The global economy is bending under successive shocks but has not broken. Following the turmoil triggered by US tariffs, the Middle East crisis now appears to be stabilizing. However, oil prices remain elevated, inflation in most major economies is still above target, and the macro environment remains vulnerable to fresh volatility ahead of the US midterm elections.
For investors, what matters is not just market direction but the range of potential outcomes. Divergence is intensifying across regions, asset classes, and market narratives: the US economy remains relatively resilient, while Europe and parts of Asia are more sensitive to energy supply and price shifts. Markets are sending conflicting signals: bonds point towards a more stagflationary path, while equities reflect a more optimistic growth outlook.
This divergence is playing out within asset classes, too. High inflation risks and a 'higher for longer' rate environment are focusing attention on value, income, and quality sectors. Simultaneously, the AI-driven investment boom continues to support growth and valuations in parts of the market. Rising stock-bond correlation is diminishing the effectiveness of traditional diversification, highlighting the need for a broader toolkit.
In this environment, relying on beta alone may be insufficient. Investment returns will depend on prudent choices across countries, sectors, and instruments, as well as the ability to adapt to market shifts.
The sustainability of any rally hinges on the continued normalization of energy flows through the Strait of Hormuz and the emergence of a credible political solution. Our base case remains one of economic resilience—but current market pricing reflects a reduction, not an elimination, of risk.
This Quarter's Chart
US tech investment has hit a record high. The share of US information technology investment in GDP has now surpassed the peak of the dot-com bubble, underscoring that the current AI cycle is in a phase of reinforcement, not fading. As investment broadens beyond a handful of firms, identifying winners becomes more critical and more challenging for investors.
Growth Amid Headwinds
Our proprietary Macro Breadth Growth Index, which tracks 354 global, regional, and national monthly macroeconomic data series, shows the global economy exhibiting unexpected resilience—at least for now. Despite persistent geopolitical headwinds, our global growth index rebounded in May. Sustained AI investment, accommodative financial conditions, and resilient consumer and corporate behavior are keeping the global economy on track.
Regionally, AI industry linkage is becoming a key determinant of economic performance amid energy shocks—with the US significantly outperforming Europe and Japan. Sectorally, manufacturing has been strong during the Middle East conflict, driven by AI-related investment and precautionary 'buying ahead', effectively offsetting weakness in services.
Taken together, these conflicting signals suggest a global economy under pressure, not heading for a breakdown, in the face of elevated risks.
Uneven Regional Impact
In the United States, technology and AI-related investments continue to propel growth, with the contribution of information processing equipment and software investment to the economy now exceeding the peak of the dot-com bubble in late 2000. Given resilient growth, we do not expect Fed Chair Kevin Warsh to push for immediate rate cuts. A sustained fall in energy prices may eventually reopen the window for cuts, but inflation remains high enough to warrant a cautious stance.
Europe, due to geographical proximity and high dependence on energy imports, has been particularly sensitive to recent external shocks. However, fiscal stimulus (especially in Germany) should provide a stabilizing hedge; a de-escalation in geopolitical tensions could deliver significant marginal improvement. Central banks remain highly alert to inflation risks: the ECB may hike again in September after a June move if oil prices do not normalize, while the Bank of England is likely to keep its policy rate steady at 3.75%.
In Asia, we anticipate China's growth momentum may moderate following an initial boost from front-loaded fiscal stimulus in early 2026. Elsewhere, Taiwan and South Korea are benefiting significantly from strong demand linked to the US AI investment cycle. Japan continues to gain from fiscal stimulus measures. We expect the Bank of Japan to continue its gradual policy normalization path, delivering a cumulative 50 basis points of rate hikes during 2026.
Valuation Reset Creates Selection Opportunities
Both bond and equity valuations have declined. According to our analysis, nearly all assets we monitor saw a slight downward shift in valuation scores compared to three months ago.
Concerns over the Middle East and resurgent inflation were key drivers of this repricing, leaving roughly one-third of the assets we survey in undervalued or near-fair-value territory. In an environment where selectivity is set to be a key driver, this repricing may create opportunities for investors able to capture nuanced market shifts and long-term trends like AI.
By our measures, Japanese and UK equities remain the most attractively valued stock markets, despite Japan's recent rally. Sovereign bonds in these two countries and the US also screen well on valuation.
Asset Class Views
Equities
AI infrastructure is transitioning from the training (model-building) phase to large-scale deployment. This shift is broadening demand beyond GPUs, pointing to diversified opportunities in semiconductors, data center equipment, and enabling technologies.
Value stocks show potential for allocation, offering diversification benefits within an AI-driven market and potential gains from different macro scenarios. After a long period of dominance by growth and mega-cap stocks, increased volatility and 'higher for longer' rate concerns are driving a return to fundamentals.
