As we gathered for our quarterly Research Summit in late March, we recalled a Q1 of sharp contrasts. Economic fundamentals looked solid as the year began, with U.S. growth resilient, labor markets cooling but intact, and a Federal Reserve (Fed) that appeared to be biased toward easing. Growth outlooks were also robust in Europe, China and Japan.

Then came a software sell-off and rising concerns about private credit – a prelude to war in the Middle East and a historic supply shock that threatened to usher in a significant shift in the economy’s macro regime.

It’s a complicated backdrop but one that we think still means a positive economic outlook in the U.S. Today we see a market absorbing waves of disruption as investors contemplate a wider range of potential macro outcomes and a fatter bearish left tail, even as there are signs of de-escalation in the Middle East conflict. In our own base case scenario, in which Brent crude averages around $100 in Q2 before retreating to more normal levels over the course of Q3 and Q4, the global economy would likely be able to move past the energy shock and deliver solid growth.

This view sets the foundation for our continued risk-on stance, including an equity overweight, over a 12-18 month investment horizon. But as we explore here, many economic and market forces are in play. We will closely monitor their push and pull as we aim to identify investment opportunities and manage portfolio risk. Not surprisingly, the price of oil will be center stage. 

Macroeconomic and policy views

Vulnerability to higher energy prices varies across the global economy. In our base case, we see the U.S. economy shifting from above-trend growth rates to closer to slightly above-trend growth rates, with limited pass through of higher oil prices to core inflation. Both consumers and businesses will treat the energy price spike as temporary, we believe, which should help avoid a broader economic slowdown.

Relative to other major economies, China looks to be among the most insulated from the energy shock. We expect its GDP growth rate this year to fall only slightly, from 5% to 4.8%. Europe is another story altogether. Its heavy reliance on energy imports makes it vulnerable to both weakening growth and rising inflation.

How do we think about bearish left tail risk – and in particular, the possibility of an all-out regional war that disrupts not just the Strait of Hormuz but damages regional energy infrastructure and shuts other shipping routes? While we think the risks are low, the impact would be dramatic and non-linear.

Using rough short-run demand price elasticities for crude oil, we consider what would happen to oil prices if all of the 20 mbpd of oil behind the Strait of Hormuz were not transitable. (As of the start of April before the U.S. blockade, roughly 5-6 mbpd is likely transitable either through the Strait of Hormuz or via re-routing through Saudi Arabia and UAE pipelines.) If 20 mbpd of oil were effectively frozen in place, it’s easy to imagine Brent soaring past $150/bbl.

Were high energy costs to persist, eroding business sentiment and household confidence, companies could eventually postpone investment and large-scale hiring and consumers could pull back their spending. Investors in risk assets might shift from pricing an inflation shock to pricing a growth shock. In this environment, inflation outcomes would become more uncertain. While near-term inflation may rise, over a medium-term trajectory inflation may decline as broader demand destruction restrains the pace of price hikes.

Examining the prospects for AI and private credit

Beyond energy markets, our Research Summit discussed how developments in artificial intelligence (AI) and private credit could support or challenge our base case outlook.

In a nutshell: We think the AI capex cycle should remain relatively resilient, and the superior profit margins and balance sheet strength of companies in these sectors should endure. Against this backdrop, we maintain strong conviction in our preference for both the technology and communication services sectors. On the private credit front, risks should prove contained for now.

AI’s recent developments include more agentic models that can execute workflows end-to-end. We also see rapid improvements in inference economics (essentially, the cost and tradeoffs involved in running an AI model in production). Collectively these advances are pulling forward enterprise adoption of AI. They are also concentrating advantage with platforms that control distribution, data, and developer ecosystems.

At the same time, scaling AI systems requires considerably more computing power, networking, memory, and electricity. That is creating durable demand for companies that build AI hardware and infrastructure, and for the big networks that can monetize higher user activity and AI-enabled products.

On the other hand, many software companies look decidedly less well-positioned to prosper in the new AI ecosystem. Significant improvements in large language models (LLMs) have led investors to price in existential risk for some software companies, though we believe that the software sell-off last quarter did go too far.

These concerns about software have sent shockwaves through the private credit market as well. Importantly, however, we view private credit as having a software problem, rather than something more systemic.

Private credit’s software exposure is in some ways a legacy of private equity activity in 2020–21. During that period, many transactions were underwritten at valuations that proved aggressive and with leverage that left limited margin for error. As growth has normalized and some software business models have come under greater scrutiny, equity and enterprise values have moved lower. But the debt stack—and associated leverage—has largely remained in place.

Because roughly half of software sector debt does not mature until after 2028, a spike in defaults does not appear imminent. But we expect that a meaningful number of issuers will need to refinance over the next year to reduce the risk that they run into the 2028 maturity wall.

Core views across assets and sectors

One subject in particular animated discussion at our Research Summit: How to manage portfolio risk in a world of elevated geopolitical uncertainty. At a high level, we look to maintain exposure to resilient growth opportunities while taking steps to limit downside vulnerability.

