With contributions from:
Columbia Threadneedle Investments maintain a constructive outlook for equities, with a broadening of opportunities for selective investment, backed by disciplined diversification
2026 Equity Outlook: Harnessing growth with a broad view
Fixed-income investors face falling rates, tight spreads and a fragile labour market. The playbook requires locking in yield and managing duration, while staying vigilant on credit quality
2026 Fixed Income Outlook: Seizing opportunities in a rate-cutting cycle
Inigo Fraser Jenkins, Co-Head of Institutional Solutions at AllianceBernstein, outlines an outlook for the asset management industry based on AB’s view of the macro investment environment that suggests asset owners may need to re-examine their strategic allocations
The future of asset management: The macro imperative
Select an article to read
Heading into 2026, higher-for-longer rates, persistent inflation and accelerating AI adoption could disrupt familiar playbooks and prompt fresh thinking about global portfolios, diversification, risk budgets and time horizons.
Outlook 2026: Rethinking risk, return and balance
Amid continued macroeconomic and geopolitical volatility, private markets benefit from both cyclical and structural tailwinds that allow them to play a key role in diversified, resilient portfolios
Decoupling is driving resilient opportunities
Julien Houdain and Lisa Hornby examine central bank policy divergence, inflation risks, valuation dynamics and emerging opportunities across global fixed income markets
Global bond market conditions will demand an active management approach
Alex Tedder examines reasons for optimism, even amid elevated valuations
Robust earnings and ongoing tech investment may continue to support global equities
Liam O’Donnell, who leads the Artemis fixed income team's strategy on macro and rates, believes sticky inflation will keep policy rates elevated and the cutting cycle is almost over
Sticky, not scary: Why investors shouldn’t fear inflation
Resilient growth and rising markets mask underlying structural tensions – the risks of a misstep are accumulating. We assess the balance for investors
Treading a finer line
US economy expected to outperform in 2026, but other regions may lag as tariffs weigh on manufacturing
Fiscal expansion to propel US economy in multispeed world
AI has the potential to biggest productivity driver for the global economy, but the focus for investors is shifting from potential to profitability—and risk
From hype to hard returns: AI enters a new phase
US dollar weakness could boost overseas currency exposure, according to T.Rowe Price’s 2026 Global Market Outlook
Amid stretched valuations, look to non-US equities and local bonds
Our playbook for 2026 aims to address real risks by expanding allocations in new directions
Equity Outlook 2026: Mapping a new spectrum of return drivers
2025 was a banner year for bonds – and AllianceBernstein’s Head of Fixed Income, Scott DiMaggio, thinks more of the same is in store for 2026
Fixed-income outlook 2026: Bedrock and balance
After a strong year for global equity markets, we ask our fund managers where they are actively investing to capture the next phase of growth and how they are positioning portfolios to navigate ongoing macroeconomic risks
On the Profit trail of tomorrow
Prospects for bonds in 2026 look strong, but not without hurdles. With proactive rate cuts by the US Federal Reserve (Fed), resilient corporate fundamentals and continued investor appetite for fixed income, conditions support compelling returns. Still, a weakening labour market and tight credit spreads present potential challenges. We see 2026 shaping up to a year where investors can find value by locking in yield, managing duration and focusing on diversification – while keeping a close eye on credit quality.
We are in an environment where the Fed is proactively cutting rates to remove the risk of negative outcomes, not in reaction to a crisis (ie, recession). The market is currently pricing in a sequence of cuts totalling 75-100 basis points (bps) in 2025 and an additional 75bps in 2026. This suggests the market expects an aggressive cycle of rate cuts, which would be a significant departure from historical norms outside of a recession (see Figure 1). To deliver this level of easing, the Fed would require further evidence of labour market deterioration, and this evidence will need to arrive relatively soon. It also requires the Fed to look through (overlook) any direct and secondary effects of tariffs on inflation, the acceleration in private sector capital spending, the easing of financial conditions and the positive fiscal impact of the One Big Beautiful Bill Act. We believe this scenario is unlikely, which suggests the front end of the Treasury curve is mispriced – creating an opportunity for investors. And unlike previous cycles, where rate cuts steepened the yield curve, today’s cuts are likely to keep the curve stable or slightly flatter. This creates three implications for fixed-income portfolios: Duration becomes attractive. It offers both more yield and downside protection against equity market drawdowns, especially relative to cash. Income harvesting. Investors can capture elevated starting yields without needing to take a directional bet on the economy. Diversification. High-quality fixed income provides a buffer, particularly in an environment where inflation remains (relatively) subdued.
The tension between labour market softness and ongoing economic growth will define the bond market’s path in 2026
The tension between labour market softness and ongoing economic growth will define the bond market’s path in 2026. We believe three scenarios could play out:
In our base case scenario, with 10-year Treasury yields around 4% and investment-grade credit yielding near 5%, bonds present a compelling value proposition, especially with inflation at around 3% (Figure 2). In this environment, investors should prioritize sectors offering higher yield per unit of duration.
Positioning for proactive Fed rate cuts
There are growing downside risks to the “steady as you go” outlook for 2026: Credit dispersion. Recent high-profile defaults were issuer-specific, reflecting weakness at the bottom end of both household and corporate borrowers. Importantly, we are not seeing that weakness spread. Instead, the real story is dispersion: After several years of monitoring, we are now seeing meaningful differences in credit performance across sectors and issuers. Tariffs. Another potential risk is tariffs. While the economic reaction has been muted so far, the effects may be working through inventories slowly and could hit consumers more forcefully in 2026. Credit volatility. Investors should also be prepared for volatility in spreads as the cycle matures. Focus on real risks – labour market trends, consumer stress and tariff impacts –while tuning out the noise. This is when and where fundamental credit research shines. Policy and politics. Policy-related noise has been intense and is expected to remain so in 2026. However, investors should keep in mind that this has limited influence on the actual performance of fixed=income markets. Demand for US fixed income continues to be strong, as many policy themes have not significantly impacted market dynamics.
Our playbook: Finding value with falling rates, tight spreads and strong fundamentals
In 2026, we believe the bond market will continue to offer value and opportunity – but not without risk. The Fed’s pre-emptive cuts, stable macroeconomic backdrop and healthy demand for fixed income set the stage for constructive returns. Yet, vigilance is warranted as labour market stress and credit events could become more pronounced. By focusing on duration, yield and diversification, investors can position portfolios to weather volatility and capture opportunity in a changing landscape.
Managing portfolio risk in a tight credit environment
Bloomberg corporate yield net CPI year-on-year inflation (%)
Source: Bloomberg LP. Data as of 30 October 2025. Corporate yield is represented by the Bloomberg Corporate yield-to-worst index, which tracks the YTW of the US investment grade corporate bond market.
Figure 2. The real yield on high-quality bonds remains attractive
The bottom line
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Gene Tannuzzo, Global Head of Fixed income, Columbia Threadneedle Investments
Ed Al-Hussainy, Portfolio Manager, Columbia Threadneedle Investments
Figure 1: Fed easing cycles since 1990
Source: Bloomberg LP and Columbia Threadneedle Investments. Data as of 31 October 2025. 1990/91, 2001, 2007/09 & 2020 = recession.
Source: Columbia Threadneedle Investments. For illustrative purposes only.
Fixed-income scenarios
These factors point to specific areas of opportunity within fixed income: Consumer loans. Asset-based finance stands out as an area of value. Backed by healthy household balance sheets and secured with collateral, consumer-oriented bonds offer diversification away from traditional corporate credit. Investment grade. Fundamentals are solid, but elevated prices make corporate bonds less compelling due to the risk of spread widening. For institutional investors, they remain an important asset class for liability matching. Agency mortgage-backed securities offer investment-grade quality at a better value. Artificial intelligence (AI). The massive buildout of AI infrastructure is reshaping credit markets, creating new opportunities for bond investors through innovative funding structures and increased capital demand. International bonds. Non-US growth may begin to look more attractive, with steeper yield curves offering additional risk premium in markets like Japan, France and Australia. There are pockets of value in emerging market debt. Leveraged loans. This is a contrarian call, given tight spreads and falling rates. However, they are not as expensive as other sectors and have matured into a through-the-cycle product, extending the high-yield opportunity set. At the same time, we remain relatively risk-averse in sectors where we think we are not compensated enough for risk.
Period
Peak-to-trough change in Fed Funds rate (bps)
Fed Balance sheet quantitative easing
Trough-to-Peak change in unemployment rate (% pts)
1990/91 1995/96 1998 2001 2007/09 2019 2020 2024 2025/26
-525 -75 -75 -550 -500 -75 -150 -100 -75 (2025) and -75 (2026)
No No No No Yes No Yes No No
+2.8 <0 <0 +2.5 +5.6 <0 +11.3 +0.8 +0.3 (January–
Market implied
August 2025)
Scenario
Status quo (Base case)
Labour supply reset lower; unemployment below 4.5%; growth remains at 1%
Description
Fixed income outcomes
Full spectrum multi-sector duration, selective credit
Recession
Demand slowdown leads to higher unemployment with a lag
Trade uncertainty recedes; capex leads to hiring; fiscal stimulus; accommodative financial conditions and monetary policy
Investment grade, longer duration fixed income
Short-term bonds
Recovery
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Gene Tannuzzo, Global Head of Fixed income
Today’s mix of policy easing, supportive fundamental backdrop, and transformative AI investments sets a constructive outlook for equity markets in 2026. Economic growth is steady, and central banks stand poised for further rate cuts as inflation moderates. The continued build out of the artificial intelligence (AI) supply chain is driving momentum across a broadening set of beneficiaries. Additionally, fiscal expansion in Europe and structural changes in Japan stand to buoy earnings growth from a global perspective. Despite this broad-based optimism, we remain cognisant of potential risks and view diversification as essential, particularly as a broader set of opportunities emerges.
US company earnings will likely be a key driver of equity returns in 2026. Our expectations are for robust growth with the likelihood of upside surprises exceeding the potential for disappointment. Our base case is for high single-digit gains with scope for low double-digits at the upper end of our forecasts. Several factors contribute to our positive assessment: Companies appear to have adjusted well to the new environment of higher tariffs and resulting cost shifts with redesign, alternative sourcing and selective pricing curbing earnings headwinds to an estimated 3-5% range. Gross margins could surprise positively if inflation remains contained. The AI-driven capital expenditure cycle persists as a potent force, and we expect it to be stimulative for revenues across a broadening range of sectors. Additionally, interest rates trending lower and inventory buildouts should support earnings recovery in sectors of the economy that have been operating in challenging conditions in recent years. As this occurs, more opportunities will emerge. We view these trends as supportive of investors’ equity allocations.
