2026 Outlook
Global Equity Outlook
Many themes that were top of mind in remain highly relevant in , including the somewhat surprising resilience in the U.S. and most economies worldwide.
As was the case a year ago, we enter 2026 with limited clarity on the trajectory for the global economy or equity markets. The capital intensity of developing artificial intelligence continues to increase. There has been a divergence in the breadth of market returns around the world, and there seem to be more opportunities to find relative value outside the U.S. While we don’t see kindling for a major crisis in the near-term, most financial assets are currently priced with little compensation for risk, which makes it essential to remain focused on individual security analysis and downside protection while pursuing differentiated returns.
In 2026, we will continue to maintain a comprehensive market mosaic, leveraging our collaborative, bottom-up culture to deliver actionable insights. The following observations highlight key considerations from our diverse global investment team, offering a differentiated perspective rooted in active management.
A Two-Speed U.S. Economy: IT Investment Driving Growth Amid Broader Softening
Although we only have three quarters of GDP data, there seem to be only a handful of pockets of real strength in the U.S. economy. Consumption has decelerated broadly, while capital expenditures for residential and non-IT investment are down year over year. The clear bright spot is private IT capital expenditures, which encompass all data center and software investments related to the race for leadership in artificial intelligence.
IT investment is growing at over 14% year-over-year, almost five times faster than the rest of the U.S. economy (see the lefthand chart below). However, with total IT investment now annualizing at about $1.5 trillion, it’s a much smaller component of the total economy than personal consumption ($21 trillion) or federal, state, and local government spending ($5 trillion or more). Yet even though IT investment totals just about 5% of GDP, it looks set to contribute over 40% of 2025’s GDP growth (see the righthand chart below).
IT Investment Driving U.S. GDP Growth Despite Broader Slowdown
Source: U.S. Bureau of Economic Analysis, as of 23 December 2025.
In , the U.S. equity market reflected the divergent growth rates of the overall economy, with consumer stocks delivering the lowest returns amid less compelling earnings amid decelerating consumption. IT companies and social/digital media performed best, given their alignment with the AI theme. The returns of other sectors were in between, often reflecting relief rallies as new government policies were less impactful than initially feared.
While returns in the tech space were strong, we’ve seen incremental declines in stock price returns over the last two years, coinciding with rising valuations and the dramatic increase in the AI race’s capital intensity. Expectations are for the rate of growth in IT capex to decelerate in (given the high base), but the absolute level of IT spending should still be dramatic and notably higher than prior years. This is positive for the optics of measuring GDP, but investors are becoming more discerning about whether the companies are generating sufficiently attractive returns on the enormous amounts of newly deployed capital.
Sector Performance Divergence: Tech Leads, Consumer Lags
Past performance does not guarantee future results.
Given the pauses for various negotiations, the full weight of the new tariff regime will only be felt during the first half of . The all-in effective blended tariff rate on U.S. imports was less than 4% in March , about 10% by August, and it is currently expected to reach 15-17% in . We are not planting a flag about the U.S. inflation outlook for , but inflation may well remain stickier than wished as the higher tariffs and immigration policies are fully digested by the U.S. economy, flowing through consumer goods and the industrial supply chain.
With non-IT private capital expenditures shrinking in , we have not yet seen an employment tailwind or domestic production offsetting the impact of rising tariffs. Hence, our caution about predicting a major near-term recovery in consumer spending, and the low visibility into a rebound in non-IT private capital expenditures, despite the administration’s goals. However, we’re aware that unexpected tariff relief or new consumer stimulus could support stocks in the consumer sector (even if it challenges the fiscal deficit).
Diversification: Opportunities Beyond U.S. Mega-Caps
Exiting (when markets had rebased following the Tech Bubble and ), the market capitalization of the ACWI ex US Index was approximately $10 trillion, and the MSCI USA Index was almost identical in size. At the end of 2025, the U.S. index was nearly $20 trillion larger than the international index. However, when excluding the “Magnificent 7” companies, the market cap of the remaining companies in both indices is actually still roughly equal. Big tech is unique to the U.S., but value creation has still continued around the world.
Market Cap Divergence: U.S. vs. International Equities
Source: Bloomberg, as of 31 December 2025.
