What should investors watch in the second half of 2026? The first half showed that the same market forces can be both risks and opportunities. Kvarn’s mid-year outlook looks at both sides of fragmentation, inflation, artificial intelligence and diversification, and shows how a European investor can build a portfolio that does not depend on a single forecast coming true.
This content has been produced by Kvarn Investment Services Oy, a licensed investment firm supervised by the Finnish Financial Supervisory Authority. The content is intended for informational purposes only and should not be interpreted as investment advice or recommendation. All investing involves risks, and past performance is not a guarantee of future returns.
The start of 2026 has reminded investors of one thing: markets do not always behave the way headlines suggest.
Geopolitical tensions have increased, energy has become more expensive, inflation has proved more persistent than many expected at the beginning of the year, and expectations for central bank rate cuts have moved further into the future. At the same time, equity markets have recovered quickly. Several major indices have climbed back close to record highs, AI investment has remained strong, and investors’ appetite for risk has proved surprisingly resilient.
That makes the second half of the year interesting but difficult to read. On the surface, the market looks strong in many areas. Underneath, many old assumptions have changed.
For investors, the key question is therefore not only whether markets will rise or fall next.
The more important question is whether their portfolio is built for an environment in which the floor for inflation remains higher than before, geopolitical risks feed directly into energy and supply chains, and structural changes such as artificial intelligence divide the market into winners and losers more forcefully than in the past.
The core idea of this outlook is simple: investors do not need to guess perfectly which scenario will play out, but their portfolio should be able to withstand several possible futures. A good portfolio is not built around one theme, one market or one asset class. It is built from different parts with clearly defined roles. One part seeks growth, another provides stability, a third protects purchasing power, and a fourth offers considered exposure to long-term structural change.
The market in 2026 is being shaped by three major forces: fragmentation, inflation and artificial intelligence. They cannot be treated separately, because they reinforce one another.
Fragmentation increases the importance of energy, defence and supply chains. As a result, energy and critical raw materials face persistent cost pressure, which feeds into the inflation story. Inflation, in turn, determines how much room central banks have to support markets when risk appetite weakens. Artificial intelligence enters the equation from two directions: it increases demand for data centres, power grids and semiconductors, and that demand can keep short-term inflation pressures elevated. Over the longer term, the same technology may reduce prices through productivity gains.
For a European investor, the environment has its own characteristics. They invest globally, but live in euros. They can own U.S. technology companies, but their interest-rate, currency and inflation risks are shaped by the eurozone framework. They see the U.S. AI cycle, while their own home market is simultaneously going through Europe’s defence, energy and infrastructure cycle.
The question is therefore not which asset class will generate the highest return. A better question is what each part of the portfolio is meant to do.
Each of the three themes is examined through the same structure:
Risk — what pressure is linked to the theme and why investors should take it seriously
Opportunity — what counterforce emerges from the same phenomenon and where capital may flow
What investors should consider — how the theme can be approached from the perspective of the overall portfolio, risks and overlaps
Finally, we bring together a view on how a modern portfolio can be built around functions, and which signals investors should monitor in the second half of the year.
The individual instruments mentioned in the text and tables are examples of possible exposures, not investment recommendations. Availability, costs, tax treatment, currency and suitability must always be checked before making an investment decision.
The old logic of globalisation was based on efficiency: production was moved to where it was cheapest, and energy, semiconductors and raw materials were transported around the world on the assumption that routes would remain open and political risks would stay manageable. The first half of 2026 has shown that this assumption no longer holds.
Two concrete bottlenecks illustrate the problem.
Lähde J.P.Morgan
The first is energy. Under normal conditions, around one-fifth of the world’s oil and a significant share of global LNG trade pass through the Strait of Hormuz. Alternative routes, such as pipelines bypassing the strait, can replace only a small share of this if traffic is disrupted. The vulnerability of a single narrow passage is therefore reflected directly in energy prices everywhere.
