Five investment themes for 2026

Section 4: Five investment themes for 2026

1. From AI boom to AI bifurcation: knowing where to invest

   Surging hyperscaler capital expenditures remain a primary market driver across asset classes. This shows up most visibly in equities, where many are rightfully concerned about growing index concentration, but AI-related debt financing is also a powerful tailwind across public and private fixed income markets. We see no signs of AI capex slowing; in fact, it is projected to grow strongly over the coming years (Figure 2).

   But capex growth alone is not an investment theme, and we expect AI selectivity to grow in importance. We increasingly see opportunities extending beyond first-order beneficiaries into industrials, power equipment, infrastructure, health care and other AI-adjacent areas. We also see growing risk for companies that cannot demonstrate a credible path to monetizing AI. Increased AI infrastructure spending pressures margins and returns on invested capital when it doesn’t translate into meaningful revenue growth.

   Growing scrutiny, and hostility, around AI trends generally and data center buildout specifically is also clouding the outlook. For direct hyperscaler investments, we favor facilities that rely on sustainable power, avoid water stress issues and engage meaningfully with community feedback — all factors tied to longevity and profitability.

2. Cash isn’t a strategy: putting sidelined capital to work

   In conversations with clients, we’re hearing that valuation concerns, worries about global economic and geopolitical trends and uneasiness about extending duration are pushing many individual investors toward high cash levels. Some institutional investors are delaying new capital commitments or extending due diligence timelines for similar reasons.

   But in our view, the cost of waiting outweighs any potential benefit, and the need for sustainable income and long-term growth hasn’t changed. Despite Treasuries starting to offer better relative value, we see ample opportunities to put cash to work. Rising yields have created challenges for bond markets, but they’ve also created better entry points, with senior loans and securitized assets looking particularly attractive. U.S. municipal bonds also stand out given their yields and fundamentals. We also see opportunity in customized long/short mandates and other de-risking strategies designed to manage volatility exposure.

3. Alternative credit and private markets: separating headlines from fundamentals

   Negative headlines around private credit have faded in recent months, but concerns persist that the market is overbought or that deal structure quality is slipping. Some deals do rely on excess leverage or suffer from insufficient cash flows, which only reinforces the importance of deal structure, strong covenants and careful selectivity. We’re also seeing more manager dispersion, which reflects these same trends.

   Core middle market direct lending in the U.S. and Europe continues to show healthy fundamentals, including low default and non-accrual rates. We see particular opportunity in “old economy” lending, such as light manufacturing, building services and landscaping, which offers diversification away from AI themes. On the investment grade side, rising energy demand creates opportunities in utility operating companies, new power plants and expanding transmission infrastructure. We also see opportunity across other alternative credit segments, including collateralized loan obligations, real estate and infrastructure debt and C-PACE financing.

   For private equity, investor interest appears to be growing, deal flow is picking up and overall market quality has improved over the last year. As with debt markets, selectivity remains critical; we see the best opportunities in equity secondaries, particularly single-asset deals.

4. Municipals: a technical and fundamental bright spot

   Rising bond yields have pressured most global fixed income. But we see the rise in municipal yields as part of the broader macro dynamic around higher energy prices and inflation, not a reflection of municipal fundamentals, as state and local tax collections show continued growth over the last year. Demand for municipals has also been persistent, balancing still-elevated supply. As yields have increased and municipal valuations have cheapened, municipal yield curves are steeper than Treasuries, making this one area where taking on some duration risk may make sense.

5. The private real estate rebound continues to build

   Private real estate continues to offer a compelling entry point following a reset in values and fundamentals that began around the start of last year. We think real estate credit looks particularly attractive. The MSCI Global Quarterly Property Index has now enjoyed nine consecutive quarters of positive total returns, with the last seven each notching modest value gains. Elevated interest rates could delay the return of more significant capital growth, but real estate is fundamentally an income-driven asset class. On the income side, a sharp slowdown in new supply is helping occupancies improve across property types, a pattern that has typically preceded stronger periods of rent growth. In the following section of our outlook, we offer specific areas within real estate markets where we see the best opportunities.