The stock market may have lost some of its momentum, but fund investors have little reason to complain about 2026 so far.
The average U.S. stock mutual fund or exchange-traded fund gained 2.4% in August, bringing the average year-to-date return to 12.6%, according to LSEG. International stock funds gained 2.1% during the month and entered September with an average gain of 13.4% for the year.
Those are strong numbers. More importantly, they create a familiar challenge for financial advisors: helping clients distinguish between a good market and an easy market.
The two are not the same.
Investors are confronting a list of risks that would normally be expected to restrain enthusiasm. Inflation remains a concern. The possibility of another Federal Reserve interest-rate increase is no longer something investors can casually dismiss. Geopolitical tensions, including the evolving relationship between the U.S. and Iran, remain an unpredictable source of risk. At the same time, one of the market’s most powerful leadership themes—artificial intelligence—has begun to show signs of fatigue, with momentum fading in some of the shares that had been among the market’s biggest winners.
Yet stocks continued to move higher in August.
That apparent contradiction contains an important lesson for advisors. Markets do not need the absence of risk to rise. They need economic and corporate conditions that are sufficiently strong to offset those risks. For now, investors appear to be finding that support in corporate earnings, particularly among software companies that delivered strong results.
The question for advisors and their clients is whether that foundation is strong enough to support the next leg higher—or whether a nearly 13% gain has already pulled forward much of the good news.
Strong Returns Change Investor Behavior
A 12.6% gain in eight months does more than improve account statements. It changes investor psychology.
Clients who were cautious earlier in the year may now feel pressure to put more money into equities. Clients who maintained disciplined allocations may begin to wonder whether they have been too conservative. Those holding cash may regret missing the rally. And investors with concentrated positions in the market’s biggest winners may become increasingly reluctant to rebalance.
In other words, strong returns often create the conditions for bad decisions.
This is where advisors can add considerable value. The right response to a strong market is not automatically to become more defensive. Nor is it to assume that recent gains represent proof that existing portfolio risks no longer matter.
The better question is: What has changed in the portfolio as a result of the rally?
A client who began the year with a 60% equity allocation may now have materially more stock exposure simply because equities appreciated faster than bonds and cash. A concentrated technology position may have become even more dominant. A portfolio designed around a particular risk tolerance may no longer match that client’s actual exposure.
Rebalancing in this environment can be psychologically difficult because it requires trimming assets that have performed well. But that is precisely why the process should be tied to a disciplined framework rather than short-term market emotion.
Advisors do not need to tell clients that a correction is imminent. They simply need to explain that portfolio management is about maintaining an appropriate balance of risk and return—not continually increasing exposure to whichever assets performed best recently.
The Market Is Still Rising, But Leadership Is Changing
One of the more interesting developments is the deterioration in momentum among some of the artificial-intelligence-related stocks that helped drive the market higher.
For much of the recent rally, investors could identify a relatively simple leadership narrative: AI infrastructure, semiconductor companies and the major technology platforms were generating outsized gains. Companies such as Nvidia became symbols of both the investment opportunity and the concentration risk created by the AI boom.
When that leadership weakens, investors often make the mistake of interpreting it as a signal that the entire market rally is ending.
That may be too simplistic.
August’s gains were helped by strong earnings from software companies, suggesting that market leadership may be broadening rather than simply disappearing. That distinction matters. A market that becomes less dependent on a narrow group of high-momentum stocks can potentially become healthier, even if the transition creates more volatility.
For advisors, this reinforces the importance of looking beyond headline index returns.
A client who owns a diversified U.S. equity portfolio may have a very different experience from one heavily concentrated in a handful of AI-related names. The S&P 500—or the average stock fund—can continue to post respectable gains even while previously dominant stocks consolidate or decline.
The practical implication is that advisors should review not just whether clients own equities, but what kind of equity risk they own.
Are portfolios excessively dependent on a narrow technology theme? Have large-cap growth positions become too dominant? Is the portfolio participating in broader corporate earnings growth, or is it dependent on continued appreciation from a relatively small number of companies?
Those questions are likely to become more important if the market’s leadership continues to rotate.
International Stocks Are Providing Another Reminder About Diversification
International-stock funds are also having a strong year, with average returns of 13.4% through August, slightly ahead of their U.S. counterparts.
That performance is particularly noteworthy because international equities have spent long periods in the shadow of the U.S. market. Last year, however, international funds managed the unusual feat of outperforming U.S. funds amid tariffs and trade tensions. Their continued strength in 2026 suggests that global diversification is again contributing meaningfully to portfolio results.
