After a year of broad-based gains, many investors feel both upbeat and uncertain looking toward 2026.
Equities extended their bull run in 2025, but valuations remain historically stretched amid a sharp dispersion of returns across sectors. Cash offered both safety and income for a while, but it no longer seems attractive as the Federal Reserve cuts interest rates. And the U.S. economy appears resilient, yet a K-shaped split shows prosperity for wealthier households diverging from mounting strain for others.
Equities: Expensive on the surface, value beneath
U.S. equities approach 2026 with valuations still near historical highs after a multi-year, technology-driven rally. While AI investment continues to underpin economic growth and market optimism, the concentration of returns in a handful of mega-cap tech stocks raises questions about sustainability.
The tech sector, once celebrated for capital efficiency, has entered a more capital-intensive phase. AI-related spending, previously funded largely by free cash flow, is increasingly fueled by debt issuance. Another notable spending trend: The biggest hyperscalers and chipmakers are funneling billions of their investment dollars into one another through circular deals that amplify sector-specific risks.
Macro conditions could provide a tailwind for value in the near term. An outlook for trend-like U.S. economic growth should help broaden earnings growth across sectors in 2026. In our view, the best scenario for value is if the Fed continues cutting rates into reaccelerating and broadening growth.
We also see opportunities to diversify globally. Central banks in emerging markets (EM), having established stronger monetary policy frameworks, now have more flexibility to ease policy and stimulate domestic demand, potentially supporting EM equities. Specifically, we see attractive opportunities in Korea and Taiwan, which offer exposure to the tech sector at cheaper valuations, and China.
All that glitters: Gold, crypto, and the search for real assets
Gold’s extraordinary rally – recently topping $4,300/oz – has captured widespread attention. Prices have soared to all-time highs even in a generally risk-on market environment. Investor demand for inflation protection, geopolitical hedging, and diversification away from the U.S. dollar has reinforced gold’s role as a strategic asset. Central banks now hold more gold than U.S. Treasuries (see Figure 3), reflecting a shift in reserve management.
The geopolitical backdrop remains a key driver. The 2022 seizure of Russian reserves helped catalyze gold accumulation as a politically neutral store of value. This trend, coupled with persistent trade frictions and rising sovereign debt, suggests structural support for gold demand. A potential gold price increase of more than 10% over the next year is feasible, in our view.
However, gold’s recent rally has been fueled by momentum and liquidity as much as by fundamentals, and short-term retracements are possible. While falling interest rates reduce the opportunity cost of holding gold, its valuation appears elevated relative to real yields, warranting careful sizing within portfolios.
Broad commodities can also provide a potential alternative way to play the AI investment theme, as infrastructure needs drive demand for inputs such as copper, lithium, and energy as well as strategic assets like rare earths.
Crypto assets, led by bitcoin, continue to evolve as digital analogs to gold, appealing to younger investors and those concerned about currency debasement. The recent decline in bitcoin reminds investors that it is a volatile instrument and perhaps not a true store of value. The rise of stablecoins and tokenized assets points to a transformative year ahead for digital finance, though volatility, tax treatment, and regulatory uncertainty remain significant considerations.
Credit markets: Risks and rewards along the credit continuum
Credit spreads remain tight. PIMCO has cautioned throughout 2025 about risks in certain lower-rated credit sectors, particularly within private market areas that have experienced sharp growth. We are now seeing some of those challenges surface, including recent bankruptcies and instances of fraud, which may be symptomatic of broader late-cycle laxity in credit underwriting.
Challenges are showing up in other ways. On average, shares of publicly traded business development companies (BDCs), investment vehicles for corporate direct lending, are trading at roughly a 10% discount to their net asset values. This suggests that the market is cautious about a combination of declining dividends (due to falling short interest rates) and rising credit problems. Indeed, against a strong equity market backdrop, we have also seen share price declines this year for major alternatives firms.
While debt service may become easier with lower interest rates, we have observed more privately financed companies seeking amendments to their loans or paying their debt with additional debt – known as payment-in-kind (PIK) financing – both of which can be signs of debt-servicing challenges (see Figure 4). In fact, using PIK and other data, Lincoln International calculates a “shadow default rate” of 6% as of August 2025, up from 2% in 2021.
Conclusion
Across asset classes, a common thread is the need for active decision-making in 2026. Dispersion in equity returns, shifting interest rate dynamics, and the evolving interplay of public and private credit markets underscore the importance of independent investment research and risk management. Rather than chasing crowded trades or relying on static allocations, investors should consider strategies that balance liquidity, return potential, and diversification, while remaining flexible enough to seize new opportunities as they emerge.
Ultimately, 2026 may reward investors who embrace today’s macroeconomic environment: leaning into high quality fixed income as rates decline, selectively adding real assets for resilience amid geopolitical and inflation risks, and identifying undervalued equity sectors amid a concentrated market. In a world where uncertainty persists alongside optimism, thoughtful portfolio construction will be key.
