The Great Inflection Point

Policy upheaval defined the first half of 2025. Investors faced a multitude of policy shifts this year. April’s Liberation Day ushered in the biggest increase in tariffs since the 1930s. We saw the sharpest immigration restrictions since the 1950s, the most ambitious deregulation agenda since the 1980s, and stimulus bills in the United States and Germany.

Yet through that turbulence, markets adapted. Resilience emerged as the defining theme for 2025, with most global equity markets dramatically rebounding from their April lows to close out the year near all-time highs. Fundamentals have since exceeded even our relatively upbeat expectations, with consensus estimates for economic and earnings growth recovering almost all their post-Liberation Day declines.

That resilience now gives way to a new phase—the great inflection point. The policy shocks of 2025 may have tested the system, but they also accelerated deeper shifts in technology, growth dynamics, and global capital flows. As the macro landscape stabilises, markets are no longer reacting to policy disruption; they are repositioning for what comes next.

We see three inflection points that are likely to drive the investment landscape into 2026 and beyond. First, AI adoption is likely to accelerate further, reshaping energy demand, productivity, and profitability across sectors. Second, we see potential for the U.S. economy to regain momentum as the drags from tariffs and policy uncertainty fade and the tailwinds from loose financial conditions and fiscal stimulus build. Third, we expect a broadening opportunity set, with greater performance dispersion as capital rotates toward new areas of leadership in the next phase of global growth.

Broadening leadership across public and private markets

Equity markets are entering a new phase of broadening growth as fundamentals strengthen and leadership widens. Public and private assets alike are benefiting from renewed optimism tied to the next phase of the AI investment cycle and a more balanced global backdrop. We see greater dispersion creating opportunities for active managers to add value across both listed and private markets.

Key takeaways

• Market leadership is broadening as AI adoption shifts from early “builders” to widespread “users.”
• We see improving breadth across Europe, Japan, and emerging markets.
• Active managers are finding opportunity in valuation gaps and heightened dispersion.
• Private equity and venture capital are capturing the next wave of AI-enabled opportunities.

Capital flow and the new AI phase

The defining force for equity markets continues to be the AI buildout, but its impact is changing. The early infrastructure cycle—led by hyperscalers and semiconductor firms—is now expanding into broader corporate adoption. Companies that apply AI to boost productivity and margins are emerging as the next beneficiaries.

This evolution is reshaping global equity performance. While U.S. mega-caps remain influential, the investment impulse from AI infrastructure and adoption is now reaching non-U.S. regions and mid-cap innovators. For equities, that means a shift from a narrow trade in platform leaders toward a wider set of opportunities grounded in earnings delivery and operational efficiency.

Managers see this broadening phase as an opportunity to differentiate through stock selection. With fundamentals improving but valuations uneven, disciplined active positioning remains key to capturing dispersion.

Global breadth and active opportunity

Valuations remain elevated overall, but participation is improving. Europe and Japan continue to benefit from policy reform and fiscal momentum, while Asia’s technology and industrial sectors are leading earnings upgrades. We see particular value where fundamentals are improving yet pricing remains reasonable—from emerging-market technology to European cyclicals and U.S. firms embedding AI to drive efficiency gains.

We believe this renewed dispersion favours active management. Portfolio managers are emphasising diversified selection, measured tilts toward value and quality, and selective exposure to small and mid-caps. High-momentum names remain underweighted as teams focus on durable earnings and balanced regional exposure. Across our platform, managers highlight that the current cycle rewards precision—allocating capital where fundamentals are improving faster than valuations.

Growth and value managers alike are adapting their approaches to the AI evolution. Growth-oriented teams are focusing on firms demonstrating tangible productivity gains and scalable earnings leverage, while value managers are identifying opportunities in companies adopting AI more gradually, where fundamentals and pricing power are improving. This stylistic balance reflects a disciplined shift toward quality and sustainability within active portfolios.

