MONTHLY MARKET MUSINGS

June 2026

The Mid-Cycle

Economists typically try to determine where we are in the business cycle — early-cycle, mid-cycle, late-cycle, or recession — by examining a dynamic mix of variables: corporate profit trends, credit market conditions, monetary policy, and labour market dynamics. By most of these measures, the U.S. economy currently appears to be in the mid-cycle phase, a period historically characterized by strong but gradually moderating earnings growth, healthy profitability, rising inflation, and a flattening yield curve. Recent inflation data supports this view. The Personal Consumption Expenditure Price Index (PCE) rose to 3.8% in April from 3.5% in March,[1] signalling that the disinflation of the past couple of years has, at minimum, paused. This is not the runaway inflation that we experienced in 2022, but it has prompted a meaningful shift in market expectations regarding future U.S. Federal Reserve (Fed) policy. The markets are now pricing in roughly a 50–55% probability of a Fed rate hike by January 2027.[2] If inflation remains elevated and economic growth holds, a hike becomes increasingly likely; if conditions soften or inflation begins to decrease, the Fed will likely remain on hold or move back toward easing. For now, despite these inflation concerns, GDP continues to expand at a solid pace, and the labour market remains healthy, for the most part, which is consistent with an economy still well within expansionary territory.

Taken altogether, this further suggests that the economy is currently mid-cycle. This phase is the longest and most stable of the business cycle, lasting roughly three to five years. The current consensus suggests the economy had officially entered the mid-cycle by around late 2024.[3] Recent quarterly earnings support this assessment — margins remain healthy, growth is sustained, and there are no meaningful signs of the margin compression at this stage which tends to signal of a late-cycle transition. That said, the possibility of a tightening cycle in early 2027 warrants attention, as a shift to an ongoing restrictive monetary policy has historically been one of the primary catalysts for ushering in the late cycle.

Could AI Extend the Cycle?

There is a compelling case that the current AI investment boom may extend the mid-cycle beyond historical norms. The massive capital expenditure by the hyperscalers and large tech firms has provided a meaningful economic tailwind at a point when growth might have otherwise begun to slow. More fundamentally, a defining feature of the late cycle is a drop-off in productivity combined with rising labour costs as the labour market begins to overheat. While labour costs have risen with inflation, the widespread integration of AI is helping companies expand worker output and optimize headcount — effectively absorbing cost pressures that would have typically compressed margins. Wharton Business School projects that AI could increase productivity and GDP by approximately 1.5% by 2035, rising to 3% by 2055 and 3.75% by 2075.[4]

It is worth noting that this dynamic is not without precedent. Historically, there have been several major technological revolutions — the steam engine and rail network in the 19th century, the electrification and internal combustion engine revolution of the early 20th century, the internet and fiber-optic buildout of the 1990s — and each of these followed a similar pattern. There was a breakthrough in technology which triggered massive capital spending, which then drove a surge in worker productivity, which in turn delayed the onset of the late cycle. In each of these cases, it was the investment boom itself that resulted in a prolonged expansion.

Sector Divergence

One distinction worth highlighting is the degree of cycle divergence that can be seen across sectors today. Real estate, consumer discretionary, and other more cyclically sensitive industries are showing characteristics consistent with late-cycle or at least the later portion of mid-cycle conditions. Meanwhile, other sectors such as technology, financials, energy, and utilities appear to be solidly in the mid-cycle, helped by the ongoing AI capital cycle. Essentially, the AI-driven investment boom is acting as a masking force — sustaining aggregate economic momentum even as the “old economy” sectors experience a more mature phase of the cycle.

Implications for Valuations

Each of the major technological revolutions mentioned above had a lasting impact on broad market equity valuations. As high-growth, high-multiple companies leading the transformation grew into a larger share of the broad market indexes, the composition effect pulled the average valuation multiple higher. The multiples eventually retreated from their peak levels, but they never fully reverted to the prior norms — each revolution left the market with a “new normal” permanently re-rated higher. This pattern played out through the railroad era, the electrification era, and the internet era, and there is good reason to expect there to be a similar outcome today.

Overall, this suggests that the current cycle is likely to have more runway than historical averages would imply, and that a structural step-up in broad market valuation multiples will likely follow as the economy restructures around AI-driven productivity. Historically, this kind of transition is rarely smooth — volatility is part of the process, bubbles can form, and not every participant survives. The largest gains ultimately accrued with companies that successfully converted technological change into durable cash flow and earnings. For investors with the patience to stay the course through the full adoption wave, historical evidence suggests that the rewards have been substantial.[5]

JAY SMITH, CIM®, FCSI®

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA®
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com