Our June Investment Quarterly (IQ) was held in Columbus, Ohio, just as peace negotiations in the Middle East were underway, allowing oil prices to move lower and attention to shift to artificial intelligence (AI) and the cost to build out the infrastructure to support it. One underlying theme that underpinned the sessions: how well the economy and markets held up despite the constantly shifting geopolitical shocks and market narratives.

Once again in a three-year period, the economy and the markets navigated a challenging macroeconomic environment that historically would have led to recession. In 2022 and 2023, the Federal Reserve (Fed) embarked on a 525 basis point (bps) rate hiking cycle, followed by a regional banking crisis. In 2025, the U.S. Administration’s “Liberation Day” introduced an average effective tariff rate that reached almost 20%. In 2026, the U.S. and Israel’s war with Iran caused oil prices to rise by over 50%.

Using history as a guide, each of these events would have modeled out to a greater than 80% chance of recession. And yet the resiliency and flexibility of businesses and households managed to ward off any contraction. The group had to accept that there is something very different about this cycle. It could be the amount of money still sloshing around in the system (thank you COVID stimulus checks and quantitative easing). Or it could be the willingness of policymakers to respond quickly to keep an expansion going.

The economic and market mood and energy shaping this environment is very reminiscent of the Reagan era 1980’s, the 1998-1999 and 2004-2006 periods. Each of these had significant capital expenditure (capex) demands, readily available capital and a competitive drive to succeed. The advent of AI is creating that go-go spirit again. But our team sensed that the current capex cycle could broaden further and become more global. Investing in energy security, border defense and technology are top of mind for every sovereign nation.

Demand in the U.S. is also rising for investment in health care, insourcing and onshoring, affordable housing and reskilling parts of the labor force. That capex momentum can carry the economy and markets for quite some time. Of course, we recalled that the Reagan years ended in the 1987 stock market crash, the late 1990’s led to bursting of the dot-com bubble in 2000, and the mid-aught period was punctuated by the global financial crisis. Given this reality, we looked to evaluate and balance the upside potential through a risk management lens.

Macro Backdrop

De-escalation in the Middle East shifts the balance of risks in the oil market. The probability of a surge above $120/barrel is now remote and a period of excess supply pushing oil back down toward $60 seems increasingly possible. That would quickly turn energy prices from a headwind to a slight tailwind for the global economy as households and businesses see their discretionary income rise and their input costs fall. Lower energy prices combined with the AI build-out puts the global economy back on track for expansion into 2027.

The central bank reaction function to this new paradigm has been more nuanced. The European Central Bank (ECB), Bank of England, Reserve Bank of Australia and Bank of Canada should feel reduced pressure to hike rates. Other than a possible further decorative hike by the ECB, these central banks will likely be on hold for the rest of the year. The Fed and the Bank of Japan (BoJ) are the outliers. The hawkish shift at the Fed’s last Federal Open Market Committee (FOMC) meeting suggests that the central bank will be intolerant of persistently high inflation and would respond if meaningful improvement does not occur.

The BoJ continues to normalize rates at a cautious twice-yearly hiking pace. This has allowed inflation expectations to shift higher against a backdrop of more fiscal spending. What did become clear to the group is that rate cuts have been shifting increasingly further into the rearview mirror. Central banks are in, or biased to, rate hiking regimes even if many central banks would prefer to remain on hold over the near term.

Outside of the Middle East conflict, the AI build-out dominated the macro conversation. The capital to build data centers and surrounding infrastructure is immense. While the markets are readily funding the build-out now, would that continue, and if it does, would it create pressures in the labor market? The data on demand vs. current capacity suggests that the capital spending will accelerate.

The impact on the labor market is more complicated to parse. Demand for skilled trades is high and while it is helping to support labor demand in the U.S., the totality of the data suggests the broader employment market remains in balance with still moderate wage growth. The lessons from previous technology revolutions tell us that labor market productivity is more likely than sustained job losses. While some jobs will be displaced, newer jobs that are difficult to predict today will likely be created. During the dot-com bubble, the role of “influencer” could hardly have been expected 20 years later.

In the end, the group was impressed by the labor market’s stability through tariffs and higher energy prices; we felt further improvement lay ahead. The central banks will be carefully watching to see if those improvements lead to higher wage growth.

We expect the Fed to hold rates at 3 5/8% into year-end, watching both improvement in inflation from reduced energy prices and potential tightness in the labor market from a broadening out of capex spending. That should keep the 10-year U.S. Treasury in a range of 4 1/4%-4 5/8%. Global bond markets had experienced a dramatic repricing from the end of February and had become too hawkish on central bank responses. The front-end of the European as well as UK and Australian bond markets continue to offer value.

Scenario Expectations

The group raised the probability of expansion (Above and Sub Trend Growth) to 80% from 60% to reflect a sufficient resolution in the Middle East to lower oil prices and strengthening global capex spending. We evenly split the 80% into 40% in Above Trend Growth and Sub Trend Growth. While we see tailwinds that could further broaden economic activity, growth so far has remained concentrated in the AI build-out, and the lagged effects of the energy and tariffs shocks are still uncertain. Further, the labor market will need positive real wage gains to support faster consumer spending. Our debate focused on the nature of the expansion: Would it be productivity-led, or inflationary?

The risk of economic contraction (Recession and Crisis) was lowered to 20% from 40%. We also split the probability into 10% each for Recession and Crisis. The momentum in the underlying economy is not in question, but geopolitical volatility could resurface over the balance of 2026, creating some potential for contraction.

Risks

Aside from the geopolitical risk that seems ever-present these days, the group highlighted the euphoria around AI. Should the cost/benefit of the AI build-out come into question or even become prohibitive, the air coming out of the AI investment balloon would likely deflate both the markets and the economy. Already, businesses are starting to reassess the cost of token usage against benefits that are yet to come.

We are also mindful of the previous capex-led expansions supported by excess liquidity which ended painfully in 1987, 2000 and 2008. The amount of money surging through today’s global economy, in addition to renewed sovereign borrow-and-spend commitments, could create growth and inflation pressures which every central bank would have to lean into.

Strategy implications

The group sees an environment where the focus should be on constructing portfolios with yield and carry. Bank hybrid and contingent convertible bonds present some of the best risk-adjusted returns in markets. Bank loans were also favored given the strong fundamentals of corporate borrowers and the loans’ floating rate nature. Securitized credit remained a favorite, with a focus on the combination of yield and credit enhancement. And lastly, emerging market debt drew a lot of votes because of the high real yields in the local markets and the resiliency of most countries to the oil shock.

Closing Thoughts

We do get concerned when the consensus view is so compelling but also so unanimous. But the resiliency of businesses and households, along with structurally expansionary fiscal policies, is an impressive combination. The repricing in the bond market over the last four months has given investors a window to get into bonds at a higher yield. We intend to take advantage of the opportunity.

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