Executive Summary
For all the volatility, angst, and uncertainty that characterized 2025, very little was resolved one way or the other for the U.S. economy this past year.
Overall economic performance is holding up (if not spectacularly), and markets avoided the crash many expected. However, the same old fragilities and vulnerabilities linger. Wealthy consumers are sustaining growth while the majority struggle with affordability; business activity is weak outside the AI bubble; and a small group of high-flying assets is driving investment returns.
There are, of course, some differences. Inflation is trending up rather than down, the labor market is gradually cooling, and the Federal Reserve (Fed) has resumed an easing cycle.
So, we enter 2026 much as we entered 2025, under a cloud of extreme uncertainty. One of the many consequences of the clouded outlook is that annual prognostications on the macroeconomic outlook will almost certainly be wrong. Nonetheless, we in the research community are almost pathologically compelled to set our thoughts on the year to come.
To square that circle, we bring you an “anti-outlook.” We can’t say with confidence what will transpire in the year ahead, so here are five things we believe will not happen in 2026.
What Won’t Happen
1. Trump won’t back down. As pressure mounts and midterms approach, the President will trust his instincts and double down on signature policies. Avoid complacency regarding downside risk scenarios, and leverage the short-term benefits of favorable financial and regulatory conditions while they last.
2. Inflation won’t fall. Emerging price pressures will prove more persistent than expected, and the Fed will find itself behind the curve. Investigate and prioritize inflation robustness when assessing investments, particularly mid-market equity business models. In credit and fixed income, position for a steepening yield curve as inflation premiums rise relative to low front-end rates. Stay long real assets (but be mindful of elevated entry valuations).
3. The AI bubble (probably) won’t pop. But it's time to diversify. If tech stocks do crash, expect a shallow recession as AI investment slows. Diversify aggressively (geographical, asset class, factor) and underweight mega-cap AI stocks. Within the AI investment theme, move the focus downstream to businesses with truly disruptive potential (e.g., world models in game development) or a clear case for AI-driven value creation (e.g., drug discovery and defense tech).
4. Private Equity optimism won't be misplaced. For a change. The early phase of a cyclical recovery in the PE industry will gain traction. Focus on exits, distributions and regeneration to be on the right side of the deployment/distribution spectrum. Bias toward action; don't bank on better conditions in 2027/28.
5. Private Credit won't blow up. There are performance headwinds and idiosyncratic risks, but "cockroaches" are not eating the foundations of the global economy. Focus on risk appetite and understanding of underlying credit quality, overweight lower-risk segments, and stress factor exposure within the portfolio.
Top global calls
Looking beyond the U.S., we have identified three top global calls that will be prominent investment themes in 2026.
- Europe: Another thing that won’t happen. The prospect of peace in Ukraine will not materially change Europe’s geopolitical imperative to build its self-reliance. One manifestation of this theme, European Aerospace and Defense investments, is transitioning from a speculative macro bet to a stock-picker's market, favoring private equity and specialist investors.
- Japan: Happening. Economic normalization is on track despite demographic concerns, supported by rising labor force participation, strong productivity gains, and positive real interest rates that are unlocking corporate cash. We expect increased M&A activity and more foreign investment in 2026.
- Canada: Could happen. Structural underinvestment and trade headwinds have put Canada through the economic wringer, but accommodative BoC policy, ample fiscal space, and the Carney government's capital-focused budget position the country relatively well among G7 peers. Contingent on navigating USMCA talks this year, Canada is positioned to become the developed world’s rising star.
Medium-term Scenario Summary
Scenario 1: Stuck in the Muddle (45% weight) Sustained “Sluggish” regime over the 3-year horizon. AI investment and fiscal stimulus offset tariff and immigration headwinds, creating an unstable equilibrium in which growth remains below potential while inflation drifts above target. Difficult fundraising environment for private funds, slow middle-market deal flow, and elevated valuations requiring operational improvements and selective deployment. Software, financials, specialty retail, and utilities outperform.
Scenario 2: Sudden Stop (35% weight) The AI bubble bursts, triggering a short, shallow Crisis regime, followed by a Rebound. This phase proves inflationary, and after initially responding forcefully, the Fed must remain tight in a “Financially Constrained” regime. Counter-cyclical investing opportunities emerge, shifting focus to undervalued assets with strong balance sheets and quality businesses that can capitalize on repricing.
Scenario 3: Slow Stagflation (20% weight) Poorly timed Fed easing coinciding with tariff impacts, fiscal stimulus, and inflationary immigration curbs triggers an Overheating regime, which de-anchors prices and transitions into a Stagflation regime when growth eventually stalls. For investors, this means a narrow exit window during the overheating for maturing funds. The Stagflation phase favors assets with pricing power and inflation protection—utilities, transport, healthcare, specialty retail, and private credit outperform.
To see the detailed analysis, please download the report.