Most investors know that relying on speculative, high-volatility companies is not a durable strategy for generating lasting wealth, especially in an environment of slowing global economic growth and sticky inflation. So, in 2026, we believe an equity allocation should be structured to curb volatility, take advantage of a broader set of return sources and feature quality companies.
The April shock showed how quickly an extreme spike in volatility can shake investor confidence. It also reminded us why staying invested through market turmoil is the key to benefiting in a recovery. That’s why we think it’s essential to deploy an active agenda aimed at reducing volatility across allocations and within portfolios—especially with market concentration and valuations at historically high levels.
Is the AI trade a bubble? Nobody knows for sure. We do know that earnings misses for the AI–driven mega-caps have sparked sharp downside volatility. History also teaches us that the dominant players in the early stages of a technology revolution might not be the winners of the future. Staying active and risk aware is essential for navigating a concentrated market.
The opportunities outside of the AI cohort are compelling. Broadening exposures across regions, styles and themes can help ensure that sources of returns are truly complementary. During 2025, Europe, China and emerging markets all outperformed the US. Outside of the US, value stocks rebounded and outpaced growth by a wide margin, driven by European defense companies and financials, as well as Japanese corporate governance reforms.
Emerging-market (EM) equities did well, too, and offer durable themes in digital transformation, domestic consumer trends and governance reform, which can help diversify from the US mega-caps. Being active is especially important, as many of the largest EM companies are also exposed to AI–driven dynamics.
In an environment of weakening global economic tailwinds and a persistently high cost of capital, equity portfolios should prioritize companies that can sustain earnings growth independent of macro conditions. This is why we believe quality companies should anchor equity strategies today. Many of these businesses are found in the US, which continues to offer structural advantages despite ongoing debates around US exceptionalism. After a period of notable underperformance, quality companies with durable earnings now trade at attractive valuations, offering compelling long-term return potential that can weather a more turbulent market environment.
Private Credit: Depth of Experience Matters
Investors once turned to private credit primarily for its ability to generate excess return. When it was a $150-billion niche asset class some 15 years ago, it did so primarily through an illiquidity premium—the added return investors demand for holding assets that can’t be sold quickly. Today, the estimated size of the addressable market hovers around $20 trillion—and it’s growing. The pool of private lenders is deeper, too. We expect that to bring wider variation in performance and a renewed focus on lender skill.
In 2026, we expect excess return generation to be closely correlated with experience—particularly the ability to structure loans that solve complicated problems for borrowers in operationally complex markets. Often, that can mean partnering with originators rather than competing with them. In the $6-trillion-and-growing asset-based finance market, for example, we expect a steady stream of opportunities to purchase seasoned residential and consumer loans or enter forward flow arrangements with originators for new ones that meet predetermined credit criteria. Slower economic growth and an uptick in consumer delinquency rates will favor investors with demonstrated sourcing and underwriting capabilities.
Increased global demand for travel and a shortage of aircraft should combine to benefit aircraft leasing strategies and managers with expertise in this market (Display). Meanwhile, global energy demand continues to soar, driven in large part by the need for AI data centers. We expect that to favor an all-of-the-above approach to energy procurement that will include solar and utility battery storage capabilities—and one that will favor capital providers who know their way around this operationally complex market.