As the “Magnificent 7” and similar names have become larger, we’ve seen a historically unique degree of narrowness in U.S. stock market returns. Not only are the largest 25 weights in the MSCI U.S. Index now more than 50% of the total market cap, but they have contributed nearly 70% of the U.S. market’s return in each of the last three years.
The dominance of a few companies in the U.S. stands in stark contrast to international equities, where the larger weights are a far smaller component of the total index, and these largest companies have also had a much less significant impact on overall market returns.
U.S. Index Concentration vs. International Breadth
Source: FactSet, as of 31 December 2025.
Past performance does not guarantee future results.
The U.S. might be over-simplified as an “allocator’s market”, where a key decision for relative performance is simply about whether to be overweight or underweight the biggest names in the index. However, the rest of the world appears to be a “stock picker’s market,” where the breadth of solid ideas and opportunities for making relative value decisions can enable genuine alpha generation.
After a strong , many investors are asking, “Is it time to fade the international rally?” or “Is it too late to allocate into international?” We don’t discount the chance that there could be occasional market dips or that a U.S.-related scare could weigh on all stocks globally. However, even after , there aren’t notable indications that international equities are over-extended.
In particular, there is a solid argument around the outlook for earnings growth. Simply put, U.S. stocks can keep trading at 20x or higher, and international companies can continue trading at 15x or lower, but if they’re growing at similar rates, price appreciation can be similar. Add optionality for improvements in valuations, along with dividends’ contribution to total return, and the risk-return looks favorable outside the U.S.
For investors patient enough to look past short-term market volatility, the academic argument is that over the medium- to longer-term, share prices have always moved in line with expectations about the trajectory of future earnings. In the , as the dollar weakened and U.S. companies recovered from the tech bubble excesses, earnings growth was more robust outside the U.S. In the , more stimulative policies following the Global Financial Crisis supported dollar strength and led to materially faster earnings growth. In the early years of this decade, the policy response to COVID-19, combined with certain dislocations from Russia’s invasion of Ukraine, also led to faster U.S. earnings growth.
Today, AI-related tech companies are showing robust growth. There are various debates about the durability of the outlook for the current hot spots in the space, and investors have multiple ways to choose from when investing in high-growth tech. But excluding AI-related tech, the outlook for earnings growth is more similar around the world.
As the right side of this chart below illustrates, companies outside the U.S. have successfully adapted after COVID, and to the impacts from Russia’s attack, and in the last few years, they have returned to a more visibly stable growth profile – making global diversification more attractive to investors who had previously viewed the U.S. as “the only game in town”.
Global Earnings Trends: International Expectations Keeping Pace with the U.S.
Source: Bloomberg, as of 31 December 2025.
Past performance does not guarantee future results.
And we can see that it’s not just an academic idea that stocks follow earnings. Over the last 25 years, stocks have generally followed their earnings trends. Yes, opportunities to invest in high-growth companies wrapped up in the AI theme are largely found in the U.S. But as we look toward a global environment where international companies are again growing earnings in a consistent fashion, we see good prospects for international equity returns to compete well with U.S. corporates across sectors in client portfolios.
Price Returns Track Earnings Growth Over Time
Source: Bloomberg, as of 31 December 2025.
Past performance does not guarantee future results.
Relative Value and Downside Protection
For many years, one of the only arguments for investing outside the U.S. was “International is cheap.” But when general visibility into earnings growth was lackluster, many international equities were “cheap for a reason.”
Now, even after a strong , we see more prospects for relative value outside the U.S. as we triangulate prices, fundamentals, and visibility. Amazingly, despite improved earnings fundamentals over the last few years, stocks outside the U.S. are still trading at a larger valuation discount than when earnings were stagnant in the latter part of the . This is true for the general index and when looking at narrower indices like high dividend-paying stocks.
Valuation Discounts Persist Despite Improved Fundamentals
Source: Bloomberg, as of 31 December 2025.
The discounts shown in the broad indices extend across sectors and countries. The financials sector is just one area where we have been identifying individual securities with differentiated return potential, but it exemplifies the relative value asymmetry when comparing a variety of non-U.S. companies with their American peers. For brevity, we’ll just consider the specific case of European vs. U.S. financials.