US company earnings will likely be a key driver of equity returns in 2026
Nicolas Janvier, Head of North American Equities
Diversification always matters, but we view it as a crucial consideration in 2026. We expect continued strength in the US, but opportunities are evolving from the era of US exceptionalism. Post the Global Financial Crisis (GFC) earnings growth in the US (fuelled largely by the technology sector) outstripped the rest of the world. In the years since the pandemic however, the gap has narrowed significantly (Figure 1). We anticipate that pockets of earnings growth in Europe and Japan will keep pace with the US, and a broader range of sectors look capable of delivering appreciation. Defence and financials are two notable examples. From a market capitalisation perspective, we also see firmer support for small cap stocks. The path of interest rates will be stimulative for companies more closely geared to the economic cycle.
When constructing and monitoring portfolios, we contend that investors should also be wary of hidden concentrations – especially as the AI investment cycle diffuses across a host of industries. Traditional risk models may under-diagnose this trend so investors should think carefully and monitor portfolio balance. At the same time, investors should consider diversifying into areas of the market that were previously out of favour but are once again beginning to generate meaningful earnings growth. For example, we see select opportunities in areas like life insurance. In addition to generating attractive returns, these broader opportunities can provide an effective counterweight to AI-related thematics. The ‘two markets’ construct should remain at the fore of investor thinking from here.
Earnings’ prospects drive positive outlook
April 2025’s tariff announcements prompted a reassessment of geographic exposures and resulting shifts in capital allocations. In 2026, that trend should continue. Europe to accelerate as brakes eased The prospect of fiscal expansion stoked the fires of interest in European equities during 2025. In 2026 we see this potential being realised. The relaxation of Germany’s debt brake and associated defence and infrastructure spending are set to unlock growth, and lower interest rates also lend support (especially for the periphery states where the region’s prevailing rates are effectively too low). We expect a broadening of performance across sectors and industries, including into areas like financials and industrials. At the same time, we are mindful of risks, especially in countries like France, where political uncertainties cast doubt on economic discipline and the sustainability of high debt levels. In summary, opportunities abound but investors should be attentive to broader developments. Japan’s ongoing transformation Japan’s economic transformation continues with deflation firmly in the rearview mirror –inflation stands at around 2% and bond yields are above the 3% mark. Ongoing reforms support a more favourable growth environment, and corporate Japan is streamlining balance sheets, embracing a new focus on returns on equity, and investing capital. As with many other developed economies, demographic challenges persist, but for selective investors there are plenty of attractive stock-specific opportunities.
The AI-fuelled capital expenditure (capex) cycle could reach an extraordinary $3.5trn through to 2030, primarily through the build-out of data centres and related infrastructure. We view the magnitude of this investment cycle as transformative, with its impact reaching far beyond technology companies as it generates powerful tailwinds for the global economy. In the US, AI capex currently contributes more to GDP growth than traditional consumption. Demand is surging across sectors such as semiconductors, industrial equipment, materials, and utilities as investment in AI and AI data centres grows exponentially, driving rising demand for power and water. There are even positive potential impacts for select consumer-facing businesses in locations experiencing concentrated AI-related construction.
Our six- to 12-month view on equities is constructive, but we are mindful that geopolitics could trigger volatility. Additionally, companies that have invested heavily on AI-related capex will have to start demonstrating a return on that outlay and bumps along the road towards monetising AI are likely. Beyond that, medium-term risks are building. Concerns around levels of government debt rank high on our watch list, particularly in the US and parts of Europe where political fragmentation and fiscal discipline issues are unresolved. Interest payments place a strain on public finances and higher bond yields could trigger a negative reaction in equity markets. We also see structural challenges in demographic trends as ageing populations in many developed economies constrain long-term growth potential and alter savings and investment patterns.
Diversification matters – for offence and defence
We believe that conditions are in place for further appreciation in equity markets in 2026. Growth is sound and interest rates look set on a downward trajectory. These factors, together with increased investment in AI and a broader recovery in corporate profitability, are driving positive momentum. In this environment, we advocate for selective investment and assert that considered diversification is essential. Through intense research, our focus remains on building resilient portfolios to help clients reach their investment outcomes.
Over the next 12-18 months we expect to gain deeper insight into how firms are monetising AI within their operations. Through granular metrics we aim to assess how management teams are creating or maintaining competitive advantage: How are they innovating product faster than their peers and how are efficiencies impacting future earnings? Amid all the AI-related optimism it is crucial to remain mindful of associated risks. Valuations are elevated, but with interest rates falling and earnings growth both broadening and accelerating into 2026 it is unlikely we will see a significant correction in valuations. Indeed, the surprise may be that these conditions enable valuations to expand further.
Figure 1: Earnings per share (EPS) growth broadening out
Blended 24-month forward EPS growth on a weekly basis. Post-GFC (left) vs Post-pandemic (right)
Source: Columbia Threadneedle Investments, Bloomberg as of October 31, 2025.
Global lens – a world of opportunity
AI capex propels broader impact
Spending projected to reach $3.5trn
Source: Columbia Threadneedle Investments, October 2025.
Figure 2. AI capex boom
Mindful of medium-term risks
Companies that have invested heavily on AI-related capex will have to start demonstrating a return on that outlay
Neil Robson, Head of Global Equities, EMEA
Nicolas Janvier, Head of North American Equities, Columbia Threadneedle Investments
Neil Robson, Head of Global Equities, EMEA, Columbia Threadneedle Investments
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As we look ahead to 2026, the global economy is walking an ever-finer line. Growth has proven surprisingly durable, inflation has moderated (albeit unevenly), and markets have continued to climb. But beneath the surface imbalances are building. We believe the coming year will be defined by how successfully policymakers and investors can navigate the narrowing path.
2025 broadly delivered what many expected: higher equities, gradual rate cuts and contained inflation. Yet it was not necessarily achieved in the way forecasters imagined. Corporate earnings growth in the US was less than expected but nonetheless resilient and particularly strong in technology, and durable consumer demand sustained growth – even as inflationary pressures persisted. However, the divergence between regions has widened. Inflation sits near 2% in the eurozone, closer to 3% in the US and nearly at 4% in the UK. These differences reflect not only domestic policy approaches but also shifting global dynamics – most notably the principal story of 2025, the emergence of tariffs. As a result, the policy risks facing central banks have become more complex and the margin for error smaller.
While some economists argue that tariffs are a one-off price adjustment, it is possible they are more likely to feed through to sustained inflationary pressure in 2026
William Davies, Global Chief Investment Officer
We see today’s inflationary environment as fundamentally different to the post-Covid surge. Post pandemic, it was driven by excess demand and supply constraints as economies reopened; now it is shaped by supply constraints linked to trade policy and geopolitical uncertainty. While some economists argue that tariffs are a one-off price adjustment, it is possible they are more likely to feed through to sustained inflationary pressure in 2026. Higher import costs tend to translate into higher wage demands and pricing power through the supply chain. Tariffs have not only raised costs directly, but their broader effect has been to disrupt supply chains and delay corporate decision-making. Companies initially absorbed some of these costs; we believe more pass‑through lies ahead, though not dollar-for‑dollar. In the US, where tariffs are most pronounced, inflation is proving sticky at around 3%. Conversely, Europe is seeing a disinflationary impulse as Chinese exports, directed away from the US, bring cheaper goods to Europe. For investors this implies a more fragmented global inflation picture as we move forward – and therefore greater divergence in monetary policy and currency movements.
Therefore, we believe the risk of policy error – specifically, cutting rates too far too fast – is rising. Lowering short-term rates to ease financial strains could steepen yield curves sharply if bond investors lose confidence in inflation control, raising the five‑ to 10‑year funding cost and blunting any short‑rate relief. The experience of early 2025, when reciprocal tariffs briefly destabilised US bond markets, underlines that risk. In such an environment, with deficits high and pressures building on all sides, bond markets continue to act as a disciplining force – on governments and central banks alike. With an expectation of a wider dispersion in growth, employment, inflation, and deficits across major economies in 2026, there are opportunities to diversify interest rate exposure and protect portfolios against equity drawdowns or a sharp deterioration in employment.
Resilient progress, unexpected route
Importantly, central banks continue to operate independently. However, that status is being tested. With President Trump signalling that he would prefer rates closer to 1% than 4%, and with the Chair of the Federal Reserve’s term ending in May 2026, the Federal Reserve (Fed) faces continued political scrutiny. A shift towards politically aligned appointments may compromise its long-term focus on price stability. Investors should remain vigilant and consider the implications for inflation expectations and asset pricing. In addition, the government debt story is closer to becoming a market constraint (Figure 1). The US is on course to exceed 130% debt-to-GDP by the end of the decade, while France is projected to reach 118%, with its deficit stubbornly above 5% of GDP. When confidence erodes, repricing can be swift. The fact that 10-year yields in France exceed those of Italy and Spain – once the focus of concern during the euro crisis in 2009 – highlights how quickly investors can reassess financial risk, even within developed markets. Indeed, the UK’s mapped path to deficit reduction is, while ultimately stabilising, painful and problematic, illustrative of the difficulties in attempting to solve this problem. With increasing levels of government debt, it is possible that a funding scare in one major economy could raise the cost of borrowing across others.
Tariffs and political uncertainty have altered the logic of globalisation. Companies that once expanded freely across geographies now face incentives to ‘friend-shore’ production or invest domestically. The absence of stability around trade rules has led many CEOs to simply delay investment decisions. We expect this uncertainty to persist and suspect that now tariffs have been introduced, unwinding them will be difficult. As a result, emerging markets (EM) are feeling both headwinds and opportunities. A weaker US dollar has eased pressure on external debt, but the largest EM economies – China and India – face some of the largest tariff restrictions at 47% and 50% respectively. However, they both benefit from lower GDP per capita, which leaves ample runway for domestic growth. We believe selective exposure within EMs is warranted, with a focus on those benefitting from new supply-chain realignments and competitive currencies.