Private markets in parallel

Private capital is advancing alongside public markets. The AI infrastructure wave is fueling new deal flow in data centres, automation, and energy transition technologies. Venture and growth equity investors are targeting innovation adjacent to public-market leaders, while private equity managers are finding improved exit conditions as leadership widens beyond U.S. mega-caps.

Should valuations reset, disciplined entry points could emerge for long-term private investors. Many managers view this as a constructive moment to align private exposures with listed-market themes, emphasising the complementary role of private assets in capturing the next leg of innovation and growth.

Investor implications

We see equity markets transitioning toward renewal—characterised by improving growth, rising dispersion, and broader leadership across regions, styles, and asset types. For investors, this environment supports a balanced approach: diversified, quality-oriented equity exposure complemented by private and growth-stage strategies positioned to harness structural innovation.

From our vantage point, active management remains central to navigating dispersion and identifying where the next phase of value creation will emerge—across both public and private markets.

We believe managers who can integrate insights across public and private opportunities—and balance growth innovation with value discipline—are best positioned to capture the evolving AI-driven landscape.

Duration, debt, and dispersion

Lower policy rates and shifting fiscal dynamics are reshaping the global fixed income landscape. Public and private debt markets enter 2026 from different starting points, yet both face a year likely to be marked by dispersion, selectivity, and recalibration.

Key takeaways

• U.S. Treasuries remain near fair value, offering strategic duration and portfolio ballast.
• Divergent global policy paths create opportunities for relative-value positioning.
• We believe tight public credit spreads favour active security selection and exposure to securitised credit.
• Private credit and asset-based finance continue to deliver structural yield and diversification.

A market in transition

Fixed income delivered strong results in the second half of 2025 as policy rates declined and credit spreads tightened. Inflation pressures have eased, and investor focus has turned to the fiscal outlook across developed markets.

Public and private fixed income markets are now diverging. In public markets, U.S. Treasuries have regained footing following the Federal Reserve’s rate cuts. In private markets, the higher-for-longer yield environment continues to underpin attractive opportunities for long-horizon investors. Together, these segments offer complementary roles: duration and diversification from public debt, and structural yield from private credit.

We believe all-in yields remain compelling. AAA-rated investment-grade bonds offer about 50 basis points over 10-year Treasuries, while higher-quality high yield bonds deliver yields over 6%². Fundamentals remain sound with manageable leverage and strong interest coverage, while issuance has been robust and oversubscribed. Tight spreads have led many managers to hold elevated Treasury allocations, though short-lived selloffs have created selective relative-value opportunities. Early signs of stress in subprime borrowers remain isolated and contained.

A weaker U.S. dollar has also supported local-currency emerging-market bonds, expanding opportunity sets that had been narrow through much of 2024. Policy and data uncertainty, including delayed U.S. economic reports, remain a watchpoint as investors navigate the next phase of easing.

Policy easing meets fiscal strain

The Fed’s shift toward easing marks a clear inflection point for global rates. Short- and intermediate-term maturities have benefited most, while fiscal pressures in other developed markets have introduced fresh dispersion. At the 10-year maturity point, UK gilts and U.S. Treasuries trade roughly 50 basis points apart—illustrating how divergent inflation and growth narratives can shape opportunities.

We expect this combination of monetary accommodation and fiscal strain to keep yield curves biased toward mild steepening as long-term issuance rises. In the U.S., Treasuries remain close to fair value, supporting a neutral duration stance. UK yields appear attractive following fiscal-driven volatility, suggesting scope for recovery as budget clarity improves. Across bond markets, investors continue to weigh policy relief against fiscal risk—a tension likely to define 2026.

Credit markets: Structure over spread

Public credit spreads remain near historic tights, leaving limited room for compression. We have trimmed exposure to investment-grade corporates, where valuations already price in optimism, while favouring securitised credit—particularly non-agency mortgage-backed securities—for their exposure to real assets with lower rate sensitivity. Collateralised loan obligations (CLOs), roughly a third of the securitised universe, offer low-duration, floating-rate structures that suit an uncertain rate backdrop.