Banks and insurance companies are beneficiaries of higher interest rates; therefore, the zero- or negative-interest-rate environment following the financial crisis and again during the COVID-19 pandemic was particularly challenging for the earnings of all financial institutions. The U.S. first began raising rates at the end of , but Europe didn’t see rates move off the zero bound until . In both regions, financials worked hard to upgrade technology and operate more efficiently, so U.S. financials saw an inflection in earnings growth around while European financials began to see profits grow in .
However, even with a notable improvement in earnings growth and the quality of earnings, along with strong balance sheets and excess capital, European financials haven’t seen a valuation re-rate like their U.S. peers. U.S. financials are trading at their highest P/E multiples in over , while the P/Es and dividend yields in Europe remain largely unchanged from a decade ago, when uncertainty and fundamental risks were significantly higher, according to the next 12 months’ estimate (NTMe).
Financials Valuation Gap: Higher European Earnings Growth, Lower Valuations
Source: Bloomberg, as of 31 December 2025.
We observe similar trends across many sectors and countries. Yes, there was a prolonged period when fundamentals were challenged, but international fundamentals have recovered, while international valuations don’t indicate much bullishness. didn’t create a lot of froth in the market.
Still-low valuations, especially in the context of a healthier earnings picture following a strong performance, contribute to one component of downside protection for international equities. Valuation compression could be particularly painful for certain parts of the U.S. market, given the current state of U.S. valuations. An additional cushion is also available, as expectations for international earnings growth appear to be less aggressive compared to forecasts for the U.S.
And finally, while dividends are generally discussed in the context of total return, it’s often forgotten how dividends cushion the impact and “investor ride” of share price declines. Being “paid to wait” by dividends allows investors to be more patient during market volatility or to maintain conviction when a single bad quarter causes a sell-off.
In the previous charts, we showed how index price returns have closely tracked index earnings growth. However, the chart on the right only shows the price return and omits the contribution of dividends to the total return. The following chart illustrates how material dividends can help mitigate a tough environment. ACWI ex U.S. earnings grew hardly at all from to , and the cumulative share price return was only 15% over the nine years. However, dividend income contributed an additional 39% to the total return. Cumulative price appreciation was 5% while dividend income added 14% to total return during the challenging – period.
Dividends as a Cushion: Enhancing Total Return Stability
Source: Bloomberg, as of 31 December 2025.
Past performance does not guarantee future results.
If we’re incorrect about the stability of the economic or market environment, or non-AI earnings growth is weaker across the world, dividends will cushion the blow. However, across sectors, we typically see in excess of 200 basis points less cushion for downside protection from stocks outside the U.S.
Dividend Yields are Notably Higher Outside of the U.S.
Source: Bloomberg, as of 31 December 2025.
Past performance does not guarantee future results.
Currency Optionality: A Hidden Lever for Global Returns
One component of the return stream we haven’t yet discussed is the optionality surrounding currency movements in and beyond. An allocation to non-U.S. equities can provide sector and country diversification, valuation diversification, business quality and fundamentals diversification, dividend income diversification, and currency diversification.
History shows that the changing dynamics around foreign exchange rates can be material to global investors’ total shareholder returns. Using the U.S. Federal Reserve’s Trade Weighted Nominal Broad Dollar Index for perspective:
- From –, as the U.S. recovered from the tech bubble and the rest of the world accelerated from the geopolitical resets, the dollar weakened by an average of about 2% per year.
- From –, when the U.S. economy was particularly strong compared to much of the world, the dollar strengthened by an average of about 2% per year.
- From –, as the world struggled to recover from COVID and feared Russia-Ukraine dislocations, the dollar strengthened by almost 4% per year.
- In , as the role of the U.S. within the global system was debated and the economic vitality of the rest of the world became clearer, the dollar weakened by about 7%, reversing nearly half its move since .
We saw the most notable movement in the Euro, along with other European and Latin American currencies, while Asian currencies were generally more muted. In , the MSCI U.S. Index’s total return was +17.75%, while the MSCI EU index returned +20.20% in euro terms and +36.30% in dollar terms. In other words, local returns still outpaced those of the U.S., but the currency impact was significant. This situation was similar around the world, with exchange rates having differing effects by country (currency was almost immaterial for the MSCI Japan, where the yen-denominated return was +24.70% while the dollar return was +25.13%).
