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Economic Trends · Oct 26th, 2026
What this video’s about
In this episode of The Market Share, Paul Gifford, Chief Investment Officer at 1st Source Bank, is joined by Rob Romano, Director of Research, to discuss several developments shaping today’s investment landscape.
Bond yields have risen substantially, creating higher borrowing costs but also potentially more attractive opportunities for fixed-income investors. At the same time, headline stock market returns have masked increasingly narrow participation beneath the surface. Rob and Paul also examine the rapid growth of artificial intelligence investment and some of the risks that may deserve closer attention as spending continues to expand.
Higher rates are changing the fixed-income landscape
Bond investors have faced a challenging stretch as interest rates moved higher.
The 10-year Treasury yield began the year around 4.19%, reached approximately 5.30% during September, and was near 5.10% when the episode was recorded. Rob notes that while the move has been significant, markets have experienced sharp increases in rates before, including during the 2013 “taper tantrum.”
Higher rates have consequences throughout the economy. Financing a home, vehicle, or small business has become more expensive. For investors, however, higher yields have also changed the relative appeal of bonds.
“We’re seeing investment-grade yields of 5% to 6% and high-yield rates between 6% and 8%,” Rob says. “In this environment, we think fixed income is attractive.”
That can create a different opportunity set for balanced portfolios than investors faced when interest rates were considerably lower.
Headline market returns don’t tell the whole story
The S&P 500 was up approximately 12% to 13% at the time of the conversation. Yet, as Paul notes, the market may not feel nearly that strong to many investors.
One reason is market breadth.
The median stock in the S&P 500 was about 16% below its 52-week high, and fewer than 30% of stocks were trading above their 50-day moving average. During the third quarter, the S&P 500 gained roughly 2%, while the Russell 2000 fell approximately 7.5%.
The difference becomes even clearer at the sector level. Rob points to energy and technology as the two primary sectors driving performance, with semiconductors responsible for much of technology’s strength.
Semiconductors have grown from approximately 3.5% of the S&P 500 several years ago to roughly 15% to 20% of the index. The group was up about 50% year to date. According to Rob, removing semiconductor stocks from the S&P 500 would reduce the index’s year-to-date gain to around 2%.
That concentration is why the investment team is watching for greater participation across the market.
“For this bull market to continue, we believe we need to see improved market breadth and broader participation across sectors,” Rob says.
AI investment is reshaping the market
One major force behind semiconductor performance has been spending on artificial intelligence.
Paul notes that annual AI investment is approaching $1 trillion. That level of spending has made AI an increasingly important part of both the economy and financial markets.
Rob believes some of the more dramatic fears surrounding AI may be overstated. He points to McKinsey & Company’s view that while AI could displace some jobs, the technology may ultimately contribute to a net increase in employment. He also notes that business startup activity has recently reached record levels.
But optimism about the technology itself does not remove the need to evaluate the economics behind the investment.
The team is watching several areas closely, including the amount being spent, the concentration of revenue among a relatively small number of customers, and the increasingly complex ways some AI infrastructure is being financed.
The economics behind AI deserve attention
The scale of AI investment creates high expectations for future revenue.
Rob cites a Bain & Company estimate suggesting that supporting current levels of investment could require approximately $5 trillion to $6 trillion in future revenue. Whether the industry can ultimately generate that amount is an important question for investors.
Customer concentration creates another potential risk. NVIDIA has disclosed that approximately 44% of its sales come from just three customers. A meaningful reduction in spending by one of those customers could therefore have a significant effect on the company.
Financing is also becoming more complex. Rob points to greater use of special purpose vehicles and other arrangements used to finance AI infrastructure spending.
“Some of those financing structures are unusual and warrant close monitoring,” he says.
These concerns do not necessarily change the long-term potential of artificial intelligence. They do, however, reinforce the importance of looking beyond the technology itself and examining how growth is being financed and where financial risk may be concentrated.
Diversification remains important
Several themes in this episode ultimately lead back to the same investment principle.
Higher bond yields have changed the opportunity set within fixed income. Equity-market returns have become increasingly dependent on a relatively small number of sectors and companies. Meanwhile, enormous amounts of capital continue to flow toward artificial intelligence.
Each development can create opportunities, but concentration also creates risk.
As Rob explains, “We continue to believe in maintaining diversification and avoiding excessive exposure to any single theme, including artificial intelligence.”
Diversification does not mean avoiding areas of the market that are performing well. It means maintaining perspective about how much of a portfolio depends on any one sector, investment theme, or economic outcome.
Conclusion
Higher interest rates, narrow stock market leadership, and rapid investment in artificial intelligence are creating a complex environment for investors.
Fixed income may offer more competitive yields than it has in recent years, while equity investors are watching for broader participation beyond a concentrated group of market leaders. At the same time, AI continues to offer significant long-term potential, even as the scale and financing of investment deserve careful attention.
These conditions reinforce the value of maintaining a diversified portfolio built around long-term financial goals rather than relying too heavily on any single market theme.
Stay informed with The Market Share for thoughtful insights into the economic trends, market developments, and investment themes shaping today’s markets.
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