Finding Opportunity Amid Imbalance: 2026 Market Outlook

Finding Opportunity Amid Imbalance: 2026 Market Outlook

Josh Rubin: Welcome to the Thornburg Investment Insights Podcast, I’m your host Josh Rubin. Recently, we recorded our 2026 Market Outlook webcast and wanted to share with you here as well. Please enjoy.

Good afternoon, and welcome to Thornburg Investment Management’s 2026 outlook webinar. I’m your host, Josh Rubin, a client portfolio manager for Thornburg. For those of you joining today who may be less familiar with Thornburg, we’re an investment manager based in Santa Fe, New Mexico, overseeing approximately 55 billion of assets across a suite of actively managed equity, fixed income and multi-asset portfolios.

Joining me today is Christian Hoffmann, head of our fixed income, and Matt Burdett, head of equities. Gentlemen, thank you for providing this outlook. Christian, let’s start with you. In the bond world, a coupon year is what I’ll call a boring year when the environment is pretty stable. Bond prices are pretty stable, and investors total return is essentially driven by the yield on their bonds. Many strategists say 2026 could be a coupon year for fixed income. How does that align with your outlook?

Christian Hoffmann: You know, having seen many of these outlooks for multiple decades, I would say that the idea of a coupon year for an outlook is actually something of a tried cliche, and I think you could go back and see that that is the most consensus call almost every single year. And if you go back and look what actually occurred during those years, you would find that it’s actually very rare that you get a coupon year and you can maybe try to unpack why it is that people call for a coupon year. And I think you could think about, you know, efficient markets, theorems, and also the fact that, you know, what just happened is maybe likely to continue to happen. So it’s kind of a cop out in a way, to say that we think that interest rates are fairly valued and credit spreads are also fairly valued. And if that’s the case, it if I’m not calling for a catalyst, then, you know, the future should very, very much like the present. And we’ll get a coupon here. And you know, we won’t have a lot of volatility.

So why is that usually not the case? Because the world changes, facts change. And you know, risk. Appetites change. And you know generally that volatility during the year and you know the world looks pretty different a year forward. Is it did in the past. Now as we look at credit spreads from the beginning of 25 to the, you know, the end of 25, they actually ended up in a similar place. But it was far from a straight line. And if I think about client conversations that I had a year ago, when credit spreads were also quite tight, a lot of folks said, well, why wouldn’t you just, you know, really lean into risk because, you know, the outlook feels, you know, fairly subdued. And, you know, why not just clip a coupon? I don’t see any catalysts coming. And, you know, we actually pushed back on that and said, well, it’s pretty rare that you actually see catalysts coming. And the way you price risk in general can be a risk factor. And so, if things are priced to perfection, you know, any bump in the road is likely to cause volatility and, you know, can cause drawdowns.

We saw that very much during March and April. And if you look at high-yield spreads, which is a good proxy for risk in, in credit markets, you know, within 2025, you saw as tight as 250, as wide as 450, you know, during the year. And that was a year when, you know, looking back, not a ton change, but, you know, certainly there were periods of time when there was a lot of fear and uncertainty in the market.

You know, when I think about how we’re starting the year today, there’s an old adage that markets hate uncertainty. This period of time is probably the exception that proves the rule. There’s a tremendous amount of uncertainty. I think we pulled up a graph of, you know, executive actions. And, you know, in the first year of the current administration, and it’s really unprecedented. And every single day we’re seeing, pretty notable changes. You know, on the global geopolitical, landscape, on the trade landscape. You know, in terms of, you know, how our relationships with other political powers are evolving and, we’re doing that a mix, the backdrop of pretty frothy valuations, not just in fixed income, but, you know, in equity markets as well.

So, you know, I think this is, you know, the exception that proves the rule. And I think you want to be nimble going into that. And, you know, being prepared to take advantage of opportunities because I think this will be a year of more volatility and not less.

Josh Rubin: Okay. Great. That makes a lot of sense. Definitely 2025 predictability was different than we’d felt in prior years. And the beginning of 2026 feels that way. Also, as you mentioned, credit spreads remain tight relative to both their recent history and their long-term history. Arguments for this are that the economy remains reasonably healthy and has a smaller mix of the riskiest types of high yield credits within the index. Do you think spreads are properly priced at these levels in the context of what you just talked about?