The second bottleneck is semiconductors, and it is even more important than energy. Taiwan manufactures the majority of the world’s most advanced chips used in modern AI computing, and cutting-edge production cannot be moved elsewhere quickly. New factories in the United States, Japan and Germany will add capacity only after a delay of several years. The island is also dependent on imported energy and food, making the situation even more sensitive.
When so much critical production is concentrated around one narrow passage or one island, a local risk becomes global. For investors, fragmentation is visible above all in two ways: a more permanent energy risk premium and concentration risk in supply chains.
The same uncertainty that makes the world more fragile forces Europe and many emerging economies to reinvest in physical capacity. In Europe, the shift is visible in defence, energy, power grids, data centres, logistics and critical materials. In emerging markets, it is visible in raw materials, production chains and the growth of domestic demand.
Three directions stand out clearly.
Emerging markets play a key role in raw materials, semiconductors, population growth and new production chains, and valuations in many areas are clearly lower than in the large U.S. indices. Latin America sits on an unusually large share of the world’s raw materials. The region has a significant share of global copper and lithium reserves, which are needed for electrification, battery technology and data centre construction. In Asia, Taiwan and South Korea are key parts of the semiconductor chain, while India offers a longer-term growth story.
This kind of exposure is available in the market through many types of products. Broad emerging market indices are tracked, for example, by iShares Core MSCI Emerging Markets IMI (IS3N) and iShares MSCI EM UCITS ETF (EUNM), while emerging markets excluding China are covered by products such as Amundi MSCI Emerging Ex China (EMXC) and iShares MSCI EM ex China (84X0). These are only examples used to illustrate the theme. There are several similar products. In general, a broad solution is better suited as a core part of a portfolio, while a product focused on a single country increases regional risk.
NATO countries have committed to increasing defence spending substantially, and the European Commission has built a financing package for defence investments, bringing more visibility to order books in the sector. The nature of demand is unusual: the customer is the state, contract periods are multi-year, and visibility can extend up to a decade. This is a very different cyclical profile from companies that depend on consumer demand, for example.
Several products built around this theme are available in the market. Products focused on European defence include WisdomTree Europe Defence (EUDF), iShares Europe Defence (DFNC), Amundi STOXX Europe Defense (EDFS) and Future of European Defence (8RMY), while more global products with exposure outside Europe include HANetf Future of Defence (ASWC), Global X Defence Tech (4MMR), VanEck Defense (DFEN) and iShares Global Aerospace & Defence (5J50).
European defence stocks have risen strongly in recent years, and their valuations are clearly higher than average. For many investors, defence is therefore a more natural satellite allocation than a portfolio core.
Global infrastructure has historically offered relatively stable returns in different inflation environments, because many infrastructure businesses have long-term, contract-based cash flows. At the same time, demand for them is growing as artificial intelligence, electrification and data centres require more electricity, cooling and grid capacity. Infrastructure is therefore both a partial inflation hedge and a structural growth theme.
There are many routes to real asset exposure. Broad global infrastructure is tracked, for example, by iShares Global Infrastructure UCITS ETF (CBUX), data centres and digital infrastructure by Global X Data Center REITS & Digital Infrastructure (V9N), and European infrastructure development by Global X European Infrastructure Development (B41J). Products linked to copper and critical raw materials include Global X Copper Miners (4COP), iShares Copper Miners (CEBS) and Xtrackers MSCI World Materials (XDWM), while iShares Diversified Commodity Swap (SXRS) offers exposure to a broad commodity basket.
Three points stand out above all:
Sizing matters. Most fragmentation themes — defence, copper, individual regions — are better suited as portfolio satellites than as core holdings. They can be narrow, cyclical and sensitive to valuations, so a small allocation can be enough to provide exposure without making the whole portfolio move with them.
A good theme does not mean a good price. European defence has risen strongly, and valuations are high. The long-term story can be strong even if the current moment is not the best possible entry point. These two things should be kept separate.
