Audio:
Summary
- Global growth is expected to slow but remain positive in 2026, with U.S. economic activity near trend. Inflation is likely to remain above the Federal Reserve’s target and may be volatile as tariff-related pressures and uncertainties work through the economy, partially offset by easing housing costs. While the labor market has cooled, structural supply constraints and demographic trends remain key considerations, even as AI adoption introduces localized disruption rather than a broad-based deterioration.
- Within U.S. equities, the AI theme remains a primary driver of returns; however, elevated concentration and valuations among the largest companies increase the risk of volatility should earnings fail to meet high expectations. We expect leadership to broaden as diversification within domestic equities becomes more important and as non-technology companies successfully leverage AI to improve productivity. Although we expect large cap outperformance to persist, small caps should benefit from lower interest rates and a more normalized return profile, though active management remains critical.
- International equities continue to offer meaningful diversification benefits, supported by more attractive relative valuations, and improving fundamentals in select regions. Increased capital expenditures, government reform, and defense spending should support Japan and Europe, while select emerging markets remain compelling. Although valuations are above historical averages, international markets continue to trade at a discount relative to the U.S.
- Fixed income enters 2026 with elevated starting yields, though we expect the pace of rate cuts to slow. With credit spreads remaining tight and early signs of stress emerging in certain areas, selectivity will be increasingly important. Divergent economic and inflation dynamics across regions support a more flexible, global approach to fixed income as central bank policies become less synchronized.
- Real assets and private markets remain supported by longer-term structural trends. Infrastructure, real estate, and commodities should benefit if inflation remains elevated, while power and data-related investments stand out as areas of opportunity. In private markets, disciplined manager selection will be essential as higher interest rates, increased competition, and changing deal dynamics reshape return expectations across both private equity and private credit.
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