The economy’s pressure test

Over the past six months, investors have seen markets repeatedly pressure tested by geopolitical tensions, policy uncertainty, and shifting economic expectations. Yet the underlying foundations of the global economy have remained intact. While the conflict with Iran tested markets, the S&P 500 recovered its initial decline in less than three months and went on to reach new highs.

Record corporate earnings, improving manufacturing activity, a labor market that remains healthy, and early signs of AI-driven productivity support our constructive view on growth, even as we remain attentive to evolving risks.

In our Mid-Year Outlook, we examine these forces driving market resilience and the key watchpoints we believe will shape markets through the remainder of 2026.

Despite geopolitical pressure, the current supercycle for corporate profits is pushing global equities to new all-time highs. Over the past three years, S&P 500 forward earnings compounded roughly 16% annually—a pace exceeded only by post-recession rebounds in recent decades.

Yet, while earnings have remained strong, leadership has narrowed again after the onset of the Iran conflict. Price and fundamental momentum rotated back to the artificial intelligence (AI) theme—most notably among the tech heavyweights in South Korea and Taiwan. Strong corporate earnings have also helped set the stage for mega-cap IPOs and increased private market activity over the next six months.

The strong global market has largely been underpinned by U.S. growth. In our annual outlook we saw potential for the U.S. economy to inflect from resilience to acceleration, with tailwinds from fiscal stimulus, the AI buildout, and loose financial conditions. Six months later, higher gasoline prices are likely to rein in some of this upside potential.

Despite the pressure, we see a strong U.S. economy and encouraging progress in two areas:

1. Manufacturing activity is improving. After years of stagnation, we expect the sector to recover on favorable capex provisions from the One Big Beautiful Bill Act and robust data center demand. Industrial production and the order books for manufacturers are on an uptrend.
2. Labor market conditions have stabilized. Private sector hiring slowed sharply in 2025, but our analysis suggested that more than 80% of the slowdown reflected public policy uncertainty rather than private sector distress. For the first half of this year, layoffs remained low and payrolls stabilized at healthier levels in recent months. Job growth also improved. Despite growing concerns about AI's impact on employment, we continue to see stronger evidence of productivity gains rather than broad-based labor market disruption. So far, the effects appear concentrated in early-career hiring rather than widespread job displacement.

Another core pillar of our constructive annual outlook for 2026 was the potential for generative AI to move up the productivity J-curve, bringing more tangible benefits for corporates. While this is likely to be a multi-year theme, six months into 2026 we continue to see encouraging signs of its impact on productivity. Frontier models are increasingly capable, end-user demand for generative AI is strong, and there are green shoots of a new productivity cycle in the macro and microeconomic data.

Halfway through 2026 and the economy remains on solid footing, though several key watchpoints lie ahead.

Watchpoint 1: Cyclical and structural implications of the Iran conflict

While a diplomatic resolution could lower recession risk, the timing of full resumption of commodity flows and whether or not conflict re-emerges could determine how markets and the economy evolve through year-end. When evaluating the risk posed, the distinction between market reactions and fundamental economic impacts remains important. The impact arising from the conflict is likely to filter through commodities, supply chains and inflation, and ultimately, growth.

Mitigating circumstances

Markets are pricing higher inflation risks from the Iran conflict alongside stable growth. So far, we see a combination of structural and cyclical forces as mitigators of the impact on economic activity:

• The global economy not being as exposed to oil shocks as it was in the 70s and 80s. The energy intensity of output and the wallet share of energy in consumption have both declined markedly.
• Oil inventories have been drawn down and consumer demand has rotated to less energy-intensive activities.
• Larger U.S. tax rebates from 2025 more than offset the hit to U.S. purchasing power this spring.
• “Financial accelerators” are not kicking in. In stark contrast to past major oil shocks, equity and home prices remain near all-time highs and credit spreads are tight.

Even in Europe, the economic drag, while real, could be less severe than 2022. Electricity prices remain well behaved across the continent due to robust wind and solar power generation. Moreover, leading economic indicators point to positive, albeit low gear, growth.

