Solving for 2026: Policy Crosscurrents, AI, and Where to Position Now

Solving for 2026: Policy Crosscurrents, AI, and Where to Position Now

Anu Rajakumar: Policy noise, AI momentum, and a shifting rate backdrop. What will the biggest impact be on investors portfolio in 2026? Most importantly, how do investors put it to work? This is Disruptive Forces, and I'm your host, Anu Rajakumar. Today, we're discussing Neuberger's annual market outlook solving for 2026. We'll be drilling into key investment themes, including how policy cross currents and AI could shape markets, and what that means for implementation across stocks, bonds, and private markets. Joining me for this conversation are my colleagues, Shannon Saccocia and Maya Bhandari. Shannon is our CIO for Wealth, and Maya is our CIO for Multi-Asset EMEA. Welcome to you both.

Shannon Saccocia: Thanks for having us.

Maya Bhandari: Delighted to be here.

Anu Rajakumar: Now, Solving set out five key themes for investors, as we head into the new year. I want to start off our conversation by asking you, Maya, about the monetary and fiscal policy outlook as we head into 2026. Which really sets a stage for what happens across capital markets. In the piece you've written about policy cross-currents. I wanted you to just start by unpacking what all of that really means for investors.

Maya Bhandari: Thanks. That's a good place to start, I think, because this theme really is about policy cross-currents both within and, importantly, between economies. Now, within economies, and most notably, within the United States, we think the Federal Reserve do a mandate, which is to maintain maximum employment and price stability. Will be faced with, I think, what's best described as a pretty unusual combination going into the new year. This unusual combination consists of, on the one hand, soggy job creation. There is a higher unemployment rate, which, of course, we've seen coming through in recent, albeit lagged data, due to the shutdown.

On the other hand, and pulling in the opposite direction, we also have productivity gains, which have, and we expect, will continue to drive good overall economic growth, and importantly, without much price inflation. Now, it's not very often that we see the two sides of the feds mandate pulling so strongly in opposing directions. Now, unsurprisingly, rapid AI investment, that you mentioned at the top, and indeed adoption contribute to both dynamics. We'll say a bit more on this over the course of the next 15 to 20 minutes. Most conspicuously, we think, for the Fed, the pace and extent of easing will reflect these two competing macro outcomes, if you will.

On balance, we expect the Fed to cut to a neutral rate of around 3.5%. A little bit above where markets currently anticipate the Fed cutting to, which is around 3%. Candidly, we don't think the economy will need deeper cuts in interest rates, especially with fiscal policy easing, too. There's also that second element I mentioned, Anu, of cross-currents between economies. As those following Europe, or the UK, for example, will know well, productivity in these areas is moving in the opposite direction to the US, and forecasts are being revised lower, not higher.

Fiscal stances are also different, and I'd say, more generally, heading into the new year, the broader macro setup looks more challenging in Europe, and indeed, the UK. We expect deeper policy rate cuts in these regions, versus the current market consensus. Wrapping this together, then, the policy setup looks supportive for economies like the US, and indeed parts of Asia. Europe, by comparison, including the UK, looks more challenging. Carrying this through to asset markets, this theme of policy cross-currents, if you will, will be bullish for equities in areas like the US, where productivity gains have been most pronounced, and with a broad policy easing bias.

The general thrust to policies are also helpful for China and, indeed, Japan. By contrast, these factors seem somewhat more cautious for European risk assets, and on balance, insofar as lower policy rates quite dramatically shift the profile for holders of fixed income assets. Where owning these positions move from being pretty strongly negative carry to positive carry. We think this setup is also supportive for longer end rates, too. I think Shannon will pick up on this a little bit later on.

Anu Rajakumar: Great. Thank you very much. That's a good overview, I think, as we move from 2025, a little bit of a chaotic year, into a year of transition. That's a helpful backdrop. Maybe just sticking with you, Maya, for a moment. The other big trend that's identified in the Solving for 2026 piece, and you mentioned it now, is the rapid AI growth and adoption. That's both at a macro and a micro level. Maybe let's start with the macro. Broadly speaking, share your thoughts on how you think AI might shape the macro path in 2026.

