As we enter the second half of 2026, it is hard not to be struck by the resilience of global risk assets. Economic growth has mostly shrugged off repeated geopolitical crises, corporate earnings continue to surpass expectations, and the energy shock has failed to trigger the broad macro regime shift that many had feared.

Against this backdrop, our senior investment team met for our two-day Investment Quarterly in late June. Our discussions reaffirmed our positive view on risk assets. Expectations for trend-like global growth keep us moderately constructive on equities, particularly in the U.S. and emerging markets, where earnings momentum is strongest. We also take cyclical risk in credit, as U.S. high yield offers attractive all-in yields in a low-default environment. Regional divergence in growth prospects drives our neutral stance on European equities and our long in European duration. We remain neutral on U.S. Treasuries, which are trading within their expected range.

Macroeconomic and policy views

In our base case, we expect the U.S. economy to expand at a healthy 2% pace over the next 12 months. Recent purchasing manager index (PMI) composites point to global growth around trend, despite a softer outlook in Europe.

The AI capital expenditure (capex) cycle is spurring much of that growth. Global capital spending appeared to re-accelerate in the first half of 2026, with global capex ex-China running at an annualized pace of over 10%. Activity is picking up across the parts of Asia tied directly to AI and semiconductor demand. That is powering a global trade upcycle in which Asia is particularly well placed given its central role in the AI supply chain.

We expect growth momentum to continue as capex broadens into non-tech areas and labor demand firms. Last year brought an unusual disconnect between U.S. capex and employment, which tend to rise together. Over the coming months we expect the two factors to again move in tandem as the labor market continues to strengthen. That should support payroll growth and consumption, which has been boosted by rising equity wealth.

The global economy has held up well through the energy crisis in part because financial conditions did not tighten as much as they did in previous oil shocks. We expect the Iran de-escalation to hold, allowing Brent oil to gravitate toward USD 80 a barrel or lower by year-end. Oil coming out of the Strait of Hormuz will likely meet a market that was already oversupplied heading into the war. At the margin, prices may find some support from rebuilding inventory and the normalization of Chinese crude imports.

Pass-through into core inflation should therefore stay relatively modest -- though the risks to U.S. inflation are to the upside. We are monitoring for any signs that inflation expectations are de-anchoring. In addition, we’re tracking emerging labor market imbalances and the extent to which AI demand exerts more structural upward pressure on prices.

Central banks will likely keep a somewhat hawkish tone but pull their punches on rate hikes. In our view, the Fed will stay on hold through 2026 and cut rates once in the second half of 2027, while the BoE and ECB stay put for the remainder of the year. From the Bank of Japan we expect continued and gradual normalization, with a further hike later in 2026 and another in 2027. Current pricing in U.S. rates markets appears too hawkish, but to build greater conviction in this view we would need more clarity on Fed policy dynamics under newly installed Chair Kevin Warsh.

Taken together—resilient growth, a fading energy shock and an upside inflation skew—the distribution of risks tilts toward an economy that is running too hot rather than too cold. Our quantitative models lend support to this view as they flag an increased probability of reflationary and stagflationary regimes.

As Q3 gets underway, we are therefore mindful of how the risk of a further interest rate rise – though not our base case – might impact equity markets. We also weigh the possible follow on effects of a positive stock-bond correlation over the next 12 months.

Fundamental asset allocation views

With growth around trend, earnings momentum strong and defaults low, we are comfortable taking cyclical risk. But we’re investing with discipline, conscious of how far some trades have already run.

We remain moderately overweight equities. Given that further support from rising valuations seems unlikely in many markets, our relative preferences lean toward strength in earnings momentum rather than simply toward cheapness. Strong U.S. and EM earnings per share (EPS) growth supports an overweight despite richer valuations in the U.S., while in parts of Europe, softer earnings momentum has met elevated absolute multiples.

After an extraordinary U.S. earnings season—the fastest pace of growth since 2021—we see the S&P 500 reaching 8,400 over the next 12 months, driven by earnings on a roughly unchanged 21x multiple. Across the Pacific, we favor emerging markets, where AI capex should feed earnings at cheaper valuations, and we continue to like Japanese equities on expectations of reflation and corporate governance reform.

Tight spreads mean that we view our overweight to U.S. high yield as a carry story rather than a bet on further spread compression. Issuance remains well received, and public credit fundamentals look stable, helped by robust nominal growth and the run-up in index quality. Still, we are watching the ongoing pressure on software companies and private credit markets closely for any risk of cross-contamination. The market's absorption of AI-related IG and HY supply warrant ongoing attention for any signs of indigestion.

We see better prospects for risk taking in rates than in FX. We hold an outright long in European duration, expressed through Italy. That stance reflects attractive starting valuations, a euro area growth outlook that should lag other major regions, and a market that has already priced ECB tightening. In sum: a compelling return profile over a 12-month horizon.

We also prefer UK Gilts to U.S. Treasuries, where a weaker UK growth outlook will keep the BoE on hold. U.S. Treasuries sit at neutral, with the 10-year trading well within our 4.20%–4.75% range. In currencies, we have moved to neutral on the dollar, which has been range-bound over the past quarter. Renewed U.S. economic exceptionalism and a possible hawkish Fed shift are near-term risks to our longer term view of a weaker U.S. dollar.

Debating the trajectory for AI, inflation, momentum

We expect three key dynamics will continue to drive returns and shape how markets evolve over the next 12 months: The evolution of the AI ecosystem, trajectory of inflation, and momentum dispersion and volatility.

Turning first to AI, the question is not whether AI will transform the world—we believe it will—but where the economic value accrues. How—and when—will that value shift among the picks-and-shovels (infrastructure) companies, the AI applications layer, and the broad set of AI beneficiaries that will turn compute into productivity? All important questions, with no certain answer.

We expect capex will keep growing at a robust pace over the next 12 months as end demand continues to outpace supply. But we are vigilant for signs of constraints – fundamental, financial or political – that could cap further upgrades.

On the inflation trajectory, we see disinflation in the U.S. as our central case over the next 12 months, with core inflation falling to 2.8% by year-end. Still, the risks tilt to the upside. We are closely following AI demand, labor market slack and other inflation metrics, as well as the constitution of the new Fed task forces under Chair Warsh.

Equity momentum has been the top performing factor within markets for the past couple of years. In 2026 it has done particularly well, responding and adapting to market pricing of AI’s impact across different stock cohorts. While momentum winners have generally demonstrated sufficient earnings acceleration to justify their stock price increases, volatility in the factor has risen to levels last observed in 2020.

This type of volatility spike has historically corresponded with momentum reversals. As a result, we are actively monitoring momentum-driven active managers and remain attuned to how a reversal in the factor could impact the market more broadly.

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