Risks remain

In an adverse re-intensification scenario, the economic effects of the conflict could become more pronounced in the second half of the year as fiscal support fades in the U.S. and inventories are drawn down globally. India may prove to be an important test given the country’s scale and energy dependence on the Middle East.

The Iran conflict could also have longer-term implications, particularly after a staccato of geopolitical shocks in recent years. Ramifications include more inflation volatility, higher stock-bond correlations, higher term premia, and a ramp in military spending, with consequences for portfolio diversification and opportunities across public and private markets.

Watchpoint 2: Supply chains strain

The biggest yellow flag facing markets are the signs of emerging supply chain pressures. The Federal Reserve Bank of New York’s Global Supply Chain Pressures Index has spiked to its highest level since 2022. Similar disruptions from the COVID lockdowns contributed to the last inflation surge, and global manufacturers are raising goods prices at a relatively rapid pace again.

If the first half of 2026 has reinforced one lesson, it is that markets are more resilient than many anticipate. New sources of friction have emerged, including geopolitical tensions, supply chain pressures, and heightened interest-rate volatility, increasing the complexity of the risks facing investors.

Yet resilience has prevailed. Strong market fundamentals continue to support a constructive outlook. For investors, this environment reinforces the importance of maintaining portfolio durability through market regimes, balancing participation in growth opportunities with the diversification needed to withstand periods of stress.

Halfway through the year, the good news is that markets appear to have passed the pressure test. Now the focus is on sustaining it.

This outlook reflects our views as of June 18, 2026. Given the rapidly evolving geopolitical environment, including recent reports of a potential Iran agreement, market conditions and risks may change. We encourage readers to follow our Market Week in Review for ongoing updates and analysis.

Key takeaways:

• Landmark initial public offerings (IPOs) could signal a new phase where value accumulated in private markets begins to transition into public markets.
• Benchmark-driven buying may increase volatility as passive investors absorb newly listed shares.
• These IPOs could reinforce, rather than reduce, concentration in technology and AI markets.

Entering 2026, investors expected a gradual reopening of the IPO market following several years of subdued exit activity. Six months later, that reopening appears to be accelerating, with SpaceX's public debut potentially marking the start of a new mega-IPO cycle that could also include OpenAI and Anthropic. The number of the IPOs this year might remain relatively modest, but the scale of the upcoming listings is unprecedented. When completed, these transactions will rank among the largest venture-backed IPOs in history.

After years in which capital accumulated inside private markets, these listings could test whether public markets are prepared to absorb the next generation of mega-cap growth companies and if they will broaden market opportunities or concentrate them further.

Over the coming months, investors should watch whether these IPOs improve liquidity and valuation discovery, how benchmark-driven demand influences trading dynamics, and whether they broaden market opportunities or reinforce existing concentration trends.

One of the defining features of the current investment cycle is the concentration of value inside private markets alongside a drop in IPO activity since 2021. Investors have waited years for meaningful distributions, while private companies continued raising capital at increasingly ambitious valuations. Estimates suggest global venture funding reached a record $330.9 billion in Q1 2026, driven largely by AI-focused companies.¹

For investors with exposure through venture funds and growth-equity mandates, successful IPOs could improve liquidity, provide clearer valuation benchmarks, and support a broader reopening of the exit market. The transition from private to public markets may also transform years of accumulated gains into significant public equity positions, creating new concentration, benchmark, and implementation challenges.

Public market investors, meanwhile, may gain long-awaited access to companies that have historically been available only through private markets. Yet access alone does not guarantee attractive returns. Given elevated valuations, limited free float, and significant investor demand, share prices could become disconnected from fundamentals during the initial stages of trading.

As a result, the key issue may not be whether these companies list, but how they are valued and incorporated into portfolios. Large IPOs can reshape benchmark exposures, alter sector weights, and amplify concentration risks, particularly if passive demand accelerates shortly after listing.