The rapid advance of artificial intelligence (AI) is another topic dominating discourse, corporate strategy and market sentiment. We believe AI investment remains at the early-adoption stage – marked by extraordinary potential and clear signs of fiscal excess. Circularity is a concern with firms investing in their own suppliers and partners, blurring financial exposures and creating dependencies. This is workable when there is momentum, fragile when there isn’t. Our credit analysts are scrutinising such structures closely. There are echoes of the dot.com boom of the early 2000s, with some companies generating immense cashflows from selling the ‘picks and shovels’ of AI, while others spend heavily in the hope of future rewards. Well-capitalised businesses are better placed to fund this long gestation period. The energy transition is another enduring theme. While we acknowledge that the rollback of the US Inflation Reduction Act has slowed momentum in the US, global investment in renewables, electrification and grid infrastructure is set to continue. So far, $2.2 trillion of capital has been allocated to renewables, nuclear, grids, storage, low-emissions fuels, efficiency and electrification in 2025 – twice as much as the $1.1 trillion going to oil, natural gas and coal.1 In Europe and parts of Asia, policy support and corporate commitment remain strong (Figure 2). Consequently, we still expect energy transition to be a persistent source of capital market opportunity, even if progress is likely to be more uneven.
Tariffs and inflation: a new kind of supply shock
After another strong year for equities, valuations – particularly in the US – leave less margin for error. Market reactions to geopolitical shocks and tariff announcements have shown how quickly corrections can occur and reverse. But if we were to see a downturn alongside weaker growth or rising unemployment, the rebound might not be so swift or profound. Diversification, therefore, is non-negotiable. Investors should think in three dimensions: across asset classes (equities, credit and alternatives); across regions (the US, Europe and EMs); and across themes (AI, fiscal resilience, the energy transition, etc). Credit markets could provide early indications of shifting dynamics, highlighting any increased differentiation between higher and lower quality borrowers. Private equity, meanwhile, could face headwinds from higher borrowing costs and tighter liquidity.
Figure 1: Up, up and away
Government debt as a percentage of GDP
Source: Bloomberg as of 24 October 2025.
Central banks under pressure
Global trade in transition
Global investment in the energy transition around the world, 2004-2024
Source: IEA/BloombergNEF Energy Transition Trends, 2025. EMEA = Europe, the Middle East and Africa; APAC = Asia Pacific.
Figure 2: Energy – changing regional variations
AI and energy: Themes in motion
Three-dimensional investment thinking
With deficits high and pressures building on all sides, bond markets continue to act as a disciplining force – on governments and central banks alike
William Davies Global Chief Investment Officer, Columbia Threadneedle Investments
The global economy enters 2026 in reasonable health, but the risks of a misstep are accumulating. Inflation remains sticky and uneven, fiscal deficits are uncomfortably high and seemingly without solution, and the geopolitical framework continues to creak. For policy makers and investors alike, the balance between caution and optimism has rarely been so delicate. We believe driving portfolio growth in this environment will come from patience, discipline, diversification and selectivity – with an active approach best-placed to recognise where change creates opportunity and exuberance masks fragility. The path is narrow, but it still offers a route to positive outcomes.
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929
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EMEA
All data is Bloomberg as of 31 October 2025 unless otherwise noted. 1.Source: IEA, World Energy Investment 2025, June 2025.
A higher equilibrium level of inflation, high valuation multiples and less available diversification are not bearish per se, but they do prompt a need to change portfolio design, with the need to protect long-term purchasing power at its heart. We see an increased role for investing in an explicitly multi-asset context, in part responding to needs of asset owners, but also reflecting a structural change in the pattern of capital raising in the contemporary economy. This shift raises the level of allocation to private assets in portfolios. A further example is a need to redesign allocations for pension plans in response to greater longevity and a reduced role for bonds as diversifiers. An outlook of lower asset-class returns means that persistent sources of alpha need to play a greater role in allocation. We also think that innovation, e.g., in the form of tokenization of real assets, is an important step toward incorporating diversifying return streams without compromising liquidity. Ultimately, this evolution subverts the notion of asset classes. There are plenty of views of the industry from a consultant perspective. Here, we try to offer a perspective that is intentionally different from that—in an attempt to be additive—and rooted in a strategic macro outlook. The recent uncertainty in the macro outlook, strong returns across asset classes and concentration of markets might have consumed the attention of the industry. However, we think there is a case that asset owners face a new paradigm in the investment outlook, one that changes how they need to operate compared with the norms of recent decades. This paradigm shift has implications for return assumptions, asset allocation, governance and organizational structure. In this note, we reflect on what this means for the asset management industry and how it will need to adapt.
The death of the 60:40 portfolio has been proclaimed many times before, but 2022 provides an example of what can go wrong with such a strategy
Inigo Fraser Jenkins, Co-Head of Institutional Solutions
The challenge that asset owners face has evolved. For years, the challenge was generating return in a low-yield world. Now, yield is apparently plentiful. For some investors, this might have made asset allocation easier; however, for most we expect that ease is ultimately illusory. This depends on what the objective is, but for DC funds, endowments, sovereign wealth funds and those advising individuals saving for retirement, the objective has to be real returns and the protection of purchasing power, which we think is becoming harder. The key elements of this macro outlook are: 1. Returns have been plentiful. However, they likely will not be in the future because valuations are high across asset classes and there are downward risks to long-term economic-growth rates (from demographic change, deglobalization and climate, only partly offset by gains from AI). 2. Inflation has apparently been tamed in this cycle, and market-based measures of forward-looking inflation are not unduly elevated. However, the pricing of gold and other non-fiat assets shows a very different picture. Our view of the structural forces at work is that inflation remains a risk long term (public debt, deglobalisation).
The vision of the investment environment that we have laid out suggests a change in the status of multi-asset investing. With hindsight (always a reassuring perspective), equities and bonds both delivered positive returns over the last 40 years and managed to do it while having a negative correlation between them. In that context, investors could be forgiven for thinking that they did not need to pay for multi asset investing. They might even have been led, falsely, to believe that there was such a thing as a “passive” approach to multi-asset investing in the form of 60:40. We think that the experience of 2022, with a simultaneous fall in both equities and fixed income, has shaken such comfort. We also believe that the need for a more active approach to multi asset, one that firmly embeds allocations to private assets and non-traditional assets (e.g., non-fiat assets, factor strategies), is essential. Moreover, in a world where the role of traditional active intra-asset class strategies has shrunk, such multi-asset active investing will be a larger part of what people understand active investing to be. The death of the 60:40 portfolio has been proclaimed many times before (including by the current author), but 2022 provides an example of what can go wrong with such a strategy. A move away from the assumption that 60:40 provides a neutral basis for asset allocation is needed for investors to think more deeply about the need for a different approach to multi asset. Display 1 shows the real return against volatility for stocks, bonds and a 60:40 combination of the two in the US. The period from 1980–2020 provided a super-normal boost to both returns and the internal diversification of the strategy that has underpinned its popularity, but this experience was also far above the long-term normal. Our 10-year forward projection is much more sober, and indeed the return over the last five years (shown in green) has been much worse than this long-term trend, particularly in terms of the volatility experienced.
A tougher backdrop for real returns
A recognition of the need for multi-asset active investing can take many forms. For example, there are funds that can invest across all asset classes with an objective of beating some cash-return or inflation benchmark. Another permutation would be multi-asset income funds. Perhaps a larger part of the recognition of an active approach to multi asset is via the growth of interest in Outsourced Chief Investment Officer (OCIO) arrangements.
Multi asset investing is active investing… and OCIO
Past performance does not guarantee future results. As of September 22, 2025. Source: Global Financial Data, LSEG Data & Analytics and AllianceBernstein (AB)
Return/Risk of 60:40 has been unusually strong in recent decade
The challenge that asset owners face has evolved
Inigo Fraser Jenkins, Co-Head of Institutional Solutions, AllianceBernstein
The 60/40 happened to beat inflation for 40 years, but it has not always been so effective
Past performance does not guarantee future results. As of August 31, 2025. Source: Global Financial Data, LSEG Data & Analytics and AB
US 60/40 10-Year Trailing Return (Annualized)
US CPI, Year-over-Year
Jan 1881–Dec 2023
10–Year Forward Forecast
Jan 1982–Dec 2019
Dec 2019–Aug 2005
1980–2020
Forecast
Post–1881
2019–2025
3. The confluence of (1) and (2) is, ultimately, a governance issue. What should the target or benchmark be? Investors need to focus on the generation of real returns and protection of purchasing power in a way that has not needed to be core to the outlook for decades. 4. In addition, diversification had been plentiful in recent decades, but that changed in 2022. We think that finding diversifying return streams is going to remain a problem, requiring further shifts in asset allocation and rules of thumb about investing. We are not going to lay out the evidence for this macro view in this note, as we have extensively covered it in our recent research. This macro view creates challenges for asset owners and suggests a shift both in strategic asset allocation and also in governance. This shift creates opportunities for the asset management industry to respond to it. An important step in this process is educating asset owners and investors about the change in the investment outlook for the next 10 years and how its difference from the last 40 years implies a need to change strategic asset allocation and governance. By the latter, we explicitly mean a change in the objective function, with the need to protect purchasing power being elevated in importance over other targets for many types of investors.
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Global equities delivered strong gains in 2025, led by US technology megacaps, yet artificial intelligence (AI) wasn’t the only game in town. A broader set of return sources emerged across regions, sectors and styles, which we believe can guide investors to a wider set of opportunities while preparing for evolving risks. The MSCI ACWI advanced 22.3% in US-dollar terms in 2025, as Japan, Europe and emerging markets outpaced the US.
Style leadership was mixed. Growth stocks continued to lead in the US. But outside the US, MSCI EAFE Value Index surged 42.2%, eclipsing non-US growth stocks. After two years of narrow performance leadership driven by the US AI hyperscalers, our cluster research shows the beginnings of a global broadening in themes in 2025. Shifting return patterns were also seen through most of last year in the weakness of quality stocks alongside a rally in speculative growth stocks, which benefited from expectations of US interest-rate cuts and the AI trade.
US equities face three notable headwinds in 2026: market concentration, elevated valuations and continued questions about US exceptionalism. Are the tides turning against the S&P 500, which has outperformed non-US markets in 11 of the last 15 years? Concentration is near record levels: the 10 largest stocks account for over 40% of S&P 500 market cap, making diversification harder and magnifying index volatility. In 2025, the S&P 500’s relative volatility versus non-US markets reached a record high for the 21st century. Elevated US valuations may have also skewed earnings-season behavior. Our research shows that in 2025, US shares that beat expectations were not consistently rewarded, and misses were punished more severely, while non-US companies continued to enjoy positive payoffs for exceeding earnings forecasts.
Meanwhile, policy uncertainty—trade tensions, government shutdown risks and concerns about Federal Reserve independence—adds to skepticism. We believe the pessimism may be overstated. US companies benefit from deep capital markets, innovation clusters and superior profitability, which help justify higher valuations. In our view, US equities remain central to global allocations, but disciplined diversification and selectivity are critical. Active managers should seek resilient business models, strong profitability and long-term growth, using risk-aware construction to capture world-leading US firms while mitigating concentration and valuation risks.