Maya Bhandari: Thanks, Anu. We touched on this a little bit already with AI arguably contributing to both higher productivity and weaker labor markets. On balance, contributions to higher productivity have been and will remain, in our view, greater. Academic studies and indeed company reports coalesce around a 30% median boost to total factor productivity in the United States from generative AI adoption, going up to as much as twice that from some studies over the 5 to 10-year period post-adoption.

Now, although it's been an AI-focused year already, I think it's fair to say that there is still wide dispersion at both the macro and the micro level. Unpacking the macro piece a bit, regionally, as most of our listeners will know, the US and indeed China are moving quickest on AI development, with the US hyperscalers furthest ahead and furthest ahead by some distance. Indeed, in billions of dollars, I think the US is more than 11 times ahead of China. AI CapEx alone has driven over half US economic growth over the last 12 months or so, and key reasons for the strength of AI in the US and also China is, I think, supportive regulatory postures and an intense scope of deployments.

AI, in turn, as we just discussed, has had and will continue to have, in our view, pretty profound implications for inflation policy and indeed asset prices in 2026 and frankly beyond. Now, there does need to be a broadening out and an increase of CapEx, for example, in the US, to drive further growth. Insofar as this continues to occur, we expect that the benefits will materialize faster and more emphatically, driving increasingly disparate macro and indeed policy outcomes.

I should say up front that, although we aren't concerned with bubble talk, given the cash-rich balance sheets of the big CapEx spenders, AI is a multi-year theme, and the timing and adoption across countries and sectors is uneven and is expected to remain uneven. Now, landing on the macro investment implications, AI broadly is one factor supporting US stocks. Access to AI as a theme at a lower cost is a key support for areas like Chinese equities, too, for example. We do see an opportunity for investing in AI beyond the US and China, for example, in emerging market equities more broadly, as well as opportunities in adjacent and critical industries that are non-tech in nature.

Ultimately, it's not necessarily the companies that spend on infra, but those that can utilize these models that certainly may be counted amongst the winners. Needless to say, we expect more upside in businesses with clear monetization and operating leverage. That's perhaps a perfect segue to Shannon, who I think has been reflecting on this.

Anu Rajakumar: Yes. Actually, maybe, Shannon, if we can continue on this theme of the transformational power of AI, when it comes to public equities and AI, how do you think about balancing those, the AI enablers and the adopters, and what does that all mean for clients and their portfolios?

Shannon Saccocia: I think the enablers have clearly been the proverbial easy button, as we discussed in our Solving conversation. I think the way that we see that being reflected in the markets is that whenever we see any weakness or concerns or consternation around valuations, the potential for slowing earnings growth, we talked a lot about that delta between tech earnings and the rest of the market compressing. We haven't experienced that. That actually hasn't manifested in the second half of this year.

If you look out over the next couple of years, in 2026, but also into 2027 and 2028, it's going to be those AI adopters where the real work is going to be done in terms of the transformational aspect of AI. It's what we need to be focusing on in terms of how we're building those robust portfolios, because the gains have been pretty significant already. The enablers have generated those gains. We've seen that reflected in client portfolios. The way that we're looking at this is to really prioritize quality, which has been challenging this year.

That has not been rewarded by the market. It has been very much focused on speculation. You see that particularly in the small-cap space, where lower-quality companies with low or no earnings have been the leaders and quality companies have been the laggards. Why we're focused on quality is not just because we feel like that's a longer-term trend. We look at the ability for companies that have stronger balance sheets that are creating cash flows. They're the ones who are actually going to be able to invest in the CapEx that's going to be necessary in this next phase to be able to first generate those productivity enhancements that Maya had mentioned earlier.

Perhaps more importantly, AI is not a force to just lower costs. It's not a force to just create a lower hiring environment for these companies over the next couple of years. What it should be being utilized for is to supplement, complement, and improve their growth profile. I think that when you're building a portfolio, you're going to want to own selectively the enablers. I think they're going to continue to benefit from this trend. There's a very long tail here in terms of the economics that can be generated.

