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Macro + public markets

Economic fundamentals remain healthy, but both the economy and markets maintain an uneasy reliance on artificial intelligence (AI). Combined with persistent policy risks and lofty asset prices, there is a compelling case for diversifying outside public markets.

• The U.S. economy is on a straightaway full of potholes. AI capital spending and wealthy consumers have kept growth resilient despite a softening labor market. The path toward a healthy economy in 2026 is clear—the Fed is easing, fiscal policy will become more accommodative, and corporate earnings are strong—but risks from policy, housing, and labor remain.
• Fixed income faces risks on multiple fronts. The Fed has lowered short-term interest rates substantially over the past 15 months. Strong growth and the potential for delayed-onset tariff-driven inflation introduce risks to further easing, while a new Fed chair will inject uncertainty into the central bank’s communications and independence. Expect rate volatility and curve steepening.
• Three years into the AI trade, stocks head into a new phase. The S&P 500 has gained more than 80% since ChatGPT’s launch three years ago, with AI-related names driving nearly three-quarters of the return. While the earnings backdrop remains quite healthy overall, surging capex is set to pressure the cash flow generation of many tech giants. This is likely to make for a choppier, less unified AI trade.

Private markets

Private markets activity is springing back to life as healthy fundamentals and easing monetary policy promote dealmaking. Segment selection will be paramount as the next private markets cycle gets underway.

• Private equity deal volume is rising, but focused in large take-privates. U.S. PE deal volume in Q3 was the highest for a quarter since 2021, a strong signal of a recovery M&A market. However, we estimate around 70% of investment dollars were deployed into public assets, where deals command hefty take-private premiums. We favor the lower and core middle market, where private equity remains private and multiples are more attractive.
• Private credit spreads are tight, but originations are ramping. Private credit lending activity is improving alongside PE deal activity. While spreads have tightened, the asset class continues to offer a 200bps premium over traded credit markets. Despite idiosyncratic issues, credit health is broadly healthy, as demonstrated by lower leverage and improving debt service coverage.
• Commercial real estate performance reflects “back to basics” market. The commercial real estate has exited its correction phase and appears to be entering something more normal. Transactions volumes are gradually rising, pricing has stabilized, and loan origination is back, led by private lenders. Equity performance has reentered positive territory, with income driving the entirety of the gains.

Portfolio construction

Concentration and correlations have created fresh challenges for portfolios. Private markets offer opportunities to gain exposure to different risk premia, diversify mounting exposure to technology firms in public markets, and drive a handsome level of income

• Elevated stock/bond correlation diverts diversification search elsewhere. With inflation still elevated, policy uncertain, and risks to the fiscal situation and central bank independence, bonds are no longer a reliable offset for equities. Private markets have historically offered an opportunity to source diversification across a broad set of asset classes.
• Private markets have historically outperformed public markets over the medium-to-long-term. Public equities have rallied on the AI trade in recent years and outperformed private equity, which is not uncommon over shorter timeframes. However, over the nearly 30 years of data to which we have access, private equity has beaten the S&P 500 in 93% of five-year periods. Investors should consider private equity as a long-term portfolio enhancer.
• Time to think about an AI allocation strategy. The artificial intelligence theme has become so significant, investors should consider ways to ensure diversification between AI builders and AI users. Public markets are concentrated in the former, while private markets offer an opportunity to allocate to the latter at scale.