2026 Outlook: Fixed Income and Equity Markets

George Bory: As we look ahead to 2026, fixed income investors are facing a complex landscape. To cut through the noise, we believe investors should focus on earning “real yields” to drive resilient fixed income portfolio returns. Despite political uncertainty, global economies continue to show some signs of strength. But with momentum slowing down, subpar growth is expected next year in many regions around the world as economies adjust to a new global trading regime. Central banks have a big balancing act to perform. The need for accommodation to buffer slower growth while preserving their inflation-fighting credentials is a fine line to walk. We believe interest rates will continue to come down next year, but slowly, as inflation will likely be sticky for the next three to six months. So, what's the good news? We expect bonds to continue to offer good value for investors. Nominal yields are trending lower but remain strongly positive after adjusting for inflation. Led by the U.S. and a few other heavily indebted developed market countries, bond yields remain well above current inflation rates and forward-looking expectations. So, with real yields between 100 and 300 basis points (100 basis points equal 1.00%), we expect yields to be the primary driver of bond market returns for next year. Within bond markets, we expect yield curves to steepen, with front-end rates declining and long-end yields staying elevated due to inflation concerns and a global debt overhang. This should create opportunities in the short-to-intermediate part of the curve for bond investors around the world. So, where are the specific opportunities? We believe high-quality investment-grade corporates have sound fundamentals, emerging market debt provides good cyclical exposure, and U.S. municipal yields—both taxable and tax-exempt—offer attractive relative value for a wide range of bond investors. Overall, in 2026, we believe bond investors should look for solid, inflation-beating returns by focusing on resilient portfolio strategies like extending into short-to-intermediate-maturity bonds, adding global diversification, and making smart security selection decisions.

Ann Miletti: After a year of market surprises, where do we look for growth now? Although a few dominant players have been driving recent gains in equity markets, we believe the next wave of opportunity is broadening. For 2026, we're looking at three key areas. First, sector opportunities might be expanding thanks to what we're calling “AI 2.0.” So far, technology infrastructure providers have been the main beneficiaries of artificial intelligence (AI) adoption. In 2026, we anticipate that moving beyond the tech sector. Broader adoption of AI across industries like health care, manufacturing, and financial services could drive a meaningful new cycle of corporate investment and earnings growth. Second, it's time to take a fresh look at U.S. small- and mid-cap companies. With high valuations for some large-cap stocks being called into question, SMID caps may offer compelling value. Interest rates are expected to fall, and M&A (merger and acquisition) activity is on the rise, putting quality companies with strong earnings and healthy balance sheets potentially back in the spotlight. Finally, we turn to emerging markets. Much of the global hardware build-out for AI began in these countries. Yet, this area of the market remains significantly under-owned and, we believe, undervalued by global investors. With improving fundamentals, even a small shift in overall asset allocation could create a powerful momentum investors wouldn't want to miss. Overall, for 2026, our outlook points to a year of expansion. Opportunities are emerging across various sectors, company sizes, and regions, and we believe that, for investors focused on quality, the stage is set to capture significant market growth.