Christian Hoffmann: No, I feel like spreads are priced for perfection. And, you know, we could spend an hour unpacking. You know why that’s the case, especially relative to history. You mentioned high yield. You know, the composition of the high yield market is higher quality relative to the past. But if you actually deconstruct that and look how, double Bs and single Bs are priced relative to history, they also look exceptionally tight, you know, relative to history. Like we’re flirting with, zero with percentile in terms of richness, you know, relative to history. You could also say that that argument does not imply to the investment grade market. And we saw multi-decade tights and spreads in the investment grade market, you know, during 2025. And we’re just slightly off of those levels today. You know, you see it in many aspects of structured product as well. So, you always have to be careful when people try to explain something and say, you know, this time it’s different. Sometimes that’s true, but usually it’s not.

Josh Rubin: Okay, we’ll give you a break for a moment and, transition to you. Matt. So I think, for a long time, we’ve been talking in sort of about this foundational question for equity investors. Where will returns come from in the future, both from a geographic perspective or sector perspective, but also capital appreciation versus income. And 2025 was a year that looked different than a number of the years in the past. We saw international equities outperform US equities last year. And although US indices still provided solid returns, each region achieved the returns differently.

The US market has become highly dependent on some of the biggest companies. Can you talk about what you think this indicates about the health of global equity markets and the opportunity for stock picking in the US and international markets going forward?

Matt Burdett: Sure. No. Thanks for the question. And look, I think, you know, investors should always ask themselves, where are my total return… where is the total return going to come from, right? And equities it’s earnings growth. It’s multiple expansion or compression dividend yield. And if it’s a foreign stock you have a currency impact. Right. And the currency impact was in particular a benefit to dollar-based investors in 2025. And I think people kind of saw that diversification benefit come through. They’ve been told that for many years. And it hadn’t really paid off. But last year I think was a year with that kind of shine. But there are there are material imbalances. I would think, in the, in the stock markets in particular in the US market. And it has to do, with just rising concentration levels. Right? I mean, there’s, there’s numerous factors that you know, contribute to that one that continue to rise of passive investing to the monopolistic tech companies that only the US has. Right? I mean, some other countries have good, semiconductor companies, but the US has the large, you know, subscriber base tech companies. Right. And then the other driver is massive capital flows into the US. Right. And on the screen, the audience can see the percentage in the US market attributed by the top 25 stocks. And what you can see is from, you know, going back to 2022, that was 37%. And then it went up all the way to 51% in the US, in 2025. You know, compare that to international markets. It’s kind of in 20% and then got up to 21% in 2025. So, it’s not merely the concentration and weight. And then if you look on the right hand side of the slide, you can see the contribution of total return, which is even more extreme. Right. So, if you look 2024, the top 25 were 72% of the total return, right?

So that that means that the other 475 didn’t matter very much or mattered far less. Right. That’s not as true in the international markets, you know, as this slide highlights. So, you know, equity market structure is also very different today than it was even five years ago, much less 20 years ago. You know, a lot of the volume traded, especially in the US, is not based on perceived value of a stock.

It’s based on something else. Right? High frequency trading, quant trend following all of these things. And when you have, an environment where there’s no real disruptive force to that, you can get these kind of kinds of extremes, you know, that that we’re seeing and, you know, viewers can see the slide on the screen that highlights, you know, if you go back to, to 2016, the international markets, which are, the chart on the left of the screen were about the same size and total market cap as the U.S and then as the Mag seven and this concentration in the top holdings really took off, which is what you see on the right and the, the purple shading, you can see that just extreme, levels of differences in total market cap, you know, over this time. And then it becomes a question of, well, okay, these are great companies. I think everybody would agree they are. And it becomes a question of what’s the sustainable earnings power of these companies from here? And just based on the law of large numbers, you know, it’s harder to grow it really high growth rates when you are in a gigantic, you know, place in terms of your earnings so far.

Josh Rubin: Sure. Okay. Yeah, that’s very helpful. And I think a different, type of question after 2025 is, given the strong run, is it too late? And, you know, over the last 10 or 15 years, there have been a couple head fakes from international, that usually, you know, we sort of had a one and done type of year. And the question is, does the international strength have legs? But we’ll get to currency and some other things. But do you think the fundamentals or the macro environment are in a different place today compared to the last decade? That can allow the strength to sustain itself?