The role of US equities
Past performance does not guarantee future results. Source: FactSet, FTSE Russell, MSCI, S&P and AllianceBernstein (AB). *Europe ex-UK represented by MSCI Europe ex UK Index, UK represented by MSCI United Kingdom Index, emerging markets represented by MSCI Emerging Markets Index, China represented by MSCI China A Index, Japan represented by MSCI Japan Index, US large-caps represented by S&P 500, Australia represented by MSCI Australia Index and US small-caps represented by Russell 2000 Index. As of December 31, 2025.
Global stocks advanced, led by Europe and emerging markets
Hyperscalers are investing hundreds of billions of dollars in infrastructure capex, raising questions about their long-run return on investment and whether we’re in an AI bubble
Nelson Yu, Head—Equities
Could Earnings Growth Convergence Narrow the US Valuation Gap?
Past performance does not guarantee future results. Source: Bloomberg, FactSet, MSCI, S&P and AB. 1H: first half; 2H: second half. *Earnings growth forecasts are based on consensus estimates. †Based on price to forward earnings (next 12 months) from January 1, 2000, through December 31, 2025. US represented by MSCI USA Index, Japan by MSCI Japan Index, Europe by MSCI Europe Index, Asia ex-Japan Index by MSCI Asia ex-Japan and emerging markets by MSCI Emerging Markets Index. Left display as of November 30, 2025; right display as of December 31, 2025.
These trends are unfolding in an uncertain macroeconomic environment, as global growth continues amid multiple risks. Against this backdrop, we believe two debates loom large for equity allocators in 2026: the role of US equities in global portfolios and how to position in an AI-driven market.
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The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Shifting patterns in global equity markets point to diversification opportunities
US Stocks Are Rewarded Less for Beating Earnings, Punished More for Misses
Past performance does not guarantee future results. Source: IDC, MSCI, S&P and AB. EPS: earnings per share. Long term is a 20-year period from January 2005 through December 2024. Beat and miss returns measure the relative return during a five-day period around an earnings report: two days before the report, the day of the report and two days after the report. As of November 30, 2025.
Past performance does not guarantee future results. Source: Delta One, FTSE Russell, IDC, MSCI, S&P and AB. *Quality represented by MSCI World Quality Index. Speculative growth stocks are hyper-growers with profitability (free cash flow to assets) and valuation (free cash flow to price) in the bottom 60% (lower profitability and more expensive stocks in quintiles 3–5) and year-over-year sales growth in the top 30%. †Clusters were derived from the MSCI ACWI universe returns from January 2024 through November 2025 using UMAP for dimensionality reduction followed by hierarchical clustering to obtain 41 clusters. Return contribution is the benchmark-weighted cumulative USD return over each year. Cluster labels were assigned using generative AI based on a range of data, including constituent securities, Barra risk exposures, sector membership and macro factor exposures. Left chart as of December 1, 2025; right chart as of November 30, 2025.
AI enthusiasm has amplified concentration and valuation concerns, intensifying the active-versus-passive debate. AI’s rapid buildout can unlock productivity gains and return potential, but it brings risks. Hyperscalers are investing hundreds of billions of dollars in infrastructure capex, raising questions about their long-run return on investment and whether we’re in an AI bubble. Much capex in public markets has been funded by free cash flow rather than debt, which limits balance-sheet stress. However, the next phase is seeing more circular deals among large players and private-credit structures that could be more vulnerable. Despite the risks, we don’t think long-term investors should stay on the sidelines. AI’s impact is pervasive across industries and regions. Beyond the megacaps, future winners may emerge across the ecosystem—from early enablers to semiconductor suppliers and software firms building new architectures—as well as across non-tech companies that will become consumers and beneficiaries of AI. Active portfolios should own megacaps selectively, with weights aligned to clear investment disciplines and sober assessments of spending and profitability paths. Diversified exposure—by business model, industry and geography—will be important as AI broadens. Remember that the early dot-com era winners don’t rule the web today and expand the search for companies that could become tomorrow’s leaders.
Assessing the AI-driven market
1) Seek active approaches to curb volatility. Complacency about volatility is a risk following a strong year for equities. US market dynamics and AI controversies could provoke turbulence. Megacaps may not cushion drawdowns, so investors should consider defensive equity strategies—including in the US—and take advantage of diversification across a broader global set of themes that are poised to deliver returns. 2) Cast a wider net for long-term return potential. Regional diversification is not only a risk-control tool; it’s a source of differentiated returns that counters concentrated leadership. For investors who are overweight US stocks, consider expanding toward non-US markets. The revival of value stocks outside the US can help diversify popular US growth allocations. Capital discipline in Europe and corporate-governance reform in Japan can support uncorrelated sources of returns. Emerging markets may benefit from US-dollar weakness and structural themes such as digitization and China’s anti-involution agenda. Earnings prospects differ by region: while Europe’s expectations are relatively suppressed, forecasts for Japan and emerging markets are trending upward. Select companies outside the US, where valuations are more attractive, could see earnings-driven multiple expansion that augments market gains. US equities remain integral, but opportunities extend beyond the megacaps into sectors such as healthcare, industrials and financials, where earnings growth is improving.
Three investing guidelines for 2026
3) Double down on quality. Despite a period of underperformance, our research suggests that quality companies with consistent profitability and resilient business models tend to outperform over time. They can sustain earnings growth independent of macro conditions. Short-term lapses do not imply erosion of long-run potential; earnings and cash flows remain the best long-term predictors of equity returns. If volatility rises and tailwinds weaken in 2026, we believe quality is likely to become even more valuable within portfolios.
Policy uncertainty, uneven macro conditions and AI have added meaningful challenges to long-term wealth creation. We believe equity investors should ensure current exposures align with long-term strategic allocations, emphasizing complementary return sources across regions, styles and themes. Tapping a truly diverse range of equities—across a spectrum of regional, style and thematic return drivers—is the best way to capture long-term return potential while staying vigilant against a widening array of global risks.
Investors in developed markets still face high valuations, policy uncertainty and concentrated sector leadership, but supportive elements such as resilient earnings and advancements in AI could offer meaningful upside. Meanwhile, in emerging markets, valuations remain reasonable, we expect earnings momentum to persist, and a resumption of US dollar depreciation would be a marked tailwind. As always, understanding the unique drivers and risks present in specific markets and sectors and with individual companies remains essential for navigating the global equities landscape. Notwithstanding market concentration, relatively high valuations and rising fears about a potential AI bubble, the outlook for global equities isn’t necessarily negative. Positive economic momentum, robust earnings support and structural investment in new technologies may underpin global markets for a while yet.
Overall consensus estimates are strong: Europe, Asia and the US are now forecast to generate 12-15% earnings growth next year
Alex Tedder, Portfolio Manager & CIO (Equities)
In 2024, against a backdrop of macroeconomic and geopolitical uncertainty, global equities delivered 18% in US dollar terms. In 2025 so far, despite ongoing political volatility, global equity markets have again performed extraordinarily well, producing a return of 20.5% in dollars at the time of this writing. A number of factors are at work. The US economy remains robust, supported by massive fiscal stimulus (as with the One Big Beautiful Bill Act); high levels of capital expenditure, particularly by big tech companies; solid wage growth; and low energy prices. President Trump’s tariff policies have accelerated inward investment in the US and, so far at least, not led to higher inflation. The overall result has been strong earnings growth: earnings for the S&P 500 are likely to rise by 13% year-over-year overall in 2025. It is not surprising, therefore, that investors have simply looked through the geopolitical noise and focused on the fundamentals. In the rest of the world, optimism has also prevailed, with both European and Asian markets notching up some of their best returns in many years. The drivers of return have so far been slightly different, however, as economic momentum and earnings growth have been much more muted in both regions. Re-valuation has been the primary factor. Investors are anticipating economic recovery in 2026. Overall consensus estimates are strong: Europe, Asia and the US are now forecast to generate 12-15% earnings growth next year.
There is understandably much focus on the degree of concentration in equity markets, particularly in the US. The 10 largest technology names now account for around 40% of the S&P 500 market capitalization, a record high. Looking back in time, it’s clear that every major phase of innovation has been characterised by prolonged periods of concentration. Unlike previous phases, the current technology-driven innovation wave is composed of multiple innovation cycles, of which the most recent (and most rapid) is evident in the field of large language models, otherwise known as Generative AI. The share price performance of the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) has been driven by gigantic investment in AI infrastructure. As shown in Figure 1, the rises in capex in recent years represent a relatively small proportion of their operating cashflows. The biggest spenders have scope to increase spending quite a bit further if they deem it appropriate.
Another surprisingly strong year
Concentration in itself is not a bad thing
Positive economic momentum, robust earnings support and structural investment in new technologies may underpin global markets for a while yet
Figure 1: The hyperscalers’ capital expenditures may still have room to grow
Source: Schroders, Bloomberg as at 31 July 2025. Figures are annualised, forward estimates are based on consensus estimates. The securities shown were holding in the strategy but the timing of purchases, size of position and the return may vary amongst portfolios within the same strategy. Current economic and market trends are not a guide to future results and may not continue.
A valid concern is that markets are already more than discounting a positive growth scenario. Almost all markets around the world look expensive relative to recent history, trading at multiples well above their 15-year medians. Long-term fundamental measures such as the cyclically adjusted price-to-earnings ratio (CAPE) or the market-cap-to-GDP (gross domestic product) measure (favored by Warren Buffett) are flashing red. The doubters can certainly point to the fact that, historically, markets have always reverted to the mean, and that suggests significant downside from current levels. While that is a risk that rightly looms large in our daily debate, all the market dynamics we have noted here lead us to believe those elevated valuations are sustainable for the time being. Short-term interest rates in many countries are likely to fall, providing support to market multiples, specifically in the US. As confidence levels in economies such as China, India or Brazil begin to improve, there could be strong demand for assets in these markets, particularly given diversified risk exposure. Structural factors, such as China’s transition to becoming a technology giant (already evident in the electric vehicle, renewable energy and robotics sectors), are also probably being underestimated by the market. Similarly, in Europe, structural drivers such as technology infrastructure and energy transition remain fundamentally underestimated, in our view. All these factors suggest that relatively high valuations can be sustained and could go higher still.
To learn more about: The outlook for global equities in 2026 Whether emerging markets equities can continue to deliver returns Finding EM opportunities beyond the ‘big four’ Click here to read the rest of the article.
