federal Reserve signals, and even modest shifts in interest rate expectations, driven by inflation data, employment trends, or geopolitical events, are influencing asset prices and investor behavior in meaningful ways.

Another defining characteristic of the markets halfway through 2026 is the compression of market cycles and concentration of returns. Leadership has rotated rapidly between sectors, particularly between value and growth, reflecting shifts in economic expectations, and the speed at which investors are repositioning portfolios.

Historically, growth stocks have outperformed value for extended periods, supported by low interest rates, strong earnings expansion, and investor preference for innovation-driven companies. That dynamic shifted earlier this year, with large-cap value briefly outperforming large-cap growth. Since April, growth stocks have regained momentum, though value was still showing slightly more upside potential as of early June.¹⁰ This back-and-forth reflects a broader structural change. Rotations that once unfolded over multiple quarters are now taking shape in compressed timeframes, driven by advances in trading technology and faster access to information.

Overall market returns remain highly concentrated. According to Charles Schwab, performance continues to be driven by a relatively narrow group of sectors, particularly those tied to artificial intelligence and energy, while broader participation across the market remains more limited.

The economic and labor backdrop adds another layer of complexity. While employment levels remain relatively stable, with the economy adding 172,000 jobs in one month as unemployment held steady at 4.3%, wage growth has not kept pace with rising prices.¹¹ Real wages are declining as inflation outpaces income growth, placing meaningful pressure on household purchasing power.

Implications

These forces are converging in ways that directly affect investor behavior. Rising energy costs are increasing the price of everyday goods and services, reducing real income and influencing saving and spending patterns. For long-term investors, this can translate into more cautious financial behavior or downward pressure on ongoing savings rates.

Persistent inflation and evolving rate expectations are contributing to ongoing market volatility, shaping both investor sentiment and portfolio positioning. Markets are reacting more quickly to new information, and short-term movements are increasingly tied to developments outside traditional financial indicators. For retirement plan participants, these conditions affect outcomes indirectly but meaningfully. Slower wage growth combined with higher living costs can pressure contribution rates, while market concentration makes diversification and allocation decisions more consequential.

Wage-to-retirement readiness

The pressure on real wages does not stop at monthly household budgets. It flows directly into retirement readiness. When income growth fails to keep pace with inflation, workers face a compounding challenge. The same dollars must stretch further for today’s expenses, leaving less available for long-term savings. This dynamic is already showing up in plan data. In Q1 2026, 19.2% of retirement savers carried outstanding 401(k) loans,12 and hardship withdrawals reached approximately 6% of participants, roughly triple pre-pandemic levels.13 These are not isolated financial decisions. They are downstream consequences of sustained real wage erosion. Plan sponsors should monitor contribution rate trends and loan activity as early indicators of participant financial stress, rather than waiting for balance declines to surface the issue.

Strategic outlook

Looking ahead to the second half of 2026, several implications stand out. Market sensitivity to geopolitical and macroeconomic developments is likely to persist, requiring close and ongoing attention to external factors influencing performance. Diversification remains essential, particularly when returns are concentrated in a limited number of sectors. And maintaining disciplined, consistent investment strategies is critical to navigating frequent short-term disruptions while positioning for long-term outcomes.

AI defining leadership and future growth trajectories

Artificial intelligence has moved to the center of the financial markets story, acting as both a near-term driver of equity performance and a longer-term catalyst for economic growth. Its influence is no longer concentrated in a single sector. It is reshaping capital flows, investment strategies, and how financial services are delivered across the industry.

Market dynamics

A defining feature of the current market environment is the outsized role a small group of AI-driven companies plays in overall returns. Recent market data shows just four large technology companies—Nvidia, Meta, Microsoft, and Broadcom—accounted for roughly 60% of year-to-date S&P 500 gains, underscoring how narrow market leadership has become.¹⁴ This concentration is reinforced by unprecedented levels of investment. Large U.S. technology firms are expected to collectively invest about $700 billion annually on AI-related capital expenditures, highlighting both the scale of commitment and the importance of AI to future growth strategies.¹⁵

The impact of AI is broadening rapidly beyond large technology platforms. Capital flows support a wide ecosystem that includes data centers, semiconductor and hardware providers, and the construction and energy infrastructure required to power AI systems at scale. This buildout effect is extending economic benefits across sectors, creating new opportunities tied to the physical and digital backbone of AI deployment.

