Why Productivity Matters for Your Portfolio

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Written By: Rodney Hathaway, Chief Investment Officer

As investors look toward the second half of 2026, one of the most important economic trends worth watching is productivity growth. While productivity may not generate the same headlines as inflation, interest rates, or stock market performance, it plays a critical role in shaping long-term economic growth and investment returns.

Understanding Productivity

Productivity measures the amount of economic output generated for each hour worked. Simply put, it reflects how efficiently businesses and workers produce goods and services.

Recent data has been encouraging. Over the past three years, productivity growth has averaged approximately 2.7% annually, compared to a long-term average closer to 2.1%.¹While that difference may seem modest, sustained improvements in productivity can have a meaningful impact on economic growth over time.

In practical terms, the economy is producing more output with fewer resources. Businesses are finding ways to operate more efficiently, and technological innovation is playing an increasingly important role in driving those gains.

Technology and the Next Wave of Efficiency

Much of the current optimism surrounding productivity is tied to advancements in technology, particularly artificial intelligence. While it remains early in the adoption cycle, many businesses are already exploring ways to use AI and automation to streamline operations, improve decision-making, and enhance overall efficiency.

If these trends continue, productivity gains could help support stronger economic growth without generating the same inflationary pressures that often accompany periods of expansion.

Breaking the Traditional Economic Pattern

Historically, stronger economic growth has often led to higher inflation and rising interest rates. As demand increases, businesses compete for labor and resources, pushing costs higher throughout the economy.

Productivity-driven growth offers a different path. When businesses can produce more without proportionally increasing costs, the economy can expand in a healthier and more sustainable manner. This creates the potential for stronger growth while helping keep inflation under control.²

What This Means for Investors

For long-term investors, improving productivity may create several opportunities.

First, it reinforces the importance of owning companies that are becoming more efficient. Businesses that successfully leverage technology and innovation to improve operations are often better positioned to grow earnings and maintain a competitive advantage over time.

Second, a productivity-driven environment may be supportive for fixed-income investors. If stronger growth can occur without significant inflation pressure, bonds may benefit from a more stable interest rate environment. This could create opportunities to lock in attractive yields while adding income and stability to a diversified portfolio.

Third, improved productivity may support economic growth without many of the overheating risks that typically concern investors during periods of expansion. While no economic outcome is guaranteed, this combination could provide a favorable backdrop for both stocks and bonds.

The Importance of Staying Selective

Not all companies will benefit equally from productivity improvements. Some organizations will adapt quickly and capitalize on new technologies, while others may struggle to keep pace.

As a result, careful investment selection remains as important as ever. Identifying businesses with strong management teams, competitive advantages, and a commitment to innovation can help position portfolios to benefit from these long-term trends.

The Bottom Line

There is growing evidence that productivity is improving, although it is still early in the cycle. If current trends continue, investors could benefit from a powerful combination of steady economic growth, manageable inflation, and a more supportive environment for both stocks and bonds.³

While the future remains uncertain, we believe the best approach is to remain focused on long-term opportunities while maintaining a balanced and disciplined investment strategy. Our advisors are available to discuss how these trends may impact your financial plan and investment portfolio, so please do not hesitate to reach out.

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