Over the coming months, successful listings could encourage additional companies to pursue public offerings and reinforce confidence in AI-related investments. Equally, disappointing outcomes could slow the reopening of the IPO market and temper enthusiasm across both public and private markets.

There is no single index inclusion date and historically newly listed companies often waited months before becoming benchmark constituents.

However, recently that timeline is shortening as index providers adopt their rules for larger IPOs, potentially bringing benchmark-driven demand into the market much earlier than investors have experienced in previous listing cycles.

Potential index inclusion timelines for mega IPOs

Source: S&P Dow Jones, FTSE Russell, NADAQ, MSCI. Data as of June 2026

This could create an unusual dynamic. The initial free float of SpaceX is expected to be relatively small despite its enormous market capitalization. At the same time, passive investors tracking major benchmarks would be required to purchase shares regardless of valuation.

Over the next six months, the interaction between constrained supply and benchmark-driven demand could become an important source of volatility. For active investors, this may create opportunities to exploit technical dislocations. For passive investors, it highlights an increasingly important reality: benchmark construction is becoming a larger driver of market outcomes.

Investors are also looking at whether upcoming IPOs increase diversification or reduce it. Public markets have already experienced a period of extraordinary concentration, with a small number of mega-cap technology companies driving a disproportionate share of returns.

At first glance, the arrival of new trillion-dollar companies appears to broaden the opportunity set and increase diversification. Yet the opposite may occur. The likely beneficiaries of investor demand, passive inflows and benchmark inclusion are the same companies already attracting the largest pools of capital in private markets.

Data shows that investment activity has become increasingly concentrated around a handful of AI leaders, while fundraising continues to favor the largest managers and franchises.

The next six months may therefore represent a continuation of an existing trend rather than a reversal. Instead of capital dispersing more broadly throughout markets, investors may witness a transfer of concentration from private markets into public markets.

The potential listings of SpaceX, OpenAI and Anthropic represent more than a reopening of the IPO window; they are a test of whether public markets can absorb the enormous value that has accumulated in private markets over the last decade.

The opportunities are clear: improved liquidity, stronger exit markets and broader access to some of the world's most important growth companies. However, valuation excesses, benchmark-driven volatility and greater market concentration remain key watchpoints. For investors receiving public shares through existing private-market holdings, overlays and other risk-management tools may help manage concentration and implementation risks as positions become liquid.

Irrespective of how the IPOs land, the next six months may usher in a new era for both public and private markets investors.

¹ KPMG Private Enterprise Venture Pulse Q1 2026 Global Report

Key takeaways:

• The next phase of the refinancing cycle is likely to separate strong private credit managers from the rest.
• Structural outflows may create better lending opportunities rather than signal broad credit weakness.
• Software risks remain concentrated and are not representative of the broader private credit market.
• Investment grade private credit continues to stand out as an attractive source of yield and diversification.

Private credit has attracted no shortage of attention this year. Headlines have focused on fund outflows, software exposure, and questions about the durability of returns as borrowers face a higher-rate environment. Yet much of the recent discussion has centered on pockets of the market rather than the broader opportunity set.

The private credit landscape in 2026 is largely shaped by the current refinancing cycle. Many borrowers benefited from low-rate pandemic-era financing conditions and now face materially higher borrowing costs. Between 2026 and 2029, approximately $1.9 trillion of U.S. leveraged loans and high-yield bonds are expected to mature¹, creating a more selective environment for both borrowers and lenders. While this environment may create greater dispersion among borrowers, it may also create opportunities for disciplined investors to access stronger lending terms and potentially more attractive risk-adjusted returns. Over the next six months, we believe that investors should pay close attention to three developments that may create opportunities: semi-liquid fund outflows, concentrated software-sector risks, and the growing appeal of investment grade private credit.

Recent headlines around outflows from semi-liquid vehicles, including interval funds and business development companies (BDCs), have fueled concerns about the health of private credit. Yet these developments in our view are the result of liquidity dynamics rather than widespread deterioration in loan quality.