We do not explicitly forecast currencies, but the prospect of a stable or weakening dollar could be another tailwind for stocks outside the U.S. in and beyond. Over the last – years, the total return for international equities has faced a persistent headwind from local currency weakening. Therefore, simply being in a stable exchange rate regime can allow earnings power to shine.
International stocks aren’t dependent on this, but it isn’t outlandish to think that the dollar could weaken by 1-2% per year going forward, reversing much of the strength it gained over the last decade. The following chart shows the Fed’s Trade Weighted Nominal Broad Dollar Index over the last years, along with the trailing -year average.
The index peaked at 130 on , along with the U.S. exceptionalism narrative. After Liberation Day, in conjunction with other policies and geopolitical developments, the dollar began to weaken more consistently. The index is still almost 14% above its -year average and more than 40% above its -year average. As the reversion during the – period showed, dollar weakening can persist beyond , and it is possible to see substantially more dollar weakness.
Dollar Trends: Potential Tailwinds for International Equities
Source: Bloomberg, as of 31 December 2025.
Past performance does not guarantee future results.
Final Thoughts on Global Equity
There is more unpredictability around the moving pieces in the U.S. environment, relative to the rest of the world, than we have seen in quite some time. This makes it easier for equity investors, based anywhere in the world, to consider reducing their U.S. allocations to diversify into other geographies. Yet great companies are also adapting to succeed in this changing landscape. While we remain “macro and policy aware”, we are most focused on the resilience and unique characteristics of each investment. The most valuable service we can provide isn’t predicting the macro but rather assessing whether these businesses can thrive (not simply survive) during these uncertain times.
Fixed Income Outlook
As we begin , clarity around the labor market, geopolitical events, growth, inflation, and leadership at the Fed remains limited, even as fixed income markets appear priced for perfection. Credit spreads across much of the market sit near historically tight levels, offering little margin for error should volatility re-emerge. In many years, the beginning of in many ways mirrors the beginning of . We would note that high-yield spreads began the year at 281 but blew out through 450 during the volatility of April. We would be surprised if we didn’t experience similar bouts of volatility during . While fundamentals remain broadly intact, valuations increasingly favor selectivity over broad exposure.
Against this backdrop, we remain focused on active, fundamentals-driven investing to manage downside risk while identifying opportunities where compensation for risk remains more compelling.
Fixed income markets are entering 2026 priced for perfection. Credit spreads remain near historic lows, leaving little margin for error if volatility returns. While fundamentals appear intact for now, the growing disconnect between tight valuations and underlying risks increasingly favors security selection over broad exposure. In this environment, flexibility, active management, and a disciplined approach to risk-adjusted returns will be essential to navigating what could be a challenging year ahead. This outlook explores:
- Why tight credit spreads create asymmetric risk
- The growing importance of portfolio flexibility
- Opportunities in securitized markets
- Why municipal bonds remain attractive
- Actionable strategies for resilience
Tight Credit Spreads Offer Little Margin for Error
Despite a higher-quality mix within the high yield index, credit spreads across both BB and B ratings remain near the tightest levels of the past two decades.
High Yield Credit Quality Has Improved, Yet Spreads Remain Near Historic Lows
High Yield Index Composite Over Time (2006 – 2025)
Source: Bloomberg, Bloomberg US Corporate High Yield Bond Index, as of 31 December 2025.
Past performance does not guarantee future results.
While today’s US Corporate High Yield Index ratings composition is structurally higher quality than in past cycles, with BB-rated corporate bonds making up a greater percentage of the overall index and CCC- & Below-rated bonds comprising a smaller percentage (see chart above), spreads holding ratings constant suggest very rich valuations. We do not believe that quality within rating buckets has evolved, and we have yet to hear this argument in the marketplace. Spreads, however, sit meaningfully below long-term averages in the top deciles of tightest spreads versus historical spreads, leaving limited room for further tightening and reducing the margin of safety should conditions deteriorate. In this environment, incremental carry comes at the cost of asymmetric downside, particularly if volatility or policy uncertainty re-emerges. Said another way, a simple mean-reversion to long-term averages versus compression to the tightest spreads in history has a very asymmetric, unfavorable risk-reward profile. This dynamic is particularly relevant for financial advisors constructing client portfolios, as traditional allocations may be exposed to more downside risk than historical models suggest.