The importance of strategic autonomy continues to rise, a trend not confined to Europe. Increased government spending on defense, energy, and critical infrastructure is underpinning corporate activity across sectors. Beyond defense, the pursuit of autonomy is also evident in energy transition, digital and financial infrastructure, and manufacturing.
In Asia, equity markets are well-positioned to benefit from global themes, particularly infrastructure, defense, and AI-related spending. China stands out due to the rapid diffusion of AI technology across its economy, with a vast ecosystem spanning hardware, software, and infrastructure supported by a strong domestic supply chain and deep STEM talent pool.
Fixed Income
In an environment with an unusually wide distribution of potential scenarios, security selection is increasingly replacing beta as the primary driver of returns.
While core rate market yields have risen significantly, credit markets have not fully adjusted, revealing differing absorption mechanisms across asset classes. Across regions and asset classes, actively managing bond duration and focusing on high-quality credit can help dampen volatility from equities and rates.
Emerging markets offer opportunities but require a selective approach, favoring oil exporters over importers. We favor 15-year Peruvian local currency bonds and 10-year Brazilian local currency bonds.
Early signs of reflation in China could make the renminbi one of the best diversification tools. Consider establishing a structural long renminbi versus US dollar position.
In credit, we favor the financials and non-cyclical consumer sectors, focusing on investment-grade bonds, while being cautious on cyclical consumers.
Despite the noise in private credit, public credit market fundamentals remain robust with low default rates. Any spread widening could present a good buying opportunity.
Multi-Asset
Despite a fragile geopolitical backdrop, we maintain a positive view on equities—more from a systematic than a fundamental perspective—favoring the US and emerging markets over Europe and Japan.
As AI becomes an increasingly important driver of EM performance, investors should manage concentration risk within broadly diversified portfolios.
In fixed income, we believe bonds offer fundamental value, though the market cycle remains challenging. We favor EM bonds, and within credit, prefer US and European investment-grade over high-yield.
In FX, following the dollar's recent decline, we have moved back to a neutral view. Medium-term, we see scope for further dollar weakness as safe-haven demand gradually fades and valuation and rate pressure resurface.
In an environment where US central bank policy independence and the dollar's status may come back into focus, we are constructive on gold. We continue to use commodities as a key diversifier: maintaining a preference for gold while balancing with more neutral views on natural gas, crude oil, copper, and silver. Given current uncertainties, we also use option strategies to enhance diversification in most portfolios.
Private Markets: Mid-Year Outlook
Resilience and return potential: Private markets are well-positioned to deliver attractive risk-adjusted returns, supported by higher base rates, tighter bank regulation, and wider spreads, which continue to create opportunities relative to public markets.
Focus on fundamentals: Recent headlines on valuation levels, redemption pressures, and end-of-cycle risks have reinforced the importance of fundamental analysis, increased transparency, and more conservative investment structuring.
Diversification remains key: Diversifying across strategies, vintages, geographies, and primary/secondary markets helps manage uncertainty, smooth capital deployment, and avoid concentration risk.
Selection is increasingly important: As performance dispersion widens across assets and managers, the need for robust underwriting, strong covenants, and platforms with deep sourcing and workout expertise increases.
Secondaries as a core allocation: We believe secondaries transactions, both LP-led and GP-led, offer investors access to seasoned portfolios, enhanced liquidity, and potentially attractive entry points.
Infrastructure driven by long-term themes: Geopolitical volatility reinforces the investment case for energy security and independence, while digitization and decarbonization continue to drive demand growth, particularly in data centers, power grids, and storage.
Private credit remains attractive: Its growing importance in mid-market financing, alongside rising demand for infrastructure credit, European and Asian direct lending, and low-correlation impact strategies, supports continued growth.
Private equity gradual recovery: An improvement in exit activity is expected to support a market recovery, while liquidity constraints continue to drive demand for secondaries solutions.
Secondaries: From Liquidity Tool to Strategic Allocation
Historical data shows private markets have delivered attractive long-term excess returns versus public markets, driven by illiquidity premia, operational value creation, and differentiated sourcing. According to Preqin, over the ten years to Q3 2025, private equity delivered an annualized return of 13.7%, while infrastructure and private credit returned 9.5% and 8.6%, respectively.
Against this backdrop, investors are increasingly using secondaries to gain exposure to seasoned assets while enhancing portfolio flexibility and liquidity management. In 2025, secondaries transaction volume surpassed $200 billion for the first time, setting a new annual record for the second consecutive year.
GP-led transactions have emerged as a 'fourth exit route' alongside sponsor sales, strategic sales, and IPOs, with continuation funds accounting for over 10% of sponsor-backed exits for three years running. While fund acquisitions remain the largest segment, GP-led activity is expanding into credit, venture/growth, and infrastructure, reflecting its broadening application across private markets. We expect total market volume to exceed $250 billion in 2026.
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