Real assets are often missing entirely. Infrastructure and commodities are completely absent from many European investors’ portfolios, even though they perform a different role than equities and bonds. This may be a gap worth identifying.
Not long ago, inflation was discussed as a temporary problem. The start of 2026 has been a reminder that this may be part of a broader shift. The key issue is not whether inflation is slightly above or below expectations in a single month. The issue is that price pressures can return again and again through new shocks, and after each shock the floor may remain higher than before.
Source: J.P.Morgan
In practice, the 2020s have brought five different inflationary pressures in succession: the pandemic, Russia’s invasion of Ukraine, the broad introduction of tariffs, tighter immigration policy in the United States, and now the Middle East energy shock. Each of them was initially framed as “one-off”, but the next shock arrived before the effects of the previous one had disappeared. When inflation shocks accumulate, households’ and companies’ expectations begin to settle at a higher level than before. Wages and contracts begin to price in the expected price level, and this is the mechanism that makes inflation persistent.
In the eurozone, the situation has its own features. The European Central Bank, or ECB, has a sole mandate of price stability, unlike the U.S. Federal Reserve, which balances inflation and employment. This gives the ECB less room for manoeuvre if an energy shock pushes inflation above target for a longer period. Electricity prices in the eurozone are also several times higher than in the United States, which highlights the direct impact of energy prices on consumers’ purchasing power.
For investors, this means that the role of cash must be reassessed. Cash feels safe because its nominal value does not fluctuate. But if inflation remains persistently above target, the return on short-term rates may not always be enough to preserve purchasing power after taxes. The risk is not visible as daily price volatility, but it is felt over time in the real value of wealth.
Inflation is not a one-way story. Global competition, China’s industrial capacity, a somewhat cooler labour market and the potential productivity benefits of artificial intelligence can all act as brakes on price pressures. China’s industrial overcapacity and intense price competition are pushing producer prices lower in many sectors, which also affects European import prices over the medium term. Housing and rental inflation in the United States has slowed clearly from its recent peaks, and tariff-driven price pressure may ease if trade negotiations make progress.
A portfolio should not be built around only one inflation view. It needs parts that can withstand persistent inflation, but also parts that can benefit if growth slows and rates eventually fall.
Cash and short-term rates should not be dismissed. They have an important role in a portfolio because they provide liquidity, reduce volatility and give investors the ability to act if the market offers better buying opportunities. Their role is not, however, to replace the entire long-term investment plan.
Short-term euro rates can act as a cash-like, but potentially higher-yielding, component in the portfolio. Examples of instruments linked to this theme include ERNX, JEST and YCSH. Short government bonds, in turn, can offer lower duration risk than long government bonds, which may make them more suitable for an environment where interest-rate risk needs to be managed carefully. Examples of this theme include JE13 and 2B7S.
Long government bonds are in a more challenging position. The old equity-bond diversification model worked for a long time because inflation was low and central banks had room to cut rates in crises. If inflation remains persistent, both bonds and equities can fall at the same time, as seen at the start of the year. That is why intermediate-maturity euro government bonds may offer a more moderate way to take interest-rate risk than long bonds. An example of this theme is SXRP.
Inflation-linked bonds can also have a role in the portfolio if the investor wants protection against renewed acceleration in inflation. They do not remove all the risks of fixed income investing, but they can be a more targeted tool in an environment where inflation risk remains relevant. Examples of inflation-linked instruments include IBC5, IS3V and IUS5.
Based on research and demand data, gold can be a justified diversifying part of a portfolio, especially in a world of currency, confidence and central bank risks. Central banks have bought unusually large amounts of gold in recent years. Several central banks, particularly in Poland, China, India and emerging markets, have stated their desire to reduce dependence on a dollar-driven reserve structure. This is not a cyclical phenomenon, but a strategic choice that has continued regardless of the price level.
