Five themes for 2026

Section 4: Five themes for 2026

1. Don’t bet against the U.S. in a bid for diversification

   Conversations with our clients and our own EQuilibrium investor survey show many investors shifting assets away from the U.S. or planning to – either to broaden opportunities or in the face of tariff and geopolitical risks. And while we certainly wouldn’t argue against regular portfolio rebalancing, we also think some investors may be overlooking positive U.S. trends.

   The AI boom’s initial phase may be pausing, but it is far from over. Rising productivity, solid earnings growth and favorable tax and regulatory policies should provide continued tailwinds for U.S. assets. U.S. large caps face some valuation hurdles compared to other areas of the global equity market, but we still expect to see that area of the market outperform alternatives on a relative basis thanks to the trends we just mentioned as well as sustained high capital expenditures. Beyond equities, stronger growth and a diversified economy offer compelling U.S. opportunities in private markets such as real estate, private credit, private asset-backed finance and private investment grade bonds.

2. Alternative credit and private equity should be core allocations

   Although interest remains high for these segments of the market, we believe that many (if not most) investors remain underweight private markets. Additional liquidity risk may deliver enhanced returns, income and diversification. Opportunities span alternative credit sectors beyond traditional fixed income benchmarks in areas such as public and private securitized assets, real estate and infrastructure debt, collateralized loan obligations and Commercial Property Assessed Clean Energy (C-PACE) financing. We also continue to favor senior loans, where recent spread widening has created some additional value.

   Headlines question private credit stability and potential industry risks. We see underwriting and deal structure issues in riskier segments, but attractive opportunities remain when strong underwriting and deal selection are at the forefront in the investment process. In below investment grade, we favor middle-market direct lending. We’ve added private investment-grade credit to our heat map as it offers strong relative value, limited supply and robust cash flows, particularly in private asset-backed securities.

   Private equity also looks compelling. M&A activity has been rising across the world, and tougher fundraising means experienced managers are deploying capital wisely. We favor senior over junior capital and prefer secondary markets with single-manager structures. Across all areas, selectivity and partner choice will prove critical – deal structure and covenants matter more than in recent years.

3. Municipals are still in the early stages of a new bull market

   Following a challenging 2025 (record supply), municipal bonds have rebounded in early 2026 – a trend we expect will continue. While issuance remains elevated, rising principal redemptions and coupon repayments, plus increasing demand from investors redeploying cash into areas generating real income, create a strong technical backdrop.

   Yields are relatively high and fundamentals strong, with state and local governments looking very healthy. Municipal yield curves are steeper than Treasuries, making this one area where duration risk makes sense. We see compelling opportunities across both high grade and high yield municipals.

4. The private real estate rebound is just getting started

   Following a few years of falling prices, pockets of oversupply and weak demand amid rising interest rates, 2025 saw a rebound in value and constrained new supply for private real estate markets. Demand and transaction activity have also started to accelerate as investors recognize growing opportunities.

   In fact, global private real estate returns have actually trended positive for seven consecutive quarters. Rising transaction volumes and plummeting new construction contributed. Critically, price improvements have occurred mostly from rising income growth. Capital appreciation of the underlying assets has not yet been a force, but we expect that will pick up, providing an additional tailwind (Figure 2).

5. Look for the second-derivative trades from the AI boom and energy revolution

   U.S. megacap tech and data centers led the early stages of the AI boom. While that rally has started to show some cracks, we hardly think AI growth and the associated rise in energy demand has ended. But we think investors should be looking for the secondary and future implications of these trends.

   Broad infrastructure investments including utilities and energy transmission should benefit from increased energy needs. AI growth and energy transformation may also create direct or indirect opportunities in asset-backed securities, real estate and municipal bonds tied to infrastructure buildouts. And despite U.S. political headwinds, the global shift toward renewables and efficiency continues to drive investment opportunities as diverse power sources become essential.

   Over the longer term, we also think investors should pay attention to even broader AI and energy-related trends and risks. Issues such as the need to upgrade and build new power grids, the manner in which data center growth intersects with water stress and scarcity, and how the growing use of AI affects employment trends and corporate governance policies all bear watching.