Our manager monitoring data shows little evidence of broad-based credit deterioration. Nearly two-thirds of our monitored private credit managers experienced no change in watchlist status during the latest review period. Even with the outflows, most private credit vehicles have liquidity management tools designed to prevent forced asset sales. As a result, recent redemption activity says more about fund structures than underlying credit quality.

As capital becomes less abundant, lenders regain negotiating leverage for stronger terms, better pricing, and improved protections on new investments. The result is a more attractive opportunity set for investors than when fundraising activity and competition for deals peaked.

RI PC Managers: Changes to Watchlist from Q3 2025

Source: Russell Investments, April 2026

Over the past year software and affiliated sectors accounted for more than 28% of total loan assets managed by BDCs and interval funds², representing a meaningful concentration within parts of the private credit market. At the same time, advances in AI are creating uncertainty around the long-term durability of some software business models. Investors should avoid extrapolating these risks across the broader private credit universe outside the BDC world that has grown to $1.7 trillion globally³ . In our view, these developments reinforce the importance of selectivity, underwriting discipline, and sector expertise rather than signaling broad-based weakness across private credit.

Many software companies continue to generate strong cash flow and maintain recurring revenue streams that support their ability to meet loan obligations. As a result, investor focus is increasingly shifting toward long-term competitive positioning. The challenge is identifying which businesses can sustain pricing power and customer demand as technology evolves, and which may face increasing pressure on future earnings power.

This distinction will become more important as refinancing activity accelerates. Companies with durable business models are more likely to retain access to capital on attractive terms, while weaker issuers may face higher borrowing costs or more restrictive financing conditions. As a result, performance dispersion across borrowers and managers could become more pronounced, making credit selection an increasingly important driver of outcomes.

Historically favored by insurance companies, investment grade private credit has expanded to roughly $300 billion and is attracting interest from a broader set of investors, including pension plans and healthcare organizations. As public investment grade spreads remain compressed, investors are increasingly exploring private markets as a potential source of additional income while maintaining a focus on credit quality.

The backdrop in public markets helps explain why. Generating meaningful incremental yield through public markets increasingly requires larger and riskier credit overweights. As of May 2026, U.S. investment grade spreads stood at approximately 0.74%, while European investment grade spreads were roughly 0.83%. Those levels are near 30-year lows and leave investors with limited compensation for taking additional credit risk.

Investment grade private credit may offer an alternative. Much of the market consists of asset-based loans backed by identifiable collateral and contractual cash flows, creating opportunities to earn an illiquidity premium while maintaining a high-quality credit profile. For investors seeking additional income within core fixed income allocations, investment grade private credit may provide an attractive complement to public markets without requiring a significant move down the credit spectrum.

Recent headlines have focused on outflows and concentrated sector risks, but the more important development is the refinancing cycle now underway. As borrowers return to the market, differences in business quality, capital structures, and financing needs are likely to become more apparent.

Rather than viewing current market developments as signs of broad weakness, investors may benefit from focusing on areas where disciplined underwriting, strong collateral structures, and experienced manager selection can help identify resilient sources of income and diversification within private credit.

¹ https://www.moodys.com/web/en/us/insights/credit-risk/outlooks/mco-20-october-2025.html
² https://www.spglobal.com/ratings/en/regulatory/article/bdcs-exposure-to-software-stays-high-steady-s101675136
³ https://www.preqin.com/insights/global-reports/2025-private-debt

Key takeaways:

• U.S. electricity demand is growing at its fastest pace in decades, increasing the need for investment across generation, transmission, and grid infrastructure.
• Utility and infrastructure consolidation reflects the growing value of scale as operators seek to meet rising power and data center demand.
• Geopolitical uncertainty and energy security concerns could accelerate investment in renewables, particularly solar and storage.
• Meeting future electricity demand will require investment across the entire power ecosystem in both public and private markets.