Still, the role of gold should be understood correctly. Gold is not a money-making instrument every year, and it does not protect against every down day. During the market volatility in March 2026, gold fell at the same time as equities and long bonds. That was a rare situation, and a reminder that no single asset class acts as protection in every environment. The role of gold is to offer a different type of risk when confidence in currencies, debt sustainability or geopolitical stability begins to crack, not to act as insurance against short-term market volatility.
Gold exposure can be built, for example, through Kvarn X Gold investment gold, or in securities form through products such as Xetra-Gold (4GLD) or iShares Physical Gold (IGLD). Broader commodities can be accessed through products such as iShares Diversified Commodity Swap (SXRS) or Invesco Bloomberg Commodity (EXXY).
Cash and short-term rates have an important role in a portfolio. They provide liquidity, reduce volatility and give investors room to move when better buying opportunities appear in the market.
They should not, however, be confused with long-term safety. If inflation remains at a higher level than before, the purchasing power of cash can erode unnoticed, even if its nominal value stays the same.
That is why a portfolio also needs parts that protect purchasing power and diversify risk in a different way. Inflation-linked bonds may be a more important building block in this environment than they were in the previous decade. Gold, in turn, is better understood as a diversifier against crisis, currency and confidence risks, not as insurance against daily market volatility.
Long-duration bond investments deserve especially critical scrutiny in this environment.
Artificial intelligence has been the most visible market theme for a long time, which naturally raises the question of whether everything has already been priced in. For investors, an even better question is: where in the value chain will AI’s impact be felt next, and has the theme become so large in my own portfolio that I no longer even notice it?
The first wave focused on large technology companies, AI models and the best-known chip companies. The next phase is more physical and broader. AI growth requires semiconductors, data centres, power grids, cooling, cybersecurity and other infrastructure that takes years to build and requires enormous amounts of capital.
Company-level figures show the scale of the investment cycle. Alphabet has guided for 2026 capex of around $175–185 billion, Meta around $125–145 billion and Amazon around $200 billion, mainly for AI. Combined, the investments of the four largest hyperscalers, or cloud infrastructure giants, will exceed $650 billion in 2026.
This has changed the financial profile of these companies. The combined free cash flow of hyperscalers peaked in 2024 at close to $240 billion, and is expected to decline significantly in 2026 as capex ties up more capital. Previously, these companies were valued at high multiples because of low leverage, strong cash flow and asset-light business models. The AI investment cycle challenges all of these assumptions.
Measured by market capitalisation, concentration is exceptional. A handful of companies dominate an unusually large share of the U.S. equity market, and the same concentration is also visible in Taiwan, South Korea and the Netherlands, where individual semiconductor companies pull the index. When an investor in a global equity index thinks they own “the world market”, they may in reality own more of the AI cycle than they realise.
Source: J.P.Morgan
“The chart illustrates how quickly the physical capacity required by artificial intelligence is growing. The surge in data centre construction supports the view that the AI theme extends beyond technology companies to electricity, infrastructure, semiconductors and real assets.”
The physical economy of artificial intelligence is only beginning to be built. Data centre electricity consumption is growing rapidly, and the International Energy Agency estimates that it will double by the end of this decade, with AI as the single largest driver. This is not merely a market narrative, but a concrete bottleneck already visible in power grid companies’ order books, transformer delivery times and data centre construction schedules.
The beneficiaries are not limited to the United States or to model developers. East Asian manufacturing chains dominate chip production, high-bandwidth memory and advanced packaging technology. Middle Eastern states are using oil revenues to build data centre capacity through significant investments. China is aiming to build its own AI capacity by emphasising commercial deployment and increased energy capacity, even while access to the most advanced chips remains restricted.
For a European investor, the perspective is important. Europe may not lead AI model development, but it can participate in the enabling infrastructure of the AI cycle: power grids, automation, industrial components, data centre capacity and critical manufacturing technology. Europe is more a region of deployment and applications than a home for core models, but over the longer term, this may be economically significant.
