Macro Matters: Selectivity, Slower Growth, and Sticky Inflation

Our economic outlook

U.S. growth appears to have continued above trend in the first half of 2026, but the growth outlook for second half may be weakening amid signs of a softening consumer. The labor market appears to have improved, with the unemployment rate falling to 4.2%. However, underlying job growth of just 72,000 new jobs created is at odds with the surprisingly large decline in labor force participation. U.S. inflation has improved due to lower oil prices, but ongoing geopolitical tensions continue to weigh on the bond market. Concerns surrounding a moderation in the artificial intelligence (AI) boom could further pose a downside risk to consumer spending through the wealth effect. We expect inflation to remain sticky above target levels while growth moderates but remains positive. This poses a challenge for the Federal Open Market Committee.

Outside the U.S., China recorded a lower-than-expected 4.2% growth rate in the second quarter. Economic activity in China remains uneven, with export volumes and industrial production on a tear, while consumer spending and the housing market remain weak. On the margin, this leaves China somewhat vulnerable to growth shocks driven by geopolitical developments or other external factors. In the EU, the withdrawal of its large fiscal stimulus package has left the region facing a dual challenge of weak growth and low productivity. This is now compounded by a more hawkish path for interest rates, which could further act as a drag on global growth.

In the background, geopolitical risks continue to loom large, acting as a headwind to growth and investment through heightened uncertainty. Coupled with this, we are beginning to see a renewed escalation in trade frictions in the U.S. as we enter a quarter likely to be dominated by political risk. Real yields in the U.S. have repriced materially higher and are likely to remain elevated in this environment. Underlying earnings growth remains robust, particularly in the U.S. but also across other regions.

Prospective changes to asset allocation:

• Equities
We continue to like equities overall but favor a selective approach. Investors’ increasingly sharp perception between winners and losers in the AI space supports greater selectivity across regions and sectors. We retain a positive view on U.S. equities as well as select EM equities and European markets, while we maintain an underweight view on Australian and Chinese equities. Earnings growth remains strong overall beyond the popular technology sector stocks. We believe a diversified exposure that extends beyond the dominant AI theme, including cheaper U.S. sectors, mid- and small-capitalization stocks, European markets, and select EM equities, may offer attractive valuations and positive earnings momentum. That said, cautious central banks, lingering geopolitical risks, and potential deleveraging of crowded AI-related positions could trigger short-term market corrections.

• Fixed income
We remain neutral on U.S. duration and interest rate positioning, with a preference for the intermediate part of the curve while preferring an underweight to the long end of the curve. Yields in developed ex-U.S. markets remain elevated and volatile, and we believe they offer appealing longer-term entry levels given attractive all-in yields.

• Commodities and foreign exchange
We continue to favor commodities, albeit with a broader focus. We shifted our view on directional energy exposures toward relative-value opportunities amid continued noise and geopolitical uncertainty. We have moved to a neutral stance on industrial metals and retain a mild overweight view on agricultural commodities, where we see fundamentals deteriorating. From a currency perspective, we remain positive on select countries benefiting from favorable growth trajectories, orthodox monetary policies, and relatively high starting interest rates.

Multi-asset allocation views:

These multi-asset views reflect tilts to our strategic asset allocation models and are based on a 6- to 12-month time horizon, driven by both quantitative and fundamental research.
+ (Overweight on overall asset class)    
= (Neutral on overall asset class)  
– (Underweight on overall asset class)

Forward investment implications:

The Atlanta Fed’s gross domestic product (GDP) tracker (formally called GDPNow) is a real-time estimate of U.S. economic growth produced by the Federal Reserve Bank of Atlanta. It is a model-based, continuously updated forecast of real U.S. GDP growth for the current quarter, expressed at an annualized rate.

Carry refers to the net return earned from holding an asset over time, independent of price movements, after accounting for the costs of financing or maintaining that position.

Curve steepener refers to a change in the yield curve where the difference between long-term interest rates and short-term interest rates increases, making the yield curve steeper.

Duration is a measurement of the sensitivity of a bond’s price to changes in Treasury yields. A fund’s duration is the weighted average of duration of the bonds in the portfolio. Duration should be interpreted as the approximate change in a bond’s (or fund’s) price for a 100-basis-point change in Treasury yields. Duration is based on historical performance and does not represent future results.

Hedging a bond means using a separate investment to offset the potential risks of the bond.

The Nikkei Stock Average (Nikkei 225) is composed of 225 stocks selected from domestic common stocks in the first section of the Tokyo Stock Exchange and is a leading benchmark for Japanese equities.

The Personal Consumption Expenditures (PCE) Price Index reflects changes in the prices of goods and services purchased by consumers in the U.S. It is part of the Personal Income and Outlays Report issued by the Bureau of Economic Analysis of the U.S. Department of Commerce. You cannot invest directly in an index.

The Purchasing Manager’s Index (PMI) is an economic indicator that measures the health of a country’s manufacturing or services sector.

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Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.

This material is provided for informational purposes only and is intended for retail public distribution in the United States. Use outside the United States is for professional/qualified investors only.

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