Five themes for 2026

Section 4: Five themes for 2026

1. From AI boom to AI disruption: The opportunity is in knowing the difference

   The surge in AI-related capital expenditures has been a massive market driver, but it is important to remember that capital deployment on its own is a means to an end, not a guarantee of success (Figure 2). The AI boom is evolving into something broader, where some investments will benefit from powerful tailwinds while others face meaningful headwinds. In the latter category, we would include certain equity and debt investments tied to software-related and IT services sectors, where valuations are stretched and defaults are elevated. Risks are also mounting for companies that cannot demonstrate a credible path to monetizing AI. Increased spending on AI infrastructure puts pressure on margins and returns on invested capital if that spending doesn’t translate into meaningful revenue growth.

   In contrast, we see a number of potential winners. Companies with proprietary data advantages and those able to deliver customized client solutions should be better positioned to navigate AI disruption. We also see opportunity in infrastructure investments such as utilities, battery storage and energy transmission, as well as in asset-backed securities, real estate and municipal bonds tied to infrastructure buildouts.

   Regarding direct investments in hyperscalers, we prefer a focus on facilities that rely more on sustainable power, avoid water stress issues and are meaningfully engaged in community feedback — all factors associated with longevity and profitability.

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

   U.S. dominance in AI growth has left some investors feeling unintentionally overweight U.S. assets. While we certainly encourage regular portfolio rebalancing to align with long term asset allocation goals, we also believe some investors may be moving too far away from compelling U.S.-centered opportunities.

   The U.S. investment case remains strong given high productivity, solid corporate earnings growth, investor-friendly tax and regulatory conditions and relatively robust economic growth. U.S. large cap valuations are elevated, but we believe investors will continue to reward properly-deployed AI-related capital spending. Beyond equities, areas such as preferred securities, senior loans, real estate, middle-market direct lending, Commercial Property Assessed Clean Energy (C-PACE) lending and infrastructure debt all appear compelling.

3. Alternative credit and private markets remain core — but selectivity and structure matter more than ever

   Increasing headline noise suggests we may be in the midst of a private credit bubble, or that poorly structured deals could trigger broader financial contagion. We agree risky segments exist and that some transactions have been structured with excess leverage or weak cash flows. But that only reinforces the critical importance of deal structure, manager selection, proper covenants and careful selectivity. We anticipate dispersion in manager performance will drive future success in fundraising.

   We continue to see ample opportunity in core U.S. and European middle-market direct lending. The software sector remains in flux, but we see no signs of middle market systemic risk. We also see opportunities to diversify away from AI-centered investments by focusing on “old economy” businesses — such as distribution, waste and stormwater management, commercial landscaping and pest control. On the investment grade side of private credit, rising energy demand creates opportunities through utility operating companies, new power plants and expanding transmission infrastructure. And we also see opportunities in other alternative credit segments, including senior loans, collateralized loan obligations, real estate and infrastructure debt and C-PACE financing. 

   For private equity, similar concerns apply in the software sector, but other areas of opportunity exist. We are wary toward fund managers who appear to be targeting stretched valuations without corresponding growth prospects. Here too, selectivity and rigorous scrutiny of potential deal partners are essential. Within private equity, we see the best opportunities in the equity secondary market with a focus on single asset opportunities.

4. Municipals continue to offer compelling, durable opportunity

   Six months in, this theme remains firmly on track. Municipal bonds have outperformed the broader fixed income market this year, and credit spreads have tightened — suggesting room for further upside. In our view, demand remains robust, yields are relatively high and fundamentals are strong, with state and local government finances looking healthy. Municipal yield curves are steeper than Treasuries, making this one area where taking on some duration risk makes sense. We see compelling opportunities across both high grade and high yield municipals.

5. The private real estate rebound is just getting started

   2025 marked the beginning of a trend toward contracting real estate supply and rising values. Those trends have taken firmer hold, and demand and transaction activity are accelerating as investors recognize growing opportunity sets. As detailed in our real estate outlook, we are primarily focused on sectors that benefit from supply constraints — such as medical office and senior housing — as well as more defensive areas like grocery-anchored retail. We also see select opportunities in retail and housing markets where demand is growing.