As investors, we continually track economic, market and issuer fundamentals to identify compelling opportunities and salient risks. This can be challenging, especially in today’s environment. Solid but slowing global economic growth, combined with persistent inflation, is muddling the monetary policy outlook. Geopolitical and trade tensions, as well as lingering impacts from missing or delayed data during the U.S. government shutdown, are also jamming the transmission of investment signals.
That said, two primary pulses are detectable: high equity valuations and tight credit spreads. Still-elevated levels of cash on the sidelines can’t be ignored, either. The real value of that cash, however, is being eroded by a gradual drop in short-term interest rates and the presence of stubborn inflation.
Don’t bet against the US
One of the main questions on investors’ minds is whether the AI-driven U.S. equity surge has created a bubble. Additionally, tariffs and the corresponding rise of deglobalization have prompted some investors (particularly those outside the U.S.) to reduce U.S. exposure. But we think U.S. large caps still have room to run. U.S. megacap tech companies may have less-than-clear monetization timelines around some aspects of AI profitability, but we think investors will continue to reward AI-related Capex spending, which shows no sign of slowing down in the U.S.
Outside of the U.S., other global equity markets appear cheaper, but we see no sustainable catalyst for a leadership shift. And beyond equities, we think stronger relative economic growth, favorable tax and regulatory policies and a diversified economy offer compelling U.S. opportunities in private markets such as real estate, private credit, private asset-backed finance and private investment-grade bonds.
Alternative credit and private equity should be core allocations
While global fixed income remains attractive, we’re wary of duration risk and credit spread tightening. At the same time, we think many (if not most) investors are underweight private markets and could benefit from taking on liquidity risk to seek enhanced returns, income and diversification. As such, we would encourage investors to seek out alternative credit sectors beyond traditional fixed income benchmarks, including senior loans, collateralized loan obligations, public and private securitized assets, real estate and infrastructure debt and Commercial Property Assessed Clean Energy (C-PACE) financing.
Private credit headlines question whether the market oversaturated or cracking. We see issues with underwriting and deal structure in riskier segments, hence our modest downgrade on our heat map. But strong opportunities remain, particularly in middle-market direct lending. Selectivity and partner choice will prove critical – rising tides will no longer lift all boats. Deal structure and covenant protections will matter more.
Private equity also shows promise. Lower interest rates should spur M&A activity, and tougher fundraising means experienced managers are deploying capital. We favor senior over junior capital and prefer secondary markets with single-manager structures.
Municipals may be at the forefront of a new bull market
Throughout 2025, municipal prices lagged despite strong balance sheets, solid credit quality and low defaults. That has started to change over the last couple of months as municipal prices have begun to rally. We believe munis continue to offer value and expect that as supply eases and demand rises, supportive interest rates and fundamentals could continue to power municipal bonds forward.
With municipal yield curves steeper than Treasuries, investors may be well compensated for duration risk. We see compelling opportunities across both high grade and high yield municipals.
The real estate rebound is just getting started
After years of falling values, oversupply and weak demand, 2025 saw values rebound and supply contract. We expect demand should follow.
For now, real estate markets are being driven by rising income returns. Capital appreciation hasn’t materialized yet but expect that will rise as well, providing another tailwind. The office sector remains under pressure, but medical office, grocery-anchored retail and affordable housing offer notable opportunities.
Look for the “second derivative” trades from the AI boom and energy revolution
Megacap tech and data centers led early AI gains. And while we still see opportunities there, we think investors should also look for the secondary and future implications of these trends.
Other infrastructure investments such as utilities, battery storage and energy transmission look compelling, as detailed in our “best ideas” section. AI also creates direct or indirect opportunities in select asset-backed securities, real estate and municipal bonds tied to infrastructure buildouts. Despite U.S. political headwinds, the global se power sources become essential.
Investors enter 2026 facing crosscurrents, risks, but also opportunities. Global growth remains solid despite emerging cracks. We suggest pursuing opportunities that are both above and below the radar: continuing well-established themes, capitalizing on potential market turnarounds and exploring lesser-known corners of global markets for greater diversification.