Our equity outlook remains moderately pro-risk, reflecting our base case of solid economic growth and structural tailwinds from global fiscal stimulus and AI adoption. In fixed income, we are leaning into shorter duration as yield curves steepen. Credit positioning is neutral, reflecting the asymmetric distribution of returns in the current environment (Exhibit 2).

As of early April, we continue to see opportunity in equities over a 12–18 month horizon, given a still positive fundamental outlook from both our top-down and bottom-up company analysts, less demanding valuations, and lighter positioning. AI remains a constructive structural driver for markets, but the near-term path could be uneven (witness the software-induced selloff earlier this year).

The transition from tech adoption (where innovations gain traction) to widespread tech deployment (where innovations are widely used in business) will be bumpy. We remain focused on developments related to corporate profit margins, monetization, leverage and backlog conversion (turning commitments into revenue).

At the same time, we emphasize diversification by leaning into countries and regions with resilient fundamentals and structural growth drivers. Japan continues to stand out as an attractive, diversified equity allocation. Stocks find support in an earnings-delivery cycle underpinned by economic reflation, ongoing corporate governance reform and improved capital discipline. Further, Japan offers convexity if global uncertainty fades given its exposure to the energy shock.

Although credit markets continue to offer attractive all-in yields, overall macro risk is rising. While fundamentals remain solid overall, some vulnerabilities are starting to appear in certain sectors. After spreads retraced their March move, forward returns look set to be driven by carry rather than capital appreciation. With asymmetric returns to the downside, we maintain a neutral stance on high yield and emerging market debt (Exhibit 3).

Across rates and FX, we have moved to short U.S. 10-year duration, reflecting a fundamental outlook for better growth and higher yields. But given the continued Middle East conflict, we hold this view with only moderate conviction. The European economy faces headwinds from energy import dependence and the European Central Bank (ECB) appears likely to hike rates this year. Finally, we expect greater divergence in the rates of economic growth in the UK vs. the rest of the G10.

In FX, the U.S. dollar could strengthen briefly over the short term if investors perceive a renewal of U.S. economic exceptionalism. Still, we hold onto our bearish dollar view over the medium term.

Gold has proved somewhat resilient amid recent market volatility, even as correlations across assets shifted and diversification benefits diminished. As of early April, gold has outperformed global government bonds and equities, supported by stable supply, a high stock-to-flow ratio, and demand from central banks and long-term investors. Looking forward, despite recent news on Turkish central bank gold holdings and a recent dip in certain gold ETF holdings, gold’s role as a portfolio diversifier remains intact. Key factors to watch include central bank demand, ETF flows, and positioning.

Opportunistic views: Re-risking after the crisis abates

As this is written, markets are still in a period of dislocation driven by war in the Middle East. When this period comes to an end, we think opportunistic re-risking in equity markets should focus on companies with quality balance sheets, durable demand, and exposure to structural investment cycles. It should also look to avoid businesses with excess leverage or fragile cash flow profiles. These stocks could easily move lower if volatility were to spike.

Therefore, as mentioned, we maintain conviction in our overweights to the information technology and communication services sectors, funded by our positions in consumer staples. Information technology draws support from the structural AI theme, double-digit earnings growth, strong balance sheets in aggregate, and an attractive valuation entry point.

On the other hand, consumer staples will likely be challenged amid a healthy macro backdrop and tepid earnings growth. We are also inclined to limit exposure to Europe given its greater sensitivity to energy dynamics; it was already our least-favored region coming into the Middle East conflict.

In rates markets, we see opportunity when yields move beyond what medium-term fundamentals would imply. Expecting steeper yield curves as governments increase spending and global growth recovers, we have maintained our UST 5s30s steepener and remain long Gilts vs. Australian government bonds.

 In FX markets, the recent energy shock has created clear dispersion between exporters and importers, leaving us long NOK (an oil exporter) vs. GBP, and long AUD (with more persistent central bank hiking bias) vs. USD and GBP.

Alpha opportunities, correlations, and volatility

Stock-bond correlations have turned positive in the U.S. and globally amid the Middle East conflict. This shift has reduced the diversification benefit that bonds typically provide in multi-asset portfolios, making risk management a trickier proposition. At the same time, equity and bond volatility remains elevated, though volatility peaks in March came in below their levels at “Liberation Day” (the April 2025 announcement of historic U.S. tariffs). Volatility has largely renormalized over the first half of April 2026.

Dispersion signals also point to an opportunity-rich but bifurcated equity backdrop. Momentum dispersion is elevated across most universes, led by MSCI World, Russell Growth, and EAFE. This suggests wide performance gaps between high- and low-momentum stocks that can favor momentum-oriented factor strategies. Quality’s valuation spread is notably wide in the U.S. and Asia ex-Japan. Value dispersion shows a pocket of opportunity in U.S. small caps, while no monitored factor or universe is meaningfully compressed.

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