Two things should be separated. Artificial intelligence may be a very significant long-term source of productivity, but individual companies or thematic ETFs can still be expensive and vulnerable to corrections in the short term. The question is not whether one believes in AI, but how to gain exposure to it and how much exposure is already present through other investments.
Broad AI exposure can provide diversified access to companies linked to the artificial intelligence theme. Examples of instruments in this category include XAIX, GOAI, WTI2 and QAIU. A more infrastructure-focused approach looks at the physical capacity required by AI, such as data centres, electricity, chips and other enabling infrastructure. Examples of this theme include AIFS and V9N.
Another route is to focus on companies that apply artificial intelligence in their own business rather than only those building the underlying models or infrastructure. An example of this approach is AIAA. Semiconductor exposure, meanwhile, focuses on chip manufacturers and the broader chip value chain, with examples such as VVSM and SEC0.
For investors who want more indirect exposure, broader technology products can also capture part of the AI theme without being limited to pure AI companies. Examples of broader technology exposure include QDVE, SPFT and LYPG.
After the correction in the first half of the year, valuations for AI companies have partly come down from last year’s peaks, while order books and capex guidance have remained strong. This has made the theme more attractive in some places than it was at the beginning of the year, but concentration risk remains high. For investors, the key question is not “should I buy AI?”, but “how much AI do I already own without realising it?”
The role of AI should therefore be sized as part of the whole. It is an interesting structural growth theme, but an entire portfolio should not be built around one vision of the future.
Traditional diversification was a simple idea: equities bring growth, bonds bring protection.
This worked for a long time because inflation was low and central banks had room to cut rates in crises. If inflation is more persistent, energy shocks repeat themselves and government debt levels are high, long bonds no longer behave according to the old model. The start of the year showed this clearly: there were days when equities, long bonds and even gold fell at the same time.
This does not mean bonds should be forgotten. On the contrary, the role of fixed income remains important, but it cannot be the only hedge. Diversification needs several active components, because different hedges work in different environments.
Short-term rates provide liquidity and lower volatility. Inflation-linked bonds protect purchasing power when price pressures remain high. Gold acts as a counterweight to currency and geopolitical risk, but it does not automatically rise in every equity market decline, as spring 2026 showed. Commodities can benefit from precisely the supply shocks that hurt equities. Infrastructure brings real-asset cash flows whose pricing is based on long-term contracts rather than daily market volatility.
Bitcoin and other crypto assets have a role of their own. The market has institutionalised rapidly, and building exposure has become easier than before. In Kvarn X, this can also be done through direct crypto assets, not only through an ETP structure. Still, crypto assets continue to behave as risk assets in most market environments. Their natural place for most investors is as a satellite, not as the main building block of diversification.
One of the most common mistakes investors make is building a portfolio as a collection of interesting themes.
A portfolio should be viewed through functions. Each part should have a role that can be stated out loud.
What does this part do if inflation accelerates? What does it do if growth slows? What does it do if the AI cycle continues? What does it do if risk appetite weakens?
If there is no clear answer to these questions, the portfolio probably contains overlaps or gaps.
A modern portfolio is not built from trends alone. It is built from parts that have clear roles.
The global equity core forms the long-term foundation of the portfolio. Its role is to provide growth and broad diversification across markets. Examples of instruments that can be used for this purpose include IWDA, IUSQ, XDWD and WEBN.
Emerging markets can add exposure to growth, raw materials and production chains outside the developed-market core. Examples of instruments linked to this building block include IS3N, EMXC and 84X0.
Short-term rates have a different role. They are not primarily a growth engine, but a source of liquidity and lower volatility. Examples of instruments in this area include ERNX, JEST and YCSH.
Inflation protection and intermediate-maturity fixed income can help prepare the portfolio for a more persistent inflation environment. This part of the portfolio can include inflation-linked bonds and more moderate interest-rate exposure. Examples include IBC5, IS3V and SXRP.