This risk is compounded by the notable disconnect between credit spreads and elevated economic policy uncertainty (see chart below). Historically, periods in which spreads fail to reflect rising uncertainty have proven difficult to sustain, with adjustments eventually occurring abruptly rather than gradually. This pattern has repeated across multiple cycles, typically catching passive investors unprepared. As a result, the risk–reward profile in high yield appears skewed: modest upside from further spread tightening versus meaningful downside should spreads revert even partway toward long-term norms.
Fixed Income Spreads Are Disconnected from the Economic Policy Uncertainty Index
Source: Economic Policy Uncertainty, Macrobond, Apollo Chief Economist, as of .
Key takeaway: With modest upside and significant downside risk, selectivity is essential. Investors should avoid chasing incremental yield at the expense of risk discipline. Consider rebalancing high-yield allocations toward higher-quality issuers with strong balance sheets and sustainable cash flows.
The Importance of Portfolio Flexibility is Rising
Many investors continue to view the Bloomberg US Aggregate Bond Index (Agg) as a bellwether for domestic fixed income, yet its construction reflects a narrow and increasingly incomplete opportunity set. The index excludes below investment grade credit, omits large parts of the securitized market, and is structurally biased towards investment rate risk. The index has also exhibited a duration generally above six in recent years, years characterized by interest rate volatility, in consequence exposing index investors to higher than desirable volatility within portfolios. These characteristics can limit its effectiveness as a guide for portfolio outcomes in more dynamic market environments.
These limitations have become especially apparent in recent years. In the post-COVID period, the Agg has lagged a range of individual fixed income asset classes, particularly in environments where rising rates or shifting credit dynamics drove returns (see table below). This divergence highlights the challenge of relying on a benchmark that is constrained by design rather than positioned to adapt.
Fixed income managers, with the flexibility to invest across a wider variety of fixed income asset classes and look different than indices, have the potential to offer enhanced risk-adjusted returns across various market environments. Given tight credit spreads, geopolitical uncertainty, and concerns about the Fed’s independence, we anticipate an environment with increased potential for volatility. In volatile markets, flexibility becomes a source of resilience, particularly for portfolios that might reduce risk exposure as the risk/reward profile becomes more asymmetrically skewed. Therefore, we believe that flexibility in fixed income has become increasingly important for navigating markets going forward.
Fixed Income Returns (–)
Securitized Market Opportunities: The Importance of Active Management in Subsectors
While investment grade and high yield corporate credit spreads sit in the tightest historical deciles, select segments of the securitized fixed income market offer better more attractive relative value. Though not cheap from a historical spread perspective either, pockets of mortgage-backed (MBS & CMO), commercial mortgage-backed (CMBS), and asset-backed (ABS) securities can provide a good opportunity to add value to fixed income portfolios at more attractive spread levels with the additional diversification benefit of low correlation to other fixed income investments.
Importantly, securitized credit provides more direct exposure to the underlying health of the U.S. consumer, housing market, and commercial real estate, increasingly reflecting a growing bifurcation within the consumer. Higher-income households, which disproportionately own homes and benefit from locked-in low mortgage rates, continue to exhibit relatively stable credit performance. In contrast, lower-income and more leveraged consumers are showing rising stress, most visibly in unsecured credit such as credit cards and student loans (see chart below).
This divergence underscores why broad, passive exposure to securitized markets can be misleading. In consumer-related ABS, rising delinquencies warrant selectivity across collateral types, borrower profiles, and deal structures. Similarly, in CMBS, elevated vacancy rates in certain central business districts contrast sharply with more resilient property types and regions. In this environment, active management that is focused on security-level analysis and subsector differentiation is critical to capturing opportunity while avoiding areas where credit fundamentals are deteriorating.
Percent of Loan Balances: 90-Plus Days Delinquent
Source: New York Fed Consumer Credit Panel, Equifax.
Final Thoughts on Fixed Income
While investors remain attentive to macro and policy developments, the primary focus of active fixed income investors should not be to forecast interest rates or spreads but to evaluate how individual securities and structures are positioned to perform across a range of economic outcomes. In 2026, this means balancing income potential against asymmetric risks, being selective about credit exposure, and maintaining the flexibility to adapt as market conditions evolve. The most valuable role active fixed income management can play is helping portfolios remain resilient by seeking income where compensation for risk is compelling, managing downside where asymmetries exist, and navigating uncertainty with discipline rather than prediction.