We believe the US economy is running hot. While financial markets are largely embracing it, signs of overheating are emerging, too. There are four main drivers for US economic activity:
AI, geopolitical tensions, and central bank policy have continued to cause episodes of volatility. However, strong corporate earnings, particularly from companies across the AI ecosystem, support equity markets. Meanwhile, expectations for inflation, growth, and interest rate hikes have impacted fixed income performance, pushing longer-term yields higher.
AI has the potential to affect entire asset classes in the months and years ahead. One example is investment grade credit, where issuance from hyperscalers (firms like Alphabet, Amazon, Meta, Microsoft, and Oracle) may lead to considerable changes in the sector, duration, and rating composition of major benchmark indices.
We think the capex boom could lead to inflation in the short term, but in the longer term, AI could be deflationary, depending on its impact on productivity. Increasing consumption of technology-related items and the ongoing chip and memory shortage also have the potential to increase inflationary pressures in the shorter term.
The strong economic and AI-related themes outlined above support the investment case for equities. At the same time, the rise in longer-term yields has made fixed income slightly more attractive. On the equity side, strong earnings growth has brought valuations down to more reasonable levels compared with where they began the year.
Globally, the US stock market still stands out as a leader. Europe as a whole seems reasonably priced, too, but there is some dispersion between the eurozone and other countries, such as the UK. The Pacific region is more expensive, but we think it’s supported by AI and the ongoing inflation/commodity cycle. Emerging markets equities seem to be valued on the cheaper side, and they’ve seen remarkable structural shifts in recent years, making them worth a closer look as well.
Despite bond markets’ underwhelming performance in 2026, there’s a lot going on the space. The US 30-year government bond yield is set to rise for the sixth consecutive year – something we haven’t witnessed since the 1970s – as inflation is on track to exceed the US Federal Reserve’s target. What’s different this time is the considerable amount of issuance from the hyperscalers, which may be causing some crowding out of the public sector. Overall, because term structure is still comparably flat and we view inflation risk as skewed to the upside, we don’t believe it makes sense to take on much duration risk currently.
As the economy gets closer to overheating, we view real assets as a potential diversifier. Many infrastructure and real estate companies have contracts built to raise prices with inflation. They could also benefit from the ongoing AI build-out, because demand is high for energy, data centers, and neoclouds.
Our analysis currently favors equities over fixed income given robust earnings growth and more reasonable valuations, and we see a compelling case for investing in real assets.
Ultimately, diversification across asset classes and regions, combined with tactical shifts based on evolving fundamentals, will be essential for navigating the months ahead. Discipline and preparation may matter more than prediction in today's volatile markets.
For the complete breakdown, download the full Q4 2026 Multi-Asset Quarterly Outlook.
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