Artificial intelligence and semiconductors represent a structural growth theme. Their role is not to replace the portfolio core, but to provide targeted exposure to one of the most important investment cycles of the coming years. Examples include AIFS, XAIX, VVSM and SEC0.
Defence and security are linked to fragmentation and Europe’s investment cycle. These exposures can make sense as satellites in a portfolio, especially if the investor wants to participate in the structural increase in defence and security spending. Examples include EUDF, DFNC, EDFS and 5J50.
Gold and commodities can support inflation, currency and geopolitical diversification. Gold exposure can be built, for example, through Kvarn X Gold, 4GLD or IGLD, while broader commodity exposure can be accessed through instruments such as SXRS and EXXY.
Direct crypto assets and crypto products can serve as a high-risk alternative satellite. In Kvarn X, crypto exposure can be built through direct crypto assets, while listed crypto products include examples such as IB1T, BTCE and WCRP.
A portfolio does not need to be completed all at once. Often, a more sensible approach is to proceed step by step: first build the global core, then define the role of liquidity and fixed income, then add protective components if needed, and finally consider selected satellites. This reduces the risk that the portfolio becomes a collection of the most interesting themes of the moment without a clear structure.
The price of oil and gas determines how quickly inflation pressure eases. If energy remains high, central banks will find it more difficult to ease policy and the European consumer will remain under pressure. If energy calms down, both corporate cost pressures and consumer purchasing power improve at the same time.
In the eurozone, energy prices feed through to inflation quickly. Investors should watch whether the ECB begins to communicate more about upside inflation risks than slowing growth. If the message turns more hawkish, long-duration bond investments will be tested again.
The investments of major technology companies are the most important fuel for the AI cycle. If they continue, electricity, infrastructure and semiconductor themes receive support. If investments are postponed or cut, the theme faces its first serious test.
The market accepts large investments as long as it believes in future cash flows. Investors should therefore monitor whether AI is visible in revenue, margins and productivity, or only in the cost lines of data centres.
Headline-level commitments alone are not enough. The European theme becomes genuinely interesting for investors only when promises are visible in budgets, orders, capacity and supply chains.
In the second half of 2026, investors do not need a perfect forecast. They need a portfolio that does not fall apart if one forecast fails.
Inflation may remain persistent, or it may ease through competition and productivity. Artificial intelligence may become the most important productivity leap of a generation, while at the same time creating short-term bubble behaviour. Europe may suffer from fragmentation and still benefit from it as an investment cycle that changes the continent’s investment map.
Investors do not need to choose only one of these truths. A better starting point is to build the portfolio around functions. Growth needs equities. Liquidity needs short-term rates. Purchasing power needs inflation protection. Structural growth needs technology, electricity and infrastructure. Geopolitical uncertainty needs gold, commodities and other diversifying components.
A modern portfolio does not guess one future. It prepares for several.
Want to build a more modern, more international portfolio in one place? In Kvarn X, you can combine equities, ETFs, crypto assets and gold in the same view.
This outlook is based on Kvarn’s own view, supported by publicly available market, research and official sources such as J.P. Morgan Wealth Management, BlackRock Investment Institute, the IEA, EIA, CRS, CSIS, World Gold Council, IMF and ECB publications.
The information and sources presented are for illustrative purposes only. While obtained from sources deemed reliable, their accuracy cannot be guaranteed.
Hyperliquid came into broader focus in spring 2026, when it enabled traders to gain exposure to oil on a Sunday night while traditional commodity exchanges were still closed. An even more compelling story for investors, however, may be the HYPE token, often described as an ‘exchange stock on the blockchain’ because its value is tied to platform usage and cash flow in an unusually direct way.
The geopolitical conflict in the Middle East and the military action dominating the news cycle understandably raise concerns. In addition to the immense human tragedies, the situation creates significant uncertainty for the global economy. Many investors are currently looking at their portfolios and wondering how to act in this situation.
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