Matt Burdett: Yeah. Look, I think, it’s always going to be about earnings for equities, right? I mean valuation as an argument by itself. It doesn’t really work in equities. You need to have you know you’re buying the ownership stake in a company, and you want to participate in the growth of the earnings and cash flow. You know, we went through different periods, of earnings growth where, you know, the international market saw greater earnings growth like in the early 2000s when emerging markets were really, coming into global investors attention. Right. And the earnings growth was higher than it was in the US. Right. Then you enter, the financial crisis, the US drops interest rates to zero, Europe drops them in negative territory, Japan drops them in negative territory. And so, what you end up having is a very different and repressive earnings environment, especially for international stocks because the international index is the largest weight is financials. Right. So if you remove, a line item on the revenue, you know, on the income statement, you know, net interest income or significantly pressure it, on top of regulatory rising regulatory costs and all of these other things, you really do depress the earnings, of international markets relative to the U.S and that’s what you saw during, you know, what I would call the great manipulation period. Right? Of financial, you know, central banks taking over. But more recently, what you’ve seen is once the, the normalization of interest rates happened, as we come out of the pandemic, inflation surges and central banks have to act. They kind of all acted a bit late. And so, but then guess what happens. You start to normalize the earnings power of international markets versus the U.S, in a way that hadn’t been seen since pre-global financial crisis. And so it’s definitely and this is more structural relative. So, to answer your question it does have legs because you now have an earnings contributor from the largest sector. That was a major you know detractor to earnings at that time. The other element would be just around dividends. And you know, price appreciation versus dividends.

The US is much more dependent on price appreciation. And that’s what the chart on the right shows versus international markets where you have a little bit better mix. But since you have a better earnings backdrop, you know, a relative earnings backdrop, it seems to me that that it’s a more fertile ground going forward than it would land. So not a one and done.

Josh Rubin: Okay. Yeah. And I think, you know, what we also do see is we’re getting this improvement in the earnings trajectory with lower valuations, as well. So, the setup for earnings growth valuations may or may not improve. But the earnings come through when you get a dividend kicker on top is a key element for driving global stocks. Christian let’s shift back to you. Because one of the things on a prior chart that we highlighted is optically U.S earnings growth looks higher than international earnings growth. But really that’s because big tech is sort of growing 20% plus a lot of the US economy is growing mid-single digits. And when you remove big tech or maybe what you might want to call the AI economy, then the US index is growing. You know, earnings are growing a little slower in the US than outside. So, AI is not just impactful for equities. It is sort of changing some of the dynamics in fixed income. I think historically, the big tech was a cash rich part of the, corporate universe. But today we’re hearing more about, the tech companies needing capital, needing funding. So they can’t just utilize existing telecom and broadband infrastructure for third party data centers. How are the tech giants impacting fixed income markets today as this race for AI, you know, seems to consume more and more capital each week?

Christian Hoffmann: So you’re highlighting an interesting change in that AI has been a dominant theme and dominant driver in US equity markets for a number of years now, but that had been largely absent from, you know, any fundamentals or anything that we are observing in fixed income markets. That really changed in 2025, when the investment grade market saw over 200 billion of issuance to fund the hyperscalers, and related projects. Now, the interesting thing there, and you’ll see some charts where you see the spreads on those names widened significantly. But the scale is very important. Four of the five hyperscalers are rated A or AA, and trade between 20 and 50 basis points of spread, which is almost nothing. The fifth one is Oracle. And that’s a little bit more of a, you know, interesting differentiated story. You know, interestingly, you can buy eight month Oracle paper and get almost 4.6% yield and you’ll get a similar yield for buying, you know, ten year risk in the other hyperscalers. So, they have a widened but still from a very tight level.

So I wouldn’t say that’s where the opportunity is. But if you think about that amount of issuance broadly and we’re looking for similar or even more this year, that’s a lot of supply. If you think about supply and demand dynamics that is likely to push, spreads across the entire, you know, investment grade space wider. And that could create opportunities. And I think that could be the more interesting place to play, as opposed to the hyperscalers, you know, in and of themselves. Now, this is an environment where, you know, if you think about the bad years in the energy market in the mid-teens, high yield was constructed of, you know, over 15%, you know, of those energy names. And so that was a key risk to people holding the equal weight, you know, index. And you saw a lot of carnage. So high yield remains pretty separated and walled off from the AI theme at this point. That could change over time. And again, the composition within the investment grade is still very high quality.