Valuations are high but could stay that way (for now)
As the numbers have grown, so, too, have doubts about the likely return on investment and the circularity inherent in the current AI supply chain. With the largest firms accounting for more than 70% of total S&P 500 capital expenditure this year, it is no exaggeration to say that the fate of the US stock market, as a whole, depends on continued confidence in the future of AI. For now that confidence remains intact. There are some signs of irrational exuberance, as reflected in the outsized performance of AI-related companies with no earnings or even no revenues. However, the total market capitalization of those companies is small. The much more important question at this point is whether AI models can monetise at a rate that justifies the huge expenditures outlined above. There have been some encouraging signs in this regard, with Google parent Alphabet reporting a material contribution to revenue growth in cloud, search and even YouTube from AI-related deployment. Interestingly, ChatGPT itself is already generating revenue: about $20 billion in 2025. Based on our analysis, ChatGPT models could generate revenues of $200 billion by 2030. That puts the current $500-billion market valuation of parent OpenAI into sharp context. If the company were listed, a not unrealistic valuation would be 10 times forward sales, implying a $2-trillion market capitalization. Given that AI-chipmaker Nvidia currently commands a $5-trillion valuation, the enthusiasm for AI investment suddenly becomes quite rational.
Our optimism about the outlook for 2026 doesn’t diminish our awareness of the risks. If as we expect, markets continue to rise, the risk of a major correction by definition becomes more acute. That is particularly true with valuations already at stretched levels. There are multiple other potential catalysts, any of which could precipitate a reset in market valuations to more normal levels. In such circumstances, most assets will do quite poorly. Within equities, there is nevertheless a cohort of unloved, cash-generative and well-funded companies that could do relatively well. Increased exposure to selective healthcare, consumer and utilities stocks will likely offer useful diversification when the correction comes.
Conclusion: Proceed with confidence, invest with caution
Microsoft
400,000
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100,000
0
2023
2024
2025E
2026E
2027E
2028E
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2029E
Total capex
Total Operating cash flow
Alphabet
AWS capex
Amazon
Other capex
250,000
150,000
50,000
Meta
As global fixed income investors look toward 2026, the landscape is shaped by cycles that are increasingly out of sync across major economies, with the trajectories for inflation, monetary policy and economic growth diverging across regions. The leaders of our fixed income teams share their views on how these markets can be navigated in the new year.
Moderating inflation, fiscal stability and a healthy consumer bode well for US fixed income returns into 2026
Lisa Hornby, CFA, Head of US Fixed Income
2025 has been a year of differentiation in bond markets, with very large divergences in yield moves, both between geographies and at different maturities of the curve. We expect this to continue as we head into 2026. Why? Simply because growth, labour market and inflation outlooks are desynchronised by country, and major central banks are at different stages of their policy cycle. The US Federal Reserve (Fed) and Bank of England remain in the easing phase, the European Central Bank looks to be happily on hold, and the Bank of Japan is not yet done hiking rates. This provides huge opportunity – but only to those who are active in their bond allocation and capable of taking advantage of fast-changing and disparate economic conditions globally. Passive management in this environment could leave portfolios overallocated to the relative “losers” as yield moves diverge, and that could lead to underwhelming returns and greater risks.
Whether its concern over concentrated AI-driven growth, inflated equity prices, volatile US policy or other risks, the diversification benefits of fixed income as an asset class are increasing as inflation pressures globally remain benign. For those investors still heavily invested in cash, the safety net is not as strong as it once was. With cash rates falling and unable to keep pace with rates of inflation, bonds remain an attractive income opportunity.
Desynchronised cycles and attractive opportunities for global bonds
The only certainty is uncertainty
Passive management in this environment could leave portfolios overallocated to the relative “losers” as yield moves diverge, and that could lead to underwhelming returns and greater risks
Julien Houdain, PhD, Head of Global Unconstrained Fixed Income
Julien Houdain, PhD Head of Global Unconstrained Fixed Income
Figure 1: 2025 has seen desynchronised yield moves by country and maturity, and we expect that to continue in 2026
Source: Macrobond, Bloomberg, Schroders, as at 28/10/2025. Current economic and market trends are not a guide to future results and may not continue.
Japan
Germany
We are optimistic about the outlook for the US economy in 2026 with both fiscal (as the full impact of the One Big Beautiful Bill Act hits) and monetary easing (spurred by a softening labour market in mid-2025) working their way into the economy. While we welcome the government and central bank support to reduce the rising hard-landing risks we saw in the summer of 2025, we worry about policymakers overcooking it on stimulus. Too much of a good thing is a real possibility, in our view. We are watchful for signs that policy has become too stimulative, such as a re-tightening of the labour market or rising core inflation and wages. After a period of outperformance for US bonds, we are seeing better opportunities emerge for global portfolios. We also believe having inexpensive inflation protection is prudent given a strong growth outlook, dovish policymaking and the ongoing threat of weakened credibility of the Fed with the end of Jerome Powell’s term in May 2026 and the appointment of a new Chairperson. Europe’s economy has been slowly improving throughout 2025. We see this continuing into next year, with German fiscal stimulus being additive, but not a game changer to overall eurozone growth, in our view. In the UK, however, a loosening labour market, combined with a budget that will tighten fiscal policy, will likely keep UK growth below trend early in the year. This should continue to create opportunities in gilts.
To learn more about: Risks to the outlook for US bonds Positioning for quality in a higher-yield world A potential new reallocation cycle in EM debt A currency cycle that may favour non-US assets Click here to read the rest of the article.
Too much of a good thing?
We believe today’s benign economic conditions should persist and support US fixed income performance in 2026. The US economy continues to absorb shocks effectively. The economy has settled into a benign mid-cycle environment, with growth moderating from last year’s elevated pace but remaining positive, inflation trending toward a range in the Fed’s comfort zone, and the labour market adjusting in a measured way. For fixed income investors, this combination—slower growth without sharp contraction and contained inflation—has historically provided fertile ground for strong total returns. Several factors could continue to be supportive of US bond markets in 2026. Notably, the inflation pass-through from tariffs remains limited, with companies absorbing more cost pressures through productivity gains and lower profit margins, thereby reducing the risk of an inflation spike. Provided this dynamic holds, there is room for interest rates to remain anchored or gradually decline further, and that could support further price appreciation for bonds.
Year-to-date yield moves across country and curve (in basis points)
UK
Corporate bonds have enjoyed another year of positive performance, but we see the valuation starting point as the key driver of forward-looking returns. The spread earned for taking additional credit risk over government bonds is now at historically low levels. With these very tight spread levels, having significant exposure here seems unwise currently. Opportunities to add risk in credit will present themselves in 2026. They always do, and we rarely know the catalyst in advance. Given our optimistic growth outlook, we believe retaining significant ability to deploy capital when these better opportunities arise is the most sensible approach. In the meantime, it’s important to use rigorous fundamental research, look where other investors aren’t and continue to innovate to generate alpha within corporate bonds. This flexible approach to asset allocation also means taking advantage of better opportunities when they arise in other markets. Agency mortgage-backed securities should be supported by attractive valuations and declining rate volatility. In Europe, we’re also finding good opportunities in quasi-sovereign and covered bond issuers. The challenges that 2026 will inevitably bring create both risks and opportunities, and that will make an agile and active approach to bond investing even more important to delivering investment performance.
Patience is a virtue
Despite early year pessimism, US fixed income posted solid performance across nearly all sectors. The strong and steady returns were driven by income earned from high coupons and further supported by price gains from lower Treasury rates and tighter spreads in the credit and mortgage-backed securities (MBS) sectors.
A strong year for US bonds—and supportive conditions could extend into 2026
Small-mid Buyout (EV≤ $1bn
Large Buyout (EV > $1bn
Russell 2000
Figure 2: Strong 2025 YTD returns across most sectors of the US bond market
Source: Bloomberg, as at 31/10/25. Past performance is no guarantee of future results and may not be repeated.
Fiscal tailwinds from the One Big Beautiful Bill Act (OBBBA) are expected to persist into 2026, thereby cushioning the economy from the effects of softer private sector demand for labour. Companies’ immediate expensing of capital expenditures and increased federal investment commitments should continue to help steady nominal GDP growth, further boding well for credit quality. The US consumer remains broadly healthy, supported by robust household balance sheets, although spending is increasingly concentrated among the top 10% of earners. This lends some fragility to growth, yet aggregate consumption is likely to remain resilient, and that would provide a supportive backdrop for credit and structured products well into next year. Such conditions — moderating inflation, fiscal stability and a healthy consumer — bode well for US fixed income returns into 2026, from both attractive income and potential capital appreciation as yields adjust to an ongoing moderate central policy and a backdrop of economic growth.
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3.91%
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US HY
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Resilience has become the key watch word for investors in an era shaped by persistent uncertainty. In fact, in Schroders’ Global Investor Insights Survey for 2025, published in June, portfolio resilience was selected as by far the highest priority for investors over for the remainder of 2025 and into 2026. The surface calm of markets today – reflected in strong public equity market performance and benign bond yields – masks a complex backdrop. Inflation remains sticky, fiscal pressures are building, and geopolitical flashpoints continue to test global stability. Even the enthusiasm around artificial intelligence, while transformative, risks fuelling new valuation imbalances.
The current market favours strategies that are able to harness three complementary sources of resilience: local champions, transformative growth, and multi-polar innovation
Dr. Nils Rode, Chief Investment Officer, Schroders Capital
While many public markets are priced near record highs, private markets are at a different stage of the cycle. Fundraising, deal activity and exits have broadly all fallen over the past several years, which has fuelled a valuation reset across asset classes and segments. This cyclical decoupling creates a healthier environment for new investments, supporting attractive entry prices and improved yield potential. Meanwhile existing portfolios have been largely insulated thanks to a focus on fundamentals and the robust, if volatile, macro backdrop. At the same time, structural trends continue to drive where value is created. The global energy transition, reshoring of supply chains and ongoing digital transformation continue to provide tailwinds to long-term growth.
Private equity continues to be in a period of recalibration. Fundraising and deal activity remain below pre-2022 levels, while exit routes have narrowed and holding periods have lengthened. These cyclical influences, combined with tighter financing and persistent macro volatility, are reshaping the investment landscape. Yet rather than signalling weakness, this phase is restoring balance and discipline. In short, lower competition, more selective deployment and wider dispersion in pricing are setting the stage for stronger vintages ahead.
Decoupling creates opportunity
Private equity: Resilience through recalibration
Source: Schroders Capital, 2025. As of end of November 2025.