You're going to want to be able to blend some of that cyclical exposure with the quality defensive stocks that, again, have the capital allocation, have the management teams to be able to make the right decisions in terms of incorporating AI. That's really where the rubber is going to meet the road in terms of the transmission and the long-term tail of AI. It's going to require selectivity and significant research and diligence to know what companies are in a position to be able to make the right decisions and be able to optimize that implementation of AI to produce stronger earnings and cash flow, and growth over the course of the next number of years.

Anu Rajakumar: I appreciate that you're sticking with that quality discipline, even though that's been so challenging to stick with this year. That '26 and beyond, that's the way that we want to be positioned. I also like your comment. I think you said AI needs to supplement, complement, and improve. Is that right?

Shannon Saccocia: Yes.

Anu Rajakumar: I love that. That's great.

Shannon Saccocia: Absolutely.

Anu Rajakumar: Excellent. Maybe, Maya, if you can comment on this as well. I appreciate that you are recording this across the pond in the UK. Are there any regional implications to consider when we're looking at various equity markets? You mentioned earlier on that there are going to be different fiscal policy changings, and then a more challenging situation, UK and Europe. How are you thinking about equity markets outside of the US?

Maya Bhandari: I'll be brief here and simply note that there are parts of the world like the US, China, Japan, and indeed Asian emerging markets like Korea, for example, that are clear beneficiaries, as we've seen candidly in the recent earnings numbers from each of these areas. AI is a strong growth support, to pick up on the point Shannon just made for these regions, among other aspects, of course, like ongoing structural reforms in areas like Japan, for instance, where valuations are also looking pretty attractive.

Europe, by contrast, doesn't have these AI names. Indeed, that's one of the key reasons why we have seen under-the-hood baskets like growth versus value perform so differently from a regional perspective. In Europe, for example, value has consistently outperformed growth, ditto for the small-cap versus large-cap comparison. With weak earnings, a challenging macro backdrop, I'd say we're less constructive in areas in Europe.

Anu Rajakumar: Great. We talked a lot about equities, so maybe now we'll turn to fixed income. Based on, again, some of the comments made in Solving for 2026, Shannon, how are you thinking about positioning across duration and credit?

Shannon Saccocia: Fixed income is definitely exciting as we go into 2026. From a tried and true equity person in my past life--

Anu Rajakumar: It speaks volume, right?

Shannon Saccocia: I think it does. It really comes back to some of those cross-currents that Maya was mentioning earlier. If you think about one-way trades, there have been many periods over the last 10 years where we've been faced with those one-way trades. They don't offer the same type of pricing differentials that fixed-income managers can take advantage of.

The other thing that we were really challenged with earlier this year was concerns about the long end of the curve and the volatility that we continue to see. Investors were hesitant, they were reticent to go out on the curve and take any additional duration. They also weren't necessarily being rewarded for it, with short-end rates being so high. If we look at the global diaspora of rates, outside of the Bank of Japan, we're anticipating they are either going to be stable or moving lower. There is this tendency to want to take what you have on the short end and start to lengthen that duration, particularly if you are less concerned, especially here in the US, around fiscal sustainability.

Some of the debt concerns and considerations that we have in an environment where we anticipate that there is going to be stronger growth in 2026, that pressure will be somewhat alleviated. It's also been alleviated by meaningful tariff revenue that may or may not look a little bit different next year, depending on what happens with the Supreme Court. Again, the expectation is that tariffs will be higher in '26 than they were in '23 and '24. I think that's an important component of this.

Increasing exposure to longer duration, but also where there's opportunity in terms of credit, we want to make sure that, again, we're taking risks where we're being rewarded, and so where that compensation matches the risk, looking at structures, looking at seniority in the capital stack, making sure that we understand the risk that we're taking on, having the ability to differentiate among those issuers in terms of the quality. What is the impact, potentially, of some of this additional growth globally? Where are there going to be tailwinds? Where are there going to be some headwinds maybe at the corporate level for certain issuers?

Really, emphasizing selection in this environment, but again, if you look at the landscape, the ability to take some of these positions and look at it