Within financial services, adoption is accelerating across multiple participant groups. Advisors are increasingly using AI to automate reporting, enhance data analysis, and generate deeper client insights, helping improve both efficiency and the quality of decision-making.

Recordkeepers and plan providers are integrating AI to streamline administrative processes, monitor participant behavior, and identify potential risks earlier. Plan sponsors are taking note, 55% believe AI will enable predictive analytics to forecast participant trends and identify potential challenges, while 52% expect it to help workers choose investment options personalized to their specific needs.16 And individual investors benefit from AI-powered tools that deliver more personalized education, guidance, and accessible financial planning support.¹⁷

Implications

AI is already contributing to earnings growth, productivity improvements, and accelerating capital investment across the economy. Government research suggests that additional AI adoption has the potential to increase overall economic output by improving efficiency and enabling new products and services.¹⁹

At the same time, the concentration of returns among a relatively small set of companies introduces a meaningful dimension of market risk. When index performance relies heavily on a handful of leaders in the space, markets become more sensitive to shifts in sentiment or earnings outcomes within that group. This dynamic warrants careful attention in portfolio construction.

Within financial services, AI adoption is also reshaping how advice is delivered, moving the industry toward more data-driven, personalized, and predictive engagement models. Client expectations are evolving alongside this shift. Technology-enabled insights, more proactive engagement, and tailored recommendations are becoming standard components of a competitive advisory experience.

AI adoption maturity across financial services

It is important to recognize that AI adoption in financial services is not uniform. A meaningful gap exists between firms at the forefront of deployment and those still evaluating early-stage tools. Large custodians, major recordkeepers, and well-resourced advisory firms are building proprietary AI capabilities or integrating enterprise-grade platforms. Smaller practices and plan sponsors, by contrast, may be working with basic automation tools or relying on provider-level AI embedded in existing platforms. This maturity gap has material implications for competitive differentiation. Advisors and plan sponsors that move deliberately, not just adopting AI, but integrating it into workflows, governance processes, and client engagement models, will be better positioned to deliver measurable value. Those that delay risk falling behind both on operational efficiency and the quality of insight they can bring to clients.

Strategic outlook

This environment reinforces the importance of balancing exposure to AI-driven growth with diversification across sectors and asset classes. While participation in AI-related opportunities remains important, portfolio construction should account for concentration risk as a relatively small group of companies continues to drive a disproportionate share of market returns.

For clients, the bar for advisory engagement is rising. Those who work with advisors equipped to leverage AI tools and translate complex market dynamics into clear, personalized strategies will be better positioned to navigate both the opportunities and the risks this environment presents.

Market volatility and investor uncertainty remains elevated

Market volatility has increased through the first half of 2026, with equity markets experiencing rapid swings, frequent sector rotation, and heightened sensitivity to both macroeconomic signals and external events. Investors have navigated sharp changes in sentiment, often driven by a combination of geopolitical developments, central bank communication, and earnings results, particularly within AI-driven sectors.

Market dynamics

The early months of 2026 saw a notable market pullback tied to geopolitical uncertainty, reinforcing how quickly external events can shift investor positioning and trigger broad selloffs. Ongoing changes in interest rate expectations have compounded this dynamic. Even modest shifts in Federal Reserve guidance have produced immediate reactions across equities and fixed income, underscoring how dependent markets remain on policy clarity.

Corporate earnings, especially among technology and AI companies, have played an outsized role in shaping market performance. Strong results and continued AI investment have supported equity gains and boosted overall index performance. However, the same concentration that drives performance in positive periods also amplifies market sensitivity when results disappoint or when sentiment shifts.

Implications

Market swings are occurring more quickly and more frequently than in prior cycles. Advances in trading technology and real-time data access allow investors to react almost instantly, accelerating market moves that might previously have taken much longer to unfold. Leadership remains narrow, and a small group of companies continues to drive a disproportionate share of returns, making markets more sensitive to any shift in performance among those names.