So, while some of the investment might be deemed as speculative and we’ll see there’s still strong underlying balance sheets and cash flows to support that, that kind of irregardless of how that investment plays out. But it is interesting in that, you know, often people say, you know, fixed income markets, lead equities. Again, this is something that, again, has been the dominant theme of equities and is now spilling over into fixed income.

Josh Rubin: Okay. So I guess within that context, if AI is an interesting and or surprising inflection in investment grade new supply, but it’s not worrying on its own. Are there areas of the economy that do give you pause or concern as we go into 2026?

Christian Hoffmann: You know, broadly, you’ve heard of this idea of a k-shaped recovery or a k-shaped economy or k-shaped consumer. You know, for a number of years, I think we’ve talked about, you know, worrying about winners and losers, and in that you’re seeing more dispersion and bifurcation between those themes. So, this idea of a k or things moving in different directions, I think is, is more and more broad based. You’re seeing that in credit markets as well, where, you know, some of the weakest companies and weakest credit’s, you know, are not are not doing terribly well and, you know, are widening and not benefiting and, you know, this robust environment and, you know, if you look at, you know, a lot of underlying credit trends there, they’re going the wrong direction. You know, if we zoom out and think about the macro environment, you know, broadly, jobs are getting a little bit better. Inflation’s, you know, getting a little bit worse. And, look, I would say this isn’t, you know, everything looks great. There’s a lot of things that look great, but there are cracks. And we just have to make sure that those cracks, you know, don’t become fissures, you know? And if they do, I think we’ll see pretty severe, repricing of risk across markets.

Josh Rubin: Okay. Matt, just one other topic. You know, so again, you started out highlighting different drivers of share price returns. We’ve talked more about earnings growth or kind of the dividend contribution. Or the valuation contribution potentially in less/lower valued international equities. What are some of the other moving pieces you think investors should be thinking about as we enter 2026 that could have a real impact on total returns from here?

Matt Burdett: Yeah, sure. So, you know, going back to the initial question of the do international stocks still have, you know, a place in portfolios and it goes back to the, to the currency element, right. If you if you think about, the dollar and we have a chart up on the screen that shows, the Fed’s trade weighted dollar index, which is a good index to use because it takes into account actual trading partners. Right. And they re-index it when the weights change significantly enough to do so. And on the screen you can see the purple line is the 20-year moving average. And this is going back 30 years. But if you’re and so what that purple line is telling you if you go back further, the dollar was a lot lower in those years leading up to the start of the graph there. And so, the US has benefited from capital flows, which has resulted in a stronger dollar. Last year it gave back some of that. And now you have an administration, treasury secretary, all of the officials are kind of signaling that they would like to have a weaker dollar because they want to rebuild the manufacturing base in the US. So, if you’re a US based investor and the dollar’s depreciating in your foreign stock, the stock goes up in dollar terms just standing there. Right. So obviously you’re going to do a lot more thinking than that. But having that be a tailwind is something that that people you know could think about.

Josh Rubin: Great. Maybe one other topic. You know, I think clients or you know, investors often will buy or sell a fund because it’s outperforming or underperforming by a couple hundred basis points. From an income contribution we see an interesting differential in yields, you know around the world how do you think about that as a tailwind or just something to incorporate into thinking.

Matt Burdett: Yeah. Look I think, you know, again going back to the question of where is my total return going to come from? Having a reasonable dividend yield to start with is a good, you know, front foot forward. Right. And the chart, that the viewers can see, you know, for most of my career, Japan was the lowest yielding equity yielding market. But now it’s the US, right. And it’s because prices have gone up a lot. Dividends are not as important in the US as they are in other markets. And so, the yields in other markets outside the US are just, are just better because it’s a bigger part of just the philosophy within a boardroom to pay dividends. And, and what you see over time is that total shareholder return, roughly half of it is from dividends over long periods of time. But in any given shorter period, it can change a lot. Sometimes it doesn’t matter very much. Like actually, since the global financial crisis, dividends have not really mattered very much …

Josh Rubin: For U.S investors?

Matt Burdett: For U.S investors, because the price appreciation overwhelmed dividend yield. But you have other decades or other times when all of your return is coming from dividends. So, you got I think people should probably me maybe just think of it in a balanced way. And the international markets will give you, you know, that better, better yield to start with.