Advisors should be careful not to overinterpret one year or even two years of relative performance. The case for international diversification should not depend on predicting that foreign markets will outperform the United States in any particular calendar year.
Instead, the lesson is more structural.
Markets do not move in permanent hierarchies. The leadership that dominates one period can lag in another. Different countries, sectors and currencies respond differently to changes in economic growth, interest rates, valuations and government policy.
For clients accustomed to evaluating international allocations primarily by comparing them with the S&P 500, the current environment offers a useful teaching opportunity. Diversification is not supposed to outperform every year. Its value often becomes more visible when leadership changes.
The fact that international funds are modestly ahead of U.S. funds so far this year should encourage advisors to revisit whether clients’ global allocations still reflect a deliberate strategy—or whether years of U.S. outperformance have gradually led portfolios to become overly domestic.
Higher Bond Yields May Create Opportunities—And Complications
The other major development is occurring in the bond market.
A Treasury selloff has pushed global bond yields higher, a move that has been interpreted by some market observers as a warning to policymakers about the fiscal outlook. Rising yields can create discomfort for investors because they pressure existing bond prices and can also raise questions about stock valuations.
But higher yields also change the opportunity set.
For much of the low-rate era, advisors struggled to generate meaningful income from high-quality fixed income without taking additional duration or credit risk. Today, higher yields give portfolio managers more choices.
That does not mean every bond investor should immediately extend duration or aggressively add exposure. The path of inflation and Federal Reserve policy remains uncertain, and another increase in interest rates could produce additional volatility.
But advisors should recognize that the fixed-income side of the portfolio is no longer simply a source of low returns and diversification. It may increasingly serve as a competitive source of income and potential total return.
For clients who have become accustomed to thinking of stocks as the only meaningful source of portfolio growth, that is an important shift.
A higher-yield environment can give advisors more flexibility to rebalance equity gains into bonds without asking clients to accept the extremely low yields that characterized earlier years.
That may become particularly valuable if equity returns moderate.
Can the Gains Continue?
The honest answer is yes—but investors should not expect the next phase of the year to look like the first eight months.
A 12.6% year-to-date gain is evidence of strong market performance, not a guarantee of future returns. The market now faces a more complicated combination of factors: inflation uncertainty, possible additional Fed tightening, geopolitical risks, elevated fiscal concerns and fading momentum in some of the stocks that have driven investor enthusiasm.
At the same time, the underlying picture is not uniformly negative. Corporate earnings remain an important source of support. Strong results from software companies suggest that growth is not limited to one narrow corner of the market. International equities are contributing to diversified portfolios. And higher bond yields may provide investors with more attractive alternatives and greater flexibility.
The environment, therefore, argues against both complacency and panic.
For advisors, the most productive message to clients may be that strong returns do not eliminate risk—but neither does the presence of risk mean investors should abandon a long-term strategy.
The focus should remain on portfolio construction.
Review equity allocations. Check for unintended concentration. Rebalance when portfolio weights move materially away from their targets. Reassess the role of international stocks. Take a fresh look at fixed-income allocations in light of higher yields. And make sure clients understand that a successful investment plan is not dependent on accurately predicting what the market will do over the next four months.
The Advisor Opportunity: Turn Performance Into a Planning Conversation
The best use of this rally may not be predicting whether stocks will rise another 5% or fall 10%.
It may be using the rally as a reason to have better conversations.
Clients are paying attention when their accounts rise. That creates an opening to discuss risk, diversification, rebalancing and long-term objectives at a time when the conversation is not being driven by fear.
Advisors could ask: If markets declined tomorrow, would you still be comfortable with the level of equity risk you have today?
That is often a more useful question than asking whether a client believes the market will continue higher.
After all, markets rarely provide a perfectly comfortable environment in which to invest. This year has already demonstrated that. Inflation concerns, Fed uncertainty, geopolitical tension and questions surrounding AI leadership have all coexisted with double-digit gains for stock fund investors.
The lesson is not that risks do not matter.
It is that disciplined investing requires separating the existence of risk from the impulse to react to every risk.
Stock funds may indeed continue their climb. They may also pause, rotate or correct after a strong run. Advisors do not need to know which outcome will occur to add value.
They need to ensure that clients are positioned so that neither outcome forces them to abandon the plan.
After a nearly 13% year-to-date gain, that may be the most important preparation investors can make.