This environment is generating a consistent and understandable question from investors: are we in a bubble? It is a question worth examining carefully, and the current environment offers some important distinctions. Elevated valuations in AI-linked equities, narrow index leadership, and sentiment-driven momentum share surface-level similarities with prior bubble periods. However, meaningful differences exist. Unlike the late 1990s technology cycle, today’s leading AI companies are generating substantial earnings and cash flows, and capital expenditures reflect genuine infrastructure buildout rather than speculative positioning alone. Concentration risk is real and warrants active portfolio management. A useful framing for clients is to distinguish between structural growth, driven by durable earnings expansion and broad economic adoption of AI, and valuation excess, where prices outpace even optimistic long-term earnings projections. Maintaining exposure to AI-driven growth while managing concentration through diversification across sectors, geographies, and asset classes is a more defensible posture than either wholesale avoidance or unconstrained participation.

Strategic outlook

One of the central challenges in this environment is reactive decision-making. Investors naturally fall into the pattern of “buying high and selling low,” responding to short-term momentum rather than long-term fundamentals. Market downturns often represent opportunities to acquire quality investments at lower prices, while periods of strong performance can be appropriate moments to rebalance or realize gains. Maintaining that perspective under pressure requires discipline and, for many investors, a trusted advisor to help hold the line. Advisors are playing a more important role in helping clients interpret market developments, stay focused on objectives, and navigate an environment where information and market reactions move faster than ever.

Heightened fiduciary scrutiny – a key focus with retirement plans

Fiduciary oversight has become one of the most consequential areas of focus across the retirement plan landscape. Increased litigation and regulatory scrutiny are placing new demands on plan sponsors in 2026, elevating both the stakes and the standards of plan governance.

Market dynamics

Data from Bloomberg Law indicates that ERISA-related lawsuits have trended higher since 2024, reflecting a more aggressive legal environment and a heightened willingness among participants to challenge plan decisions.²¹ Claims are frequently centered around familiar issues such as share class selection or recordkeeping costs, yet their volume continues to increase. According to the National Association of Plan Advisors (NAPA), more than a dozen suits have been filed against sponsors of a specific target-date fund for failing to adhere to the plan’s investment policy statement, not performing suitability tests in a timely manner, and departing from established committee practices.²²

Beyond litigation, expectations for fiduciary oversight are rising more broadly. Plan sponsors are being evaluated not just on outcomes, but on the strength and consistency of their processes, including documentation practices, committee structure, and the depth of fiduciary training across decision-makers.

Implications

Decisions that were once considered routine, such as selecting a target date fund or negotiating service provider fees, are now subject to greater scrutiny and potential legal challenge. This shift fundamentally elevates the importance of governance. Meeting minutes, decision frameworks, and documented rationale are no longer administrative formalities; they are core components of fiduciary defense.

What proactive fiduciary governance looks like in practice

Given the litigation environment, plan sponsors benefit from moving beyond reactive compliance toward genuinely proactive governance. In practice, that means treating the following as operational standards, not administrative formalities:

• Investment policy statement (IPS): Establish a documented IPS and follow it consistently—deviation without documented rationale is among the most common triggers for legal challenge.
• Committee meeting minutes: Reflect substantive deliberation, not merely attendance records.
• Fee benchmarking: Conduct on a defined schedule, with results documented and acted upon when warranted.
• Suitability assessments: Evaluate plan investment options, particularly target-date funds, with regularity and tie findings explicitly to documented participant demographics and plan objectives.
• Fiduciary training: Treat as an ongoing committee commitment, not a one-time onboarding exercise.

Strategic outlook

Formal governance processes, consistent documentation, and disciplined recordkeeping are becoming essential operational requirements for retirement plan sponsors. Committees should meet regularly, maintain clear and detailed minutes, and demonstrate ongoing education around fiduciary responsibilities and evolving best practices. Advisors play a critical role in supporting these efforts, helping organizations establish sound processes, benchmark decisions against industry standards, and navigate an increasingly complex compliance environment with confidence.

Evolving product innovation expanding retirement plan choices

Financial services companies are introducing new investment options that are expanding the retirement plan landscape. Innovation is particularly evident in income-oriented solutions, such as annuities embedded within target date funds, as well as in alternative investments, including private equity and, to a more limited extent, digital currencies.