Josh Rubin: Great. Well, so why don’t we shift to the questions we’ve been getting from the audience? And, you know, the first one, comes to Christian, maybe because you were the first to speak or because, we need your view. What’s your baseline expectation for the Federal Reserve’s policy path in 2026?

Christian Hoffmann: So, it’s, I think it’s a frequent it’s kind of evergreen question. Right. And people are curious about the path of the fed and the path of at least short-term interest rates. So, look, markets are looking for 1 to 2 cuts this year. And I think if you look at the data in front of us that’s pretty spot on. Now I think if we go a level deeper there’s a couple interesting things to think about. You know one is Powell has just three more meetings, you know, ahead of ahead of us. And you know where he’ll be leading the fed. And it’s most likely that we have seen the last change in straight policy from Powell, that we’re done. And you know it’s on hold that also brings, I think, an even more interesting question of, you know who is his successor. And we keep getting teased where it’s, you know, going to be come any minute and you know, the person has been picked and you know, now it’s maybe 1 or 2, if you look at prediction markets today, there’s two clear frontrunners. And the one we thought was the frontrunner is now, seemingly mostly out of the picture, this upcoming Fed meeting. I would not be surprised, actually, to maybe see the announcement or some telegraphing of the, you know, potential successor lined up, you know, around that meeting. So I think the meeting in of itself is probably not likely to be terribly interesting.

But, you know, in the news around it could be very interesting. I think you also have to think about, you know, the world could look very different six months from now when you do have new leadership, you know, within the fed. So if you do think about 1 to 2 for the year, you know, I would say your base case is, you know, almost nothing for the first half of the year, but there’s actually a lot of volatility and uncertainty around the second half of the year. So, depending on the economic environment and the data which we look at and the fed looks at as well, again, in the back half of the year, you could be looking at zero or you could be looking at, you know, for cuts if the world feels, you know, quite different. And that’s the framework we’re using to think about the year ahead.

Josh Rubin: Okay. So those moving pieces are another reason the, the call by a lot of strategists for this just to be a coupon year is pretty hard to anchor too, because …

Christian Hoffmann: Absolutely.

Josh Rubin: The back half actually is a lot lower visibility than you might otherwise think. Matt, you know, a different question. We’ve heard is, okay, we understand how international equities can be interesting, but does that mean the US is sort of off limits? You know, it’s just too expensive. The AI trade is just not interesting. Or do you see ways that US equities, you know, can still be interesting or there’s other ways to invest in AI besides, besides just the big 5 or 10 stocks that, that are being driven by right now.

Matt Burdett: Yeah. Look, I wouldn’t say that the US is, you know, off limits, right? It’s as stock pickers, we want to find, individual companies where there’s a mispricing and I think you will find that in the US at the index level. It’s a bit trickier for the concentration levels that we talked about earlier. You know, look, there’s a lot of development in AI and it’s been the picks and shovels that have kind of been the big winners for stocks. Now it’s about the implementation of AI and, and what kind of efficiencies it brings. You see some of that in companies. US software companies have been hit pretty hard as a result of being perceived victims, of AI. Right. And I think that remains to be seen whether that happens. And, you know, right now, even at this point, AI, you know, if you want to think in binary terms, it’s either, you know, zero means that all the capital is a total waste and one means it’s, you know, going to be massively improved trend growth. The truth is, is probably somewhere in between. Right. And so, it doesn’t mean you can find ways, you know, where there’s mispricing and take advantage of both in the US and in AI names that are unrelated, you know, to the, the names everybody thinks of as being AI place.

Josh Rubin: But at this point, discipline can make investing in the US still, you know, opportunistic discipline is value.

Matt Burdett: Absolutely. It’s really about you know, what’s the what’s the path to success for an individual company and how much are you paying for it. Right. So, having a disciplined approach around how you pick an investment I think can absolutely work.

Josh Rubin: Okay. We want to make today’s webcast time efficient. So, we’re going to wrap it up here. But glad to follow up with all of our listeners who submitted questions after the webcast. Christian and Matt, thanks very much for your time and for everyone who joined. Both. Thank you. And also, if you’d like to learn more about our fixed income and equity outlooks, they’re posted on our website at Thornburg.com/outlook thornburg.com/outlook. Thanks very much.

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