Rising economic, political and financial uncertainties
Private markets can be seen as a key area where cyclical and structural forces are aligning to create opportunity
Small-mid buyouts trade 40–50% below large-cap and public benchmarks
Past performance is not a guide to future performance and may not be repeated. Source: Capital IQ, Bloomberg, Global M&A Outlook 2025, Robert W. Baird & Co., Schroders Capital, 2025. North America and Europe M&A. Completed deals. Russell 2000 EV/EBITDA is calculated using EBITDA from the latest trailing twelve months. The views shared are those of Schroders capital and may not be verified or might be subject to change.
Of course, not all private market strategies are positioned to respond equally to this environment. Resilient return opportunities thrive where a combination of inefficiency, disruption, differentiated risk and tangible asset-backing exist. Think small buyouts or continuation investments in private equity, specialty finance and real asset debt within private credit, energy transition infrastructure, or select operational real estate. As we move toward 2026, the most successful investors will be those able to combine steady deployment with selectivity. Private markets, with their long-term capital and active engagement, are not immune to uncertainty – but they are well positioned to contribute to diversified, resilient portfolios.
To learn more about: Other market forces shaping private markets in 2026 Diversification in asset-based finance Opportunities in the renewables market Read the rest of the article here.
Fed policy uncertainty
Record high stock market valuations
Geopolitical risks
Risks to global growth
Sovereign debt concerns
Periods like this challenge investors to look beyond short-term momentum and focus instead on the durability of returns – and on bottom-up value creation. In this context, private markets can be seen as a key area where cyclical and structural forces are aligning to create opportunity.
Differentiated resilience across strategies
The current market favours strategies that are able to harness three complementary sources of resilience: local champions, transformative growth, and multi-polar innovation. Local champions: Businesses rooted in domestic markets and which benefit from more stable demand, shorter supply chains and, as such, lower exposure to trade frictions. Their locally anchored earnings can help insulate portfolios from geopolitical shocks. Transformative growth: Companies where operational improvement, innovation, or complexity drive intrinsic value creation. As financial engineering gives way to hands-on ownership, value-add has become a decisive differentiator. Multi-polar innovation: Disruptive innovation is now distributed across, and driven from, multiple hubs – from the US and Europe to China, India and broader Asia-Pacific. This reduces dependency on any single market.
From recalibration to resilience
These themes converge in three areas offering differentiated potential. Small- and mid-market buyouts (for us, transactions with enterprise values below $1 billion) have become private equity’s resilience engine. With a concentration of capital driving up competition elsewhere, these investments offer attractive entry valuations that are on average 40–50% below large buyouts and listed small-cap public peers.
Three strategic areas of opportunity
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15.6x
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Lower entry prices, lighter leverage and broader exit routes underpin small-mid's long-term edge Average entry EV/EBITDA multiples
Smaller buyouts also rely less on leverage – and more on operational agility and value creation. Most also target service-oriented, domestically or regionally focused companies, limiting exposure to global capital market swings and providing steadier exit routes through trade sales and sponsor transactions. Continuation investments allow existing private equity owners to extend ownership of high-conviction assets and so access new phases of transformation growth. Slower exit markets have catalysed long-term, structural growth, enabling these vehicles to become an established, mainstream liquidity solution. We expect the market to grow to $300 billion in the coming ten years. For investors, continuation investments align value creation with liquidity. They combine shorter holding periods (1.5 years less than traditional buyouts), with more efficient fees compared to sponsor-to-sponsor sales (secondary buyouts) and with more predictable historic returns. Early-stage venture can capture the expanding geography of innovation. Beyond artificial intelligence, where rising valuations warrant later-stage caution, advances in biotechnology, climate technology, fintech and deep tech offer diverse entry points at more compelling valuations. The recent cooling of the biotech VC market, in particular, is opening contrarian opportunities.
Corporate and consumer balance sheets remain solid, despite some stress at the lower income or higher leverage end of the spectrum. At the same time, and as the focus of policymakers shifts from inflation to employment, central banks – led by the Federal Reserve – have adopted an accommodative stance. This supports borrowers that finance at short-term rates, including smaller businesses and commercial real estate developers, and points to a relatively contained default outlook across much of the credit spectrum. Meanwhile, after decades of very low interest rates and with a substantial transition of assets into the hands of more yield-oriented investors, such as insurers, income allocations are increasing. Thanks to this increased demand we see risk premiums compressing, particularly in syndicated markets. This means inefficient markets – including those that are secured, shorter tenor or where regulated banks or insurers have been more heavily involved – are increasingly more attractive.
Private debt and credit alternatives: Giving credit its due
A look at the continuum of returns
Source: Schroders Capital, Bloomberg. Pan-European yields are hedged to USD. As of September 2025. Shown for illustrative purposes only and should not be interpreted as a recommendation to buy or sell any security. Diversification cannot protect against the loss of principal.
After several years of adjustment, signs of stabilisation are emerging in commercial real estate. The steep price declines following the 2021–2022 peaks have largely run their course, with US property values broadly flat over the past year and select industrial and retail segments showing renewed strength. From this lower base, and as policy rates begin to ease, transaction activity and demand for financing are recovering. This is coming at a time when banks have considerable pressure around their real estate exposure. A meaningful gap therefore exists in both debt and equity capital provision, creating attractive opportunities for private lenders. Development, construction and heavy refurbishment bridge loans currently offer some of the highest return potential in real assets.
Real estate debt: Repricing creates opportunity
Infrastructure debt continues to serve as a reliable source of stable, defensive income. With steady capital demand and tangible asset backing, it provides a secure foundation for long-term credit portfolios. Many infrastructure projects benefit from inflation-linked revenues or regulated frameworks, which help preserve real yields even if inflation pressures re-emerge. In this environment, infrastructure debt remains one of the most effective ways to combine yield stability with downside protection.
Infrastructure debt: The defensive income engine
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The mood music for government bond markets is about to change. After a steady drumbeat of interest rate cuts over the past couple of years, the easing cycle is grinding to a halt. The reason for this is inflation, which has been stubbornly persistent across the G10 economies. Most central banks are coming to the end of their current monetary policy cycles, with three notable exceptions: the US, where cuts are priced in, perhaps excessively so; the UK, where cuts are a distinct possibility, even though the Autumn Budget did not inflict enough pain to spur the Bank of England into action; and the Bank of Japan, which is so far behind the curve, I believe it needs to hike rates next year.
In most developed economies, I expect monetary policy to be broadly neutral next year because inflation will stay the hand of central banks. Core inflation across the G10 economies hovered around 2.7% for the 12 months up to 31 July 20251, whereas from October 2001 until the Global Financial Crisis in 2008, the average was about 1.4%1. Inflation remains stubbornly above target and has become sticky but – and this is a crucial difference – not scary. I’m not expecting a return to anywhere near the levels seen back in 2022.
The cutting cycle is almost over
In a world where inflation is running slightly hotter, bonds possess a key advantage today that they didn’t have a decade ago: higher starting yields that exceed inflation
Liam O’Donnell, Rates and Macro Expert
Liam O’Donnell Macro and Rate Strategy, Artemis Fixed Income
Inflation: Stalling at a higher level
Source: Bloomberg as at 31 July 2025
G10 – average inflation
Closer to home, bond markets seemed to take the Autumn Budget relatively well; however, I believe this had more to do with actions by the UK Debt Management Office to reduce near-term bond supply pressure, rather than a shot of confidence in the Budget. The reduction in the expected supply of bonds was the ultimate refuge for weary gilt investors. The reality of Budget Day was that borrowing will be going up, not down, over the next three years and all the fiscal consolidation and tax revenues will occur at the back end of the forecast period. This tax-and-spend approach is not what the gilt market needs. Ultimately, I believe markets will punish the Labour party for this, through higher long-end gilt yields.
UK: Labour’s tax-and-spend policy is not gilt-friendly
Against a backdrop of resilient inflation, one of the biggest questions for bond markets going into 2026 is: what if the Federal Reserve does not cut as much as the market anticipates? Neither inflation nor financial conditions indicate that monetary easing is required – despite what the president says. According to the Fed’s own measure (incorporating mortgage rates, house prices, 10-year Treasuries, the stock market and other indicators), financial conditions are currently quite loose. The US economy is growing at around 3.5% per annum and Trump’s One Big Beautiful Bill Act is providing stimulus. It doesn't feel to me as if the economy is screaming for interest rate cuts.
Trump may not get as many cuts as he wants
Financial conditions are loose, according to the Federal Reserve
Source: Federal Reserve as at 30 June 2025
Political interference is the elephant in the room. While the market has moved on slightly from the ‘threat on independence’ narrative which prevailed in August, the reality remains that Jerome Powell’s term as Chair of the Federal Reserve ends in May and Secretary of the Treasury Scott Bessent is in the process of choosing a more accommodating nominee. Although the market is pricing the terminal Fed funds rate at about 3.1%2, expectations have bounced between 2.75% and above 4% this cycle. This vacillation should continue because the market is caught between two opposing narratives: recession versus reflation.
Market pricing – terminal Fed funds rate
Market pricing of terminal Fed funds rate
Source: Bloomberg as at 8 September 2025
On the recession side of the coin: businesses are being hit with tariffs and rising costs, weakening the labour market; youth unemployment is high; incomes are being squeezed; and government spending is being directed away from supporting households, towards corporate tax cuts. All of these factors point towards economic weakness. Yet there are signs of reflation: real wage growth is still positive (even if declining); survey measures point to rising services inflation; and the price of goods is increasing due to tariffs. To that end, I have been increasing exposure to US Treasury Inflation-Protected Securities (TIPS) across the funds I co-manage. The key point, however – and one the market seems to be ignoring for now – is that to see policy rates heading towards 3% next year, something significant needs to happen to justify it, such as a more pronounced slowdown in the labour market or some sort of growth shock. If that does not happen, the Fed funds rate is unlikely to fall next year by as much as the market expects.
The broader context for fixed income is constructive. In a world where inflation is running slightly hotter, bonds possess a key advantage today that they didn’t have a decade ago: higher starting yields that exceed inflation. That persistent income stream provides an element of downside protection, cushioning investors in the event of capital losses, while on the upside, real yields should be supportive for performance over the long run.
Bonds are delivering real yields once again
G10 – average core inflation
Core – 12m average
Core – pre-pandemic average
G10 headline, core inflation
Average during this hiking cycle
Fed funds rate
Financial conditions loose
Financial conditions tight
Click here for Fixed Income at Artemis
1.Source: Bloomberg as at 31 July 2025 2.Source: Bloomberg as at 8 September 2025
Important information FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. This is a marketing communication. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.