We believe private credit remains a bright spot. Yield advantages and structural protections continue to attract capital, particularly in asset-based finance secured by tangible collateral. The next phase of AI-driven corporate investment is also expanding issuance across both public and private credit markets, creating new opportunities for managers able to navigate complexity and structure.

Investor implications

We see value on both sides of the fixed income spectrum. Public markets provide fair-valued duration and liquidity as policy easing unfolds, while private markets deliver yield, diversification, and access to real-economy assets.

Fiscal expansion and elevated issuance may keep long-term yields under gentle pressure, underscoring the importance of selectivity and active management. We see the coming phase as less about chasing yield and more about balancing liquidity, credit quality, and curve exposure—in order to position portfolios for resilience across the fixed income landscape.

² Source: Federal Reserve Bank of St. Louis

Infrastructure, real estate, and the AI buildout

As the global economy shifts from resilience to reacceleration, both public and private real assets are emerging as essential diversifiers. Listed infrastructure and real estate offer liquidity and market access, while private real assets provide durable cash flows, structural yield, and direct exposure to the AI and energy transition buildouts. Together, we believe these exposures can anchor multi-asset portfolios through 2026 as secular demand for power, resilient logistics, and defence-adjacent infrastructure grows.

Key takeaways

• Valuations in listed real assets look attractive versus equities, but less so versus government bonds.
• We see AI, energy transition, and national security as persistent demand drivers for infrastructure.
• We believe private real assets offer yield and resilience while public markets provide liquidity and tactical access.
• Security selection and manager skill remain the primary return drivers across public and private strategies.

Portfolio diversification in a new macro phase

With recession odds lower and policy uncertainty easing, real assets are poised to reclaim a central role in diversification. Listed infrastructure and REITs continue to trade at discounts to broader equities, highlighting relative value opportunities for public allocations. At the same time, private strategies can smooth volatility and capture long-dated cash flow growth that listed markets may not fully reflect. We favour a balanced approach that uses public markets for tactical tilts and private markets for structural exposure.

Infrastructure: Power, transition, and defence

Three themes continue to define infrastructure’s appeal: the rise of AI, the energy transition, and increasing national security investment.

First, AI’s expanding footprint is lifting power consumption and stressing grids already near capacity. That creates a multi-year investment cadence for generation, storage, and distribution projects—opportunities accessible through both listed utilities and private energy infrastructure. Second, the energy transition continues to advance unevenly but meaningfully across regions. Europe’s renewables push and grid upgrades is a great example of this. Third, rising national security budgets are reallocating capital to defence-adjacent infrastructure, from military accommodation to logistics and secure energy facilities.

Energy security and defence themes are attracting growing private capital. U.S. markets currently offer more transactional scale and faster private capital deployment than some parts of Europe—factors that shape where private managers are active.

Real estate and private markets: The power of selectivity

Real estate benefits from the easing rate cycle, but valuation appeal varies across subsectors. Data centres remain a high-conviction area because AI drives sustained demand for hyperscale capacity. Ageing demographics support senior housing and healthcare real estate. In private markets, managers are targeting assets with essential, contracted cash flows—utilities, telecom towers, logistics and specialised industrials—while steering clear of more cyclically exposed properties.

Defence-related and energy security assets are also moving from niche to mainstream for institutional allocators, with governance and regulatory clarity shaping European investor appetite. This reinforces our view that manager selection and thematic alignment will be critical in driving outcomes.

Investor implications

We see both public and private real assets as core building blocks for 2026 portfolio construction. Public real assets provide liquidity, price discovery, and valuation discipline. Private real assets offer income durability, lower public-market correlation, and direct exposure to structural spending on AI infrastructure, energy security, and defence-adjacent projects.

We believe investors should consider balancing listed and unlisted allocations, emphasising specialist managers with sector expertise, and prioritising assets with contracted or essential cash flows. Where private markets show faster deployment—particularly in the U.S. for defence and energy security—investors may find attractive entry points, but they should also account for regional regulatory and execution differences.