Market dynamics

Several forces are driving this evolution. Demographic trends, including an aging workforce and longer retirement horizons, are increasing demand for income-focused solutions that provide more predictable outcomes in retirement. At the same time, investors are seeking additional sources of return beyond traditional equities and fixed income. Historically, many of these opportunities were limited to institutional investors, but recent Department of Labor (DOL) guidance provides a safe harbor framework that makes it easier for plan fiduciaries to evaluate and, in appropriate circumstances, include alternative investments within defined contribution plans.

Six factors for plan fiduciaries to consider when selecting investment alternatives:

Implications

While new products can expand opportunity, they can also introduce complexity that warrants careful evaluation. Many of these solutions are still early in their development and have not yet been widely tested across different market environments. They often involve greater complexity, potential liquidity constraints, and additional layers of due diligence. Private market investments, for example, may require longer holding periods, while insurance-based income products can introduce cost and structural considerations that affect long-term value. These dynamics increase the importance of rigorous evaluation, particularly within a heightened fiduciary environment where decisions are subject to greater scrutiny.

The DOL’s six-factor framework provides a useful starting point, but applying it meaningfully requires going beyond a checklist. Two factors in particular warrant close attention:

• Fees: Alternative investments often carry layered cost structures—management fees, performance allocations, administrative expenses, and in some cases surrender charges—that are less transparent than those associated with traditional mutual funds or collective investment trusts. Fiduciaries should evaluate total cost of ownership, not just the headline fee, and benchmark against comparable options to ensure costs are reasonable relative to the value delivered.
• Liquidity: Unlike publicly traded investments that can be redeemed daily, many alternative structures impose lock-up periods, redemption gates, or limited withdrawal windows. Fiduciaries must assess whether liquidity terms are compatible with participant needs, particularly for defined contribution plans where participants may need access to funds at unpredictable times. A mismatch between a product’s liquidity profile and plan participant demographics is one of the most significant and underappreciated risks in alternative investment evaluation.

The remaining four factors, performance, valuation, benchmarks, and complexity, each carry their own evaluation demands and should be assessed with the same rigor.

Strategic outlook

Not all products are appropriate for all participants. Plan sponsors should take a measured, due diligence-driven approach when evaluating new offerings, ensuring alignment with participant needs and plan objectives. Advisor guidance is critical in this process, helping to assess suitability, understand trade-offs, and cut through market enthusiasm to make informed, defensible decisions.

Financial pressure impacting savings behaviors

Long-term investors are navigating a combination of financial strain and behavioral challenges that are directly shaping retirement readiness. While long-term savings trends remain intact, short-term pressures are increasingly influencing both how people save and invest.

Market dynamics

Rising living costs continue to weigh on household finances. General inflation reached 4.2% in May, driven by essential food and energy prices, and the effects are showing up in how individuals are managing, and drawing on, their retirement accounts.²⁵

• In Q1 2026, 19.2% of retirement savers had outstanding loans from their 401(k), underscoring increased reliance on retirement savings for near-term needs.²⁶
• Hardship withdrawals continue to rise year over year, with approximately 6% of participants taking withdrawals in 2025, roughly triple pre-pandemic levels.²⁷
• Average retirement balances declined by about 4% in the first quarter of 2026 following market swings earlier in 2025.²⁸

Market conditions are also influencing participant behavior in ways that compound the challenge. In strong markets, investors often increase equity exposure in pursuit of higher returns. During periods of volatility, reactive decisions, such as reducing exposure or moving to cash, can erode long-term outcomes. These patterns, commonly described as performance chasing and emotionally driven decision-making, can undermine long-term investment outcomes.

Implications

Financial strain can lead to reduced contributions or early withdrawals, creating savings gaps that are difficult to recover from over time. At the same time, behavioral investment decisions can amplify portfolio volatility. Historical data shows that missing just the top 10 trading days over the past 20 years would have reduced annual returns by nearly 40%, an illustration of how costly reactive decision-making can be, and how much value consistent participation in the market delivers over time.²⁹

These data points are not coincidental. They reflect the downstream impact of real wage decline discussed in the macro conditions key trend. When purchasing power erodes over an extended period, the retirement account becomes a liquidity buffer of last resort. Plan sponsors who track loan activity and hardship withdrawal rates alongside wage and inflation data will have earlier visibility into participant financial stress and a stronger basis for targeted intervention through plan design, education, and access to professional guidance.