After a strong year for global equity markets, Artemis fund managers discuss where they are actively investing to capture the next phase of growth and how they are positioning portfolios to navigate ongoing macroeconomic risks
What happens when geopolitics and a new rate regime take hold? Jacob de Tusch-Lec explores how global markets are changing in his outlook for 2026.
MSCI EM was the top performing stock market in 2025, but Raheel Altaf believes there is more road to run. With large disparities both between and within markets, he warns being active will be key to manage risk.
Global equities
Jacob de Tusch-Lec Fund Manager
UK equities
The FTSE All-Share returned 24% in 2025, ahead of many developed market peers including the US and Europe, yet it remains overlooked by investors. Watch Ed Legget as he provides his outlook for UK equities.
Global emerging market equities
Cormac Weldon shares his perspective on the outlook for US equities. Watch as he discusses the key tailwinds and headwinds, the role of the Mag7, and how investors should think about AI.
US equities
Click here for more outlooks, including Europe and Fixed Income
Important information FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. This is a marketing communication. CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.
Raheel Altaf Fund Manager
Ed Legget Fund Manager
Cormac Weldon Head of US Equities
Download video transcript
The US economy is expected to shake off its growth scare from the second half of 2025 and outperform expectations in 2026 as AI spending and fiscal expansion provide support. Europe, on the other hand, could lag consensus estimates because the front‑loading of tariffs in 2025 has drained meaningful manufacturing demand. In emerging markets, inflation and debt levels are reasonably under control, but tariffs are a wild card whose effects may take years to play out.
AI‑related capital expenditure (capex) has significantly boosted US growth in 2025, and the capex incentives in the “One Big Beautiful Bill Act” (OBBBA) should only strengthen that tailwind next year. The beneficial effects of the Federal Reserve’s (Fed) late‑2025 rate cuts will add to the US economy’s health in 2026. The labour market may be able to pull out of its stalemate between a low level of jobs added and minimal layoffs, moving toward expansion. But inflation remains an overarching risk. With U.S. government debt at more than 120% of gross domestic product (GDP)1 even as inflationary policies such as tariffs and immigration restrictions have a growing impact, the Fed will have difficulty returning inflation to its 2% target. Expectations for rate cuts in 2026 seem to overestimate the amount that the central bank will ease, and it may not be able to lower rates next year at all.
Fiscal expansion to strengthen US capex tailwind
Political pressure in the UK is likely to drive some fiscal consolidation, albeit from levels that are quite expansionary
Blerina Uruçi Chief U.S. Economist, Fixed Income
Fiscal spending is increasing globally
Sources: Bloomberg L.P., Bureau of Economic Analysis, Macrobond/National Federation of Independent Business. Right hand side chart shows actual data through April 2024 and then T. Rowe Price projections from May 2024–May 2034. 61.9% is as of April 2024. Actual future outcomes may differ materially from estimates. * Face value of total consolidated gross debt, including currency and deposits, debt securities, and loans.
Inflation and debt levels are under control in emerging markets—particularly in Asia—relative to their history. In contrast with developed economies, emerging markets have made strides toward reducing their debt burdens over the last 10 to 20 years. Emerging market growth looks decent, if a bit on the sluggish side. The global trading system has proved to be reasonably adaptable to tariffs so far, but the ultimate impact on emerging markets will take years to play out. The tariff situation with China remains particularly unsettled. The country’s “anti‑involution” campaign to reduce production of commonly exported goods should increase their prices, further complicating global trading relationships. Chinese domestic economic data are likely to continue to soften, and its housing industry remains under pressure. However, the People’s Bank of China seems reluctant to ease, preferring to use quantity‑based tools to allocate credit to favoured sectors, although one rate cut in early 2026 is not out of the question.
Inflation under control in emerging markets
There was much front‑loading of European exports to the US in 2025 to get ahead of tariff implementation, so eurozone manufacturing may be weaker than expected in 2026. This could surprise the European Central Bank (ECB), shifting its policy stance more dovish. Germany’s very large fiscal expansion is likely to drive German bund yields higher, in turn dragging all eurozone yields up. This tightening in financial conditions would be another factor leading the ECB to ease. There is also the risk of currency‑driven cuts if the euro strengthens beyond USD 1.20. Political pressure in the UK is likely to drive some fiscal consolidation, albeit from levels that are quite expansionary. In response, the Bank of England should be able to ease rates more than is currently priced in. Japan has overcome the opposite problem of other developed markets: deflation. In fact, the Bank of Japan (BoJ) appears to be behind the curve on tightening monetary policy. We expect labour shortages to cause wage inflation, building on the existing food inflation. With Japan’s new government, more fiscal stimulus is likely, adding fuel to inflation and leading the BoJ to eventually hike policy rates by more than expected.
ECB could lean dovish
The US economy is shaking off the 2025 growth scare, but the eurozone may lag as tariff front‑loading weighs on manufacturing.
Key takeaway
US on upward trend while German fiscal set to jump
Curious about what’s next for global markets? Read T. Rowe Price’s full 2026 Global Market Outlook now.
1.Source: Bloomberg Finance L.P.
Tomasz Wieladek Chief European Macro Strategist
Chris Kushlis, CFA Chief Emerging Market Macro Strategist
61.9%
6.36%
Appendix Financial Terms: Investors in the U.S. and Canada, for a glossary of financial terms, please go to troweprice.com/glossary. Investment Risks: Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Each person’s investing situation and circumstances differ. Investors should take all considerations into account before investing. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries. Emerging and frontier market countries tend to have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed market countries. Commodities are subject to increased risks such as higher price volatility, geopolitical and other risks. Commodity prices can be subject to extreme volatility and significant price swings. Inflation-Linked Bonds (Treasury Inflation Protected Securities in the U.S.): In periods of no or low inflation, other types of bonds, such as US Treasury Bonds, may perform better than Treasury Inflation Protected Securities (TIPS). Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences. Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path. Financial services companies may be hurt when interest rates rise sharply and may be vulnerable to rapidly rising inflation. Health sciences firms are often dependent on government funding and regulation and are vulnerable to product liability lawsuits and competition from low-cost generic product. The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a income-oriented stocks. Small‑cap stocks have generally been more volatile in price than the large‑cap stocks. Investing in private companies involves greater risk than investing in stocks of established publicly traded companies. 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Three years after the launch of ChatGPT, the narrative around AI is beginning to shift from “what’s possible?” to “what’s profitable?” Investment remains at full throttle, and innovation is driving real‑world gains, but strong stock performance and speculative activity in some corners of the market are sparking anxiety over a potential bubble. As leading firms increasingly tap debt markets for capex, pressure is mounting to carve out clear paths to monetization. We believe AI (artificial intelligence) remains on track to become the biggest productivity driver for the global economy since electricity. It has the potential to be transformative not just for tech firms, but for nearly every sector—healthcare, finance, manufacturing, education, and beyond—by unlocking new solutions to complex challenges. The leading firms are maintaining aggressive, multibillion‑dollar annual capex programs to build out data centres, purchase advanced graphics processing units (GPUs), and expand cloud capacity. Many have announced or have begun construction of new AI supercomputing hubs to meet surging demand from corporate and consumer AI applications.
Rising competitive intensity will likely accelerate the AI capex buildout
Xxxxx xxxxxxxxxxx
Dom Rizzo, CFA Portfolio Manager, Global Technology Equity
Beyond tech—AI’s transformative potential across sectors
Source T. Rowe Price. For Illustrative purposes only. * Capex (capital expenditure) refers to a company’s spending in long-term assets such as property, technology, or equipment.
While the risk of an AI bubble intersecting with a credit bubble cannot be discounted, we remain very positive on the outlook for the AI sector. The AI chip market still has a lot of growing to do: AMD estimates that the AI data centre chip total addressable market will rise from around $200 billion in 2025 to $1trn in 2030.1 The leading chipmakers provide the essential hardware powering both training and inference for AI models and are therefore essential for the AI infrastructure boom. They have also benefited from technological expertise, scale, and established supply chains, creating considerable barriers to entry. The AI hyperscalers—the large tech firms that operate cloud platforms and data centres—are being driven by sustained demand for cloud computing, AI infrastructure, and digital transformation as AI is adopted across industries. These firms are likely to remain the key drivers of innovation, infrastructure buildout, and broader adoption of AI. That said, these hyperscaler companies are also seeing the first rise in competitive intensity to their core businesses in decades, as new-age companies like OpenAI try to encroach on their core business. This rising competitive intensity will likely accelerate the AI capex buildout. While the AI sector’s expanding capex and reliance on debt will introduce new risks, we believe the long‑term growth prospects remain compelling—especially for the hardware suppliers and hyperscalers at the heart of the ecosystem. For investors, this means focusing not only on visionary technology, but also on execution, financial resilience, and clear paths to monetization as AI enters its next chapter.
Hardware and hyperscalers still lead the way
Until now, these capex budgets have been largely funded by the operating cash flows of the most profitable companies in history. However, the magnitude and acceleration of AI capex requirements are such that even some of the leading firms are unable to continue funding them solely through internal cash generation. The public bond market may partially fulfil firms’ funding needs, but even that could be too shallow to fund a sustained period of very high capital intensity, meaning other sources of capital will be required—most notably private credit. As debt capital starts to fund AI investments, this will add to the already‑growing pressure on the leading firms to establish well‑defined strategies for turning innovation into profits. Debt is capital that must be repaid and comes with regular interest payments, restrictive bond covenants, and a new set of stakeholders to appease, meaning the borrower must generate reliable cash flows to service the debt. Lenders are also fundamentally more risk averse than equity investors, so typically they demand a clear path to monetization to reduce credit risk. Debt funding also increases risk. As firms take on more debt, their fixed obligations increase, and if revenue growth fails to keep pace, they may struggle to service the debt—especially if interest rates rise or business conditions weaken. Debt markets can also be more sensitive to macroeconomic shifts such as rate hikes, credit spreads, and a loss of liquidity. If many AI firms become highly leveraged and sector growth slows, systemic risks could occur—impacting lenders, investors, and the broader market.
Debt demands discipline—and brings risk
AI is poised to be the biggest productivity driver since electricity, but soaring capex and the growing use of debt finance are fuelling demands for clear monetization strategies.
Capex* building across the sectors and the AI ecosystem
1. Source: AMD Financial Analyst Day 2025. Estimates provided are for the AI data center chip total addressable market (TAM). TAM is the total potential market for a product or service. There is no guarantee that any forecasts (AMD forecast, November 2025) made will come to pass and actual outcomes may differ materially.
