SpringTalk Quick Takes: 2026 Outlook

Cameron Pickoski: Hello, and welcome to a special episode of SpringTalk. We asked our portfolio managers for a quick pulse check of the markets as we head into 2026. Starting with our fixed income portfolio managers, we've got a great overview about the challenges and opportunities to be found in bond markets this year. Whether it's navigating rate volatility or uncovering value from muni bonds to European high yield, let’s see what they had to say.

Nick Venditti: As we move into 2026 and start thinking about the municipal bond market, it's worth looking back at 2025 and some of the volatility we experienced. Obviously, 2025 was a rough, rough year for munis. Almost all of that volatility was concentrated in three very difficult days in April. I've been joking with clients all year that I felt like I lived three entire investment careers in a span of 72 hours. The good news, though, for muni investors is that on a go-forward basis, the future looks incredibly bright. It looks incredibly bright because munis are yielding a lot, and if you are in the upper echelons of the tax bracket, that tax-exempt yield is incredibly powerful and will likely be a gigantic driver of total returns in 2026. Maybe more importantly than that, though, is that there are some strong relative reasons to be considering the municipal bond market right now. Number one, we live in an uncertain world. That uncertainty is almost certainly going to create disruptions in the credit landscape. And as you know and as I know, munis tend to be better credits. The revenue streams tend to be stronger, and that will act as insulation to some degree for investors’ portfolios. In addition to that, muni to Treasury ratios, muni to AA industrial ratios, muni to whatever ratios you care about look a lot more attractive, which should give investors a lot of comfort using today or the rest of this year as a potential entry point. 2026 is almost certainly going to be an exciting year for all asset classes. I think munis in particular are going to do quite well.

Janet Rilling: As we look back on 2025, it was a year that's been characterized by widespread market uncertainty but also surprisingly good returns in the bond market. Bond market returns were driven not only by attractive levels of income but also spread tightening and yields that declined. As we turn the calendar to 2026, we find ourselves still in a pretty uncertain environment. Not only are we just starting to get data after coming through a data vacuum, it's at a time that the Fed (Federal Reserve) has highlighted elevated risks to both sides of its dual mandate: stable prices and full employment. As we invest our portfolios, we'll be watching four primary themes in 2026. The first is stimulus. We're seeing stimulus coming from three primary sources: monetary, regulatory, and fiscal. Second, we will be monitoring the high levels of deficits that are occurring globally that need to be funded in the fixed income markets. Third, we'll be watching corporate debt supply that's needed to supply capital expenditure projects in places like data infrastructure and AI (artificial intelligence) projects. And, lastly, we'll be monitoring the growing risk in the private credit markets.

Sarah Harrison: When I left to go on maternity leave in February, European high yield spreads were in the high 200s. When I got back in September, European high yield spreads were—you guessed it—in the high 200s. That being said, as we all know, this year has been anything but uneventful. Looking forward to 2026, three key themes will shape how we think about our European high yield exposure. First, our aversion to subordinated risk remains. An era of less stringent underwriting standards is finally being put to the test, now that rates have not been zero for several years. In our view, this will be felt more acutely in private markets than in public markets but will still have an impact on public markets, particularly in overlevered, multi-level capital structures. Second, opacity is an indicator for the potential of future financial distress. There is a lot of talk about cockroaches. ESG (environmental, social, and governance) may not be in vogue, but this is all about the G—governance. Financial engineering and creative accounting are not new concepts, and we value transparency and simplicity, particularly in this compressed market. Finally, we look to generate alpha by identifying companies that will move from the core to the tail and vice versa. It's not about fallen angels and rising stars for 2026. It's about the core and the tail—the core being your BBs and high single-Bs with spreads of sub-300 basis points and the tail being your stressed CCC credit with spreads of 700 basis points plus. The core looks very expensive while the tail looks very cheap. Performance in European high yield over the course of 2026 may be augmented by correctly identifying which of the core will move into the tail and which of the tail will move back into the core.

Maulik Bhansali: 2025 has thrown a lot at us. From tariffs to a major fiscal bill. From a boom in AI spending to the longest government shutdown in U.S. history, the markets and the economy have weathered a lot, and they've come through pretty resilient. As we head into 2026, we think there are two themes that are going to be important for high-quality fixed income markets. The first is the tension between sticky inflation and a weaker labor market and how that's going to resolve. Is the Fed going to be comfortable continuing to cut rates? And if they don't, is the consumer going to hold up? We do think ultimately the labor market will win out on that one, but that's not a foregone conclusion, and there's going to be a lot of interest rate volatility as a result. Second is how much capacity do credit markets have to keep funding this explosion in AI capex (capital expenditure)? And, not only that, but how much capacity do they have to fund the increase we expect in M&A (merger and acquisition) activity going forward? Right now, credit markets are open and receptive, but there's a limit to that, and we think that's going to create some volatility going forward. The only thing we know for sure heading into 2026 is that volatility is going to remain a constant. This is a time to look for opportunities not just in credit but across mortgages and securitized products as well. It's a time to stay liquid and up in quality. You want to be nimble and be able to play offense when opportunities arise.