For years, infrastructure investors seeking growth in the energy sector were largely limited to oil and gas. Today, global electricity demand is entering a new phase of growth. In the U.S. alone, electricity demand grew roughly 3% last year, up from less than 1% annually before COVID. Growth is even more pronounced in areas where data centers and digital infrastructure are being built. PJM, the grid operator serving the Mid-Atlantic region and Northern Virginia's data-center corridor, projects electricity demand growth of approximately 5% annually over the next decade.

What distinguishes this cycle from previous technology-driven investment periods is that commercial demand is expected to surpass residential demand in 2027 for the first time on record¹. At the same time, infrastructure capital expenditure is being deployed both to maintain the aging grid for existing demand and to accommodate projected growth in electricity consumption.

Total Electricity Consumption (indexed Jan 2011 = 100, trailing 12 months)

Source: International Energy Agency (raw data) and Russell Investments (rebasing)

The challenge is increasingly one of delivery. Building generation, transmission, and grid infrastructure takes time, creating a mismatch between the pace of demand growth and the industry's ability to add new capacity. As the second half of 2026 unfolds, investors should watch how the industry responds to that capacity gap. Two themes stand out: consolidation among operators seeking greater scale and continued investment in renewable generation.

Before COVID, a large data-center lease typically required about 30 megawatts of power. Last year, the market saw multiple leases for 1 gigawatt, reflecting a dramatic increase in power requirements. Alphabet, Amazon, Meta, and Microsoft added roughly 25 gigawatts of new demand in 2025 alone, equivalent to approximately 2% of total U.S. power-generation capacity.

Yet only about 5 GW of capacity was built and energized over the same period, leaving a substantial buildout ahead across generation, transmission, and grid infrastructure. Recent utility-sector transactions suggest scale is becoming increasingly important as operators respond to rising power demand.

Growing M&A activity among utilities and infrastructure operators could emerge as a key driver of market activity. NextEra Energy's proposed acquisition of Dominion Energy, which is expected to close in the first half of 2027, would create the world's largest regulated electric utility business and one of North America's largest energy infrastructure platforms. Greater scale may become increasingly valuable as operators work to expand transmission networks and meet rising power demand. NextEra's plans to develop more than 30 energy centers across the United States² highlight the magnitude of the investment needed to address future capacity requirements.

The Iran conflict has renewed attention on energy security. While the global economy is less exposed to oil shocks than it was in previous decades, geopolitical fragmentation continues to reinforce the value of diversified energy systems, domestic infrastructure investment, and resilient supply chains. Since Russia's invasion of Ukraine, Europe has accelerated efforts to diversify energy supply, supporting investment across renewables, storage, transmission, and grid modernization.

Renewables remain attractive as one of the lowest-cost sources of incremental generation capacity. The share of renewables in global electricity generation, led by solar, is expected to increase from 42% in 2025 to 50% by 2030³. Simultaneously, intermittency challenges reinforce the need for a diversified power system in which renewables are supported by storage, reliable generation, and a stronger grid. Advanced nuclear and next-generation storage remain important long-term considerations, although supply chain, policy, and commercialization hurdles are likely to limit their near-term impact.

Meeting future electricity demand will require investment across generation, transmission, storage, digital infrastructure, and grid modernization. As utilities, infrastructure operators, and developers work to expand capacity, opportunities may emerge across both public and private markets.

Listed infrastructure provides exposure to utilities, transmission networks, and grid infrastructure, while private markets offer greater access to renewables, digital infrastructure, and other long-duration assets. Together, they provide exposure to different parts of the power ecosystem supporting rising electricity demand.

Infrastructure's inflation sensitivity and diversified sources of cash flow may become increasingly valuable if energy, supply chain, or capacity constraints place renewed pressure on prices.

¹ https://www.reuters.com/business/energy/us-power-use-beat-record-highs-2026-2027-ai-use-surges-eia-says-2026-05-12/
² https://www.cnbc.com/2026/05/18/nextera-nee-dominion-energy-d-data-center-ai.html
³ https://www.iea.org/reports/electricity-2026/supply

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.