Mark Stodden, CFA Credit Analyst
The economy is operating at two speeds, with AI‑related areas absolutely booming while other segments—manufacturing in particular—are lagging. Fiscal expansion is just starting to hit its stride, which will boost AI (artificial intelligence) spending even further, and the Trump administration’s prioritization of deregulation should propel the overall economy toward healthy growth in 2026. But looking across asset classes, valuations almost everywhere appear extended, clouding the outlook. Where does our Asset Allocation Committee see tactical asset allocation opportunities in this landscape?
Although the US fiscal stimulus is sizable, the pivot toward expansionary policies outside the US has been more abrupt, so we expect it to provide a larger relative impact
Tim Murray, CFA, Capital Markets Strategist
Tim Murray, CFA Capital Markets Strategist
The AI infrastructure buildout is pulling a lot of weight
January 2010 through April 2025. Source: Bureau of Economic Analysis/Macrobond. * U.S. real GDP growth, selected categories.
Investment in Information Processing Equipment
Comparing the outlooks for international and US equities, we see more room for non‑US stocks to advance as they catch up to the US in AI‑related sectors. Also, the Chinese government appears dedicated to supporting innovation in AI and other technologies as a way to offset the economic drag and rising unemployment from the country’s severe real estate downturn. Although the US fiscal stimulus is sizable, the pivot toward expansionary policies outside the US—particularly in countries like Germany—has been more abrupt, so we expect it to provide a larger relative impact. The European Central Bank, the Bank of England, and many emerging market central banks have also eased monetary policy much more than the Fed, providing further support for international stocks. While we are neutral on growth versus value stocks in the US, in international equities we prefer value companies. The global cyclical backdrop is improving, and sectors such as financials—heavily represented in value indexes—should benefit from steeper yield curves and improving loan demand. Valuations for non‑US value stocks also remain relatively attractive. We anticipate some broadening of equity market performance away from the US mega‑cap technology stocks and expect small-caps to be the biggest beneficiaries of that shift. Because of the enormous market capitalisation of the “Magnificent Seven,” even a modest move into small-caps would provide a relatively large boost to smaller stocks. Small-caps also tend to gain the most from lower short‑term interest rates, which contributes to our decision to modestly overweight small-cap equities.
International and small-cap equities are best positioned
While expansionary fiscal policy, including tax incentives for capital expenditure, will support growth, many of the US administration’s policies are also inflationary. This includes restricting immigration and imposing tariffs. Whether inflation stays near the 3% level—above the Federal Reserve’s target rate—or accelerates in 2026, it will erode the value of bonds. This leads us to favour stocks over bonds.
Inflation risk leads to underweight bonds
We favour stocks over bonds as we expect the two-speed economy to avoid recession, and non-US currency exposure as a way to benefit from likely US dollar weakness.
Investment in Residential Structures
Personal Consumption Expenditures
1.Duration measures a bond’s sensitivity to changes in interest rates.
In the fixed income allocation, we view high yield bonds as an attractive, lower‑risk way—relative to equities—to benefit from a strong economy. Overall credit quality in the asset class is the highest in years, and we don’t anticipate any deterioration in its fundamentals in 2026. Non-investment-grade bonds also have some duration,1 which would help cushion the asset class if the economy falls into recession. We favor taking some currency risk in fixed income through locally denominated international developed market and emerging market bonds. The US dollar’s decline through most of 2025 is likely to extend into 2026 as the Fed cuts short‑term rates even as other central banks are much further along in their easing cycles. Also, US inflation remains sticky, with the potential to increase even more. We see an overweight to unhedged local non‑US bonds as an attractive way to benefit from that trend.
Leaning toward high yield bonds and non‑US currency exposure
Housing and personal spending are lagging
Fixed income enters 2026 from a position of strength. Returns in 2025 were solid across sectors, supported by decelerating growth, easing inflation and monetary easing by most major central banks. The themes that shaped our constructive outlook a year ago—higher starting yields, slowing global growth and a range of opportunities across both rate and credit markets—continue to define the landscape as we head into 2026.
Fiscal expansion to strengthen U.S. capex tailwind
The probability of a sharp downturn looks lower than it did a year ago, as does the risk of an outsized inflation spike
Scott DiMaggio, Head of Fixed Income
Scott DiMaggio Head of Fixed Income
Consider these approaches to strengthen fixed-income foundations, absorb volatility and capture new opportunities as they arise: 1. Actively manage duration Historically, yields have declined as central banks have eased. Thus, in our view, bonds are likely to enjoy a price boost as yields trend lower in most regions over the coming two to three years. And demand for bonds could remain exceptionally strong, in our analysis, given how much money remains on the sidelines. As of December 31, $7.7 trillion was sitting in US money-market funds. We expect a significant portion of that to return to the bond market over the next few years as the Fed continues to reduce rates. In our view, today’s global landscape argues for keeping bonds firmly anchored within overall portfolios—and that means holding duration. If your portfolio’s duration has veered toward the ultrashort side, consider lengthening it. Duration benefits portfolios by delivering bigger price gains when rates decline. But don’t just set your portfolio duration and forget it. When yields are higher (and bond prices lower), lengthen the duration; when yields are lower (and prices higher), trim your sails. And remember, even if rates do rise from current levels, high starting yields provide a cushion against price declines. How investors hold that duration also matters. Government bonds remain the purest source of interest-rate sensitivity and remain essential for liquidity. But investors can also take duration through securitised markets such as agency mortgage-backed securities, which provide both duration and incremental yield. Curve positioning, too, is a lever that shapes how portfolios respond as the rate environment evolves. Together, these choices broaden the toolkit. 2. Think global Duration can also be sourced from diverse regions. For instance, leaning too heavily on US duration may concentrate exposure in the same dynamics that contributed to heightened volatility in 2025—tariff-policy volatility, large fiscal deficits, dollar weakness and the debate over US exceptionalism—at a time when global markets offer increasingly differentiated and compelling opportunities. A globally diversified approach to duration—including exposure to the UK and euro area—may offer a sturdier foundation.
Seven strategies to put into action
The world economy slowed in 2025 but proved resilient to significant shocks. In 2026, we expect global growth to remain below its long-run average. In our view, the range of possible outcomes has narrowed: the probability of a sharp downturn looks lower than it did a year ago, as does the risk of an outsized inflation spike. Beneath this subdued baseline, however, frictions remain—especially around trade flows, tariffs and artificial intelligence (AI)—that could create episodic volatility and lead to increasingly divergent regional cycles. We expect US GDP to grow about 1.75% in 2026, with momentum building in the second half as businesses adapt to the 2025 tariff regime. But the expansion will likely be uneven: AI-driven investment is boosting profits and financial markets for higher earners while a softer labor market weighs on those without asset exposure, pushing the top 10% toward a larger share of consumption. Deeper technology adoption should help guide inflation toward the Federal Reserve’s target and pave the way for further rate cuts, in our view. Outside the US, the adjustment to the new tariff regime will likely continue to be a front-page story. China’s economy is slowing as its population ages and trade restrictions increase. To sustain growth, China has redirected exports from the US to other countries. But the Chinese economy faces an even bigger challenge: weak domestic demand is creating deflationary pressures, which Beijing is trying to address with targeted “anti-involution” policies. Despite tariff threats, the euro area has shown pockets of resilience. However, weaker private demand and easing price pressures suggest to us that—contrary to market expectations—the European Central Bank may have scope to cut rates further in 2026. Meanwhile, we expect UK growth to continue to disappoint in the near term. With inflation likely to ease rapidly in 2026, we see room for the Bank of England to cut rates several times over the coming quarters.
Subdued global growth, frictions to persist
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3. Focus on quality credit Of course, duration isn’t the whole story. Throughout 2025’s turbulence, credit has shown more resilience than stocks, and we expect that to continue. Investors’ broad risk appetite has kept credit spreads near cyclical lows, but we think yield levels are a more reliable guide to forward returns than spreads alone. And yields remain compelling across many credit-sensitive sectors. That said, the range of potential outcomes has widened, making selectivity key, in our view. Changing policies and regulations won’t affect industries and companies uniformly, nor will weak economic growth. For instance, energy and financials are likely to face lighter regulation, while import-reliant industries such as retail could struggle. We believe that bond investors should approach the AI-driven capex boom with cautious optimism, looking past the extremes of enthusiasm and aversion. We think it makes sense to underweight cyclical industries, CCC-rated corporates—which account for the bulk of defaults—and lower-rated securitised debt, as these are most vulnerable in an economic slowdown. A mix of higher-yielding sectors across the rating spectrum—including high-yield corporates, emerging-market debt and securitized assets—provides further diversification. 4. Adopt a balanced stance As we see it, a balanced posture across rates and credit provides a sturdier mix of resilience and income. Among the most effective strategies are those that pair government bonds and other interest-rate-sensitive assets with growth-oriented credit assets in a single, dynamically managed portfolio. This pairing takes advantage of the negative correlation between government bonds and growth assets and helps mitigate tail risks. Combining diversifying assets in a single portfolio makes it easier to manage the interplay of rate and credit risks and to readily tilt toward duration or credit according to changing market conditions.
If your portfolio’s duration has veered toward the ultrashort side, consider lengthening it
5. Temper equity volatility with high yield We believe high-yield corporate bonds can play a special role for investors who are rebalancing after this year’s strong equity run. Historically, high-yield bonds have delivered returns comparable to equities but with meaningfully less volatility—and have generally outperformed equities in periods of below-trend growth. In our view, that makes high yield a credible complement for investors aiming to ease equity volatility without materially sacrificing return potential. 6. Harness a systematic approach Today’s environment also increases potential alpha from security selection. Active systematic fixed-income approaches may help investors harvest these opportunities. Systematic strategies rely on a range of predictive factors, such as momentum, that aren’t efficiently captured through traditional investing. What’s more, these strategies aren’t swayed by the headlines that drive investor emotion. Because systematic approaches depend on different performance drivers, we believe their returns complement traditional active strategies. 7. Protect against inflation We think investors should consider increasing their allocations to inflation strategies, given the risk of future surges in inflation, inflation’s corrosive effect and the relative affordability of explicit inflation protection.
Resilient, responsive, ready
Taken together, we believe these elements create a stronger, more resilient fixed-income foundation for 2026. In our view, diversified sources of duration, balanced rate and credit exposures, and ample liquidity provide a framework that can absorb uncertainty while remaining nimble enough to quickly capture fresh opportunities as they arise.