Strategic outlook

Education remains essential. Helping individuals understand long-term investing principles and recognize common behavioral biases can meaningfully improve outcomes over time. Plan sponsors should prioritize tools, guidance, and plan design features, such as automatic enrollment, managed solutions, and access to professional advice, that support more consistent saving and investment behaviors.

Recommendations

As the financial services landscape continues to evolve, disciplined, informed, and well-coordinated approaches to decision-making is essential. Partnering with advisors who can provide integrated support, specialized expertise, and timely insights is key to help improve outcomes and keep strategies aligned with long-term objectives.

For institutions and retirement plan sponsors:

Strengthen governance and decision-making – Maintaining defined processes with consistent documentation can support accountability and transparency at every level of plan administration. Ongoing training is also important, helping fiduciary committees stay aligned with regulatory expectations and emerging best practices. A structured, long-term framework for decision-making, rather than one that reacts to short-term market movements, can lead to more consistent and defensible outcomes over time.

Focus on long-term retirement readiness – Plan strategies should be aligned with clearly defined goals, with regular monitoring to assess whether participants are on track. This includes reviewing investment lineups, contribution patterns, and overall participant engagement to identify gaps and opportunities before they become material issues.

Consider plan design – Features such as auto-enrollment and auto-escalation have proven effective in increasing savings rates, while competitive employer match structures can enhance both participation and talent retention. These elements should be evaluated regularly to ensure alignment with workforce needs and market standards.

Leverage AI-enabled reporting and analytics – AI tools can provide deeper visibility into plan activity, surfacing trends, identifying shifts in participant behavior, and supporting more proactive plan management. Advisors who can integrate these capabilities with expertise across legal and compliance considerations, recordkeeper coordination, and investment strategy bring greater value to plan sponsors navigating today’s environment.

For individuals and families:

Maintain discipline during periods of market volatility – Short-term fluctuations can prompt reactive decisions that undermine long-term progress. Maintaining a consistent, long-term perspective, even when market conditions feel uncertain, helps support more consistent progress toward financial goals.

Leverage data, technology, and AI tools – Access to data, technology, and AI-driven tools is improving how investors engage with their portfolios. These resources can help monitor performance, identify potential risks and opportunities, and provide a clearer view of long-term progress. Realizing their full value, however, depends on ongoing engagement and a willingness to act on what the data reveals.

Prioritize financial education and ongoing guidance – Strengthen financial decision-making through ongoing engagement and learning. Common tendencies, such as performance chasing in strong markets or shifting allocations during downturns, can impact outcomes if not managed carefully. Building a stronger understanding of these patterns, combined with access to professional guidance, can support more informed and consistent decision-making.

Partner with a trusted advisor – Knowledgeable advisors can be a key resource for navigating today’s complex financial environment. They provide tailored guidance aligned to individual goals, help interpret market developments, and bring a structured approach to planning and decision-making.

Advisors can also help:

• Support portfolio construction
• Identify opportunities for optimization
• Maintain discipline during periods of uncertainty
• Coordinate broader financial considerations, such as tax efficiency, income planning, and long-term wealth goals
• Translate trends and market activity into clear, actionable strategies that remain aligned with long-term objectives

Protecting the Possible^®

2026 Mid-year state of the market update

The defining capability across the financial services landscape in the second half of 2026 may be the ability to respond effectively to ongoing uncertainty without losing sight of long-term objectives. Multiple forces are shaping this environment, market cycles have become faster, more volatile, and increasingly compressed, and fiduciary expectations continue to rise alongside growing financial strain at the individual level.

Success in this environment requires more than awareness of these trends. It requires the discipline to act deliberately in response to them. Staying focused on long-term objectives while markets fluctuate is essential. Equally important is the ability to adapt quickly to changing conditions without overreacting to short-term developments. Organizations and individuals that effectively leverage data, technology, and expert guidance will be better positioned to make informed decisions and maintain forward momentum, even as the environment continues to shift.

At The Baldwin Group, our commitment is to help clients navigate this complexity with confidence and purpose. By combining deep industry expertise, integrated advisory capabilities, and advanced data-driven insights, we support more informed decision-making across every stage of a client’s financial services journey. Our team works proactively to anticipate change, provide actionable guidance, and deliver solutions that remain aligned with long-term goals. In a market defined by constant change, we remain dedicated to helping clients stay focused, adapt with intention, and protect what’s possible. Connect with us today.