This is why we continue to see AI as, first and foremost, a cost and margin story. Over time, it should support higher returns on equity for the companies that deploy it well.
For investors, the key is to own the beneficiaries of that transition on both the equity and credit side – businesses with scalable models, durable cash flows, and clear plans for harnessing AI to lift productivity over time.
2026: Strong Growth, Weaker Labor, More Dispersion
So where does that leave the macro regime as we look into 2026?
A few points stand out:
- Growth can remain resilient even as labor softens. Real private domestic final purchases continue to point to an economy growing in the neighborhood of 2% in real terms, boosted by robust investment in intellectual property, software, and the AI-related build-out of data centers and power infrastructure.
- Policy is still broadly supportive. Fiscal deficits remain large, liquidity is not scarce, and the Fed should continue moving the rate to neutral, all of which provide a meaningful cushion against a classic demand-side recession.
- Yet the distribution of outcomes is widening. After a decade-plus of financial repression, with rates anchored at the floor, the return to a higher cost of capital is re-introducing dispersion—across sectors, across balance sheets, and across countries. We expect more frequent idiosyncratic defaults and downgrades, even if the aggregate macro data remains respectable.
In that world, 2026 looks like a year in which both upside surprises and downside accidents become more common. It is, in many ways, the best opportunity we’ve seen since the Global Financial Crisis to play both sides of the distribution: to own high-quality income and durable growth where you’re being paid for the risk, and to be selective (and sometimes short) where valuations ignore fragility.
That’s fundamentally an investor’s market, not a gambler’s.
Letting Income and Time Do the Heavy Lifting
Even a healthy market doesn’t move in a straight line. We’ve already lived through several clear “air pockets” since 2023—periods where markets stepped down meaningfully before recovering—and there will almost certainly be more as the regime shifts from easy money and broad speculative upside toward something more normal and dispersed.
For us, those episodes are a reminder of what investing actually is. In a gambling framework, everything depends on the next spin of the wheel. You either win quickly or you walk away. In an investing framework, what matters is whether you own assets that can keep generating cash flow through those air pockets, and whether your time horizon is long enough to let that income and compounding work for you.
That’s why we put so much emphasis on durable yield. When markets wobble, income keeps showing up. Over time, that reinvested income does a lot of the work in pulling a portfolio back toward its longer-term path, even in stormy weather.
The key, in our view, is to go into this next phase of the cycle owning cash-flow-generative assets, accepting that there will be air pockets, and relying on income and time—rather than short-term luck—to drive outcomes.