Cameron: Now, let's shift gears to our equity PMs as they share their thoughts on key sectors and trends. From AI bubbles to capex cycles, here’s what they're watching in 2026.

Mike Smith: 2025 has been a wild ride. From the panic lows in April around “Liberation Day” to the euphoric highs in October. We've seen a lot. We've learned a lot. The market made steady gains in unsteady ways. Entering 2026, the market is top-heavy again. The 10 largest companies in the Russell 1000 Growth Index are 60% of the index. I get asked every day, “Is AI a bubble?” I don't think so. I think all the capex will lead to adoption. I think the adoption will lead to revenue, and I think the revenue will create an opportunity for a broadening out that could be historic in nature. What should investors do? Diversify. Look for the opportunities in small- and mid-cap growth. Look for the next big winners. There's a lot of opportunity ahead, and I'm excited to see what 2026 will bring.

Derrick Irwin: After outperforming the S&P 500 and the broader developed market indices through most of 2025, investors are wondering: Can emerging markets continue to rally into 2026? We think the answer is “yes” for three reasons. First, many emerging market economies are poised to continue to cut rates as inflation falls, and this should spur economic growth. Second, we think markets will normalize around tariff noise that created volatility in 2025. Third, we think that earnings will accelerate and broaden across countries and across sectors. So, as we move into 2026, we are looking for artificial intelligence and some of the rallies in North Asia that drove the markets in 2025 to continue, but also it will be joined from countries like Indonesia, South Africa, and potentially Latin America. From a sector standpoint, we're also looking at consumer names. We’re looking at select financials as well as materials. So, we think it's shaping up to be a very positive year for 2026 in emerging markets.

John Campbell: 2025, what a wild ride in the stock market. You know all the themes that transpired between tariffs, the Fed, and also the dominance of AI. But what I want to talk to you about is what happened with a number of factors. It was a historic year for the beta factor, with a dramatic drawdown in February and March, followed by a historic rally as investors tried to put on more risk. Momentum continued a multiyear run of very strong performance. However, quality was left behind this year as investors really focused on the higher-risk names to try to take advantage of the rally. So, 2026, what do we expect? This is a year that we are calling for peak passive. It's been called for many times, but there is a historic concentration in the market with the top 10% of the S&P representing almost 40% of the market cap. And the valuation disparities have become more extreme. Next year, we think there are several catalysts that could actually result in a broadening of the market. Number one, we're going to see some continuation of the rate-cutting cycle. We also have a number of fiscal stimulus measures from lower taxes to capex incentives. So, this could be the year when the earnings growth gap starts to close between the small and mid caps and international stocks with the mega-cap companies in the U.S. However, we are at extreme valuations, so investors really do need to pay attention to the risks that they're taking. So, a comprehensive risk management framework will be essential in 2026.

Bryant VanCronkhite: What a year 2025 was, and people keep asking, are the economy and the markets dislocated? Markets have gone higher, but the economy also has a lot of great drivers. When I think about 2026, I'm excited about the Fed cutting rates and providing monetary stimulus into the economy. I’m excited about the tax optimization around the One Big Beautiful Bill that's still rolling through in 2026. And I'm excited about the capex cycle that's not going to slow down for quite a while. So, the economy looks really good heading into 2026. That does not mean the market's going to go in a straight line. Look for pullbacks as markets digest the transition we're going through. Digest the cycle. That's not a reason to be scared. It's a reason to be careful. And as you're carefully thinking about where to invest, think about moving up the quality scale. Think about who's going to win the next phase of this market, who's going to benefit from the tax opportunities, and who's going to benefit from the next cycle of capex spending. If you think and invest wisely around that, the market's pullback shouldn't be a concern to you. It should be an opportunity for you. Have fun in 2026!

Cameron: We just covered a lot of ground, but whether you tuned in for insights on munis or emerging markets or stayed for AI opportunities or how to navigate shifting interest rates, we hope this helps you kick off 2026 with confidence. Thanks for joining us, and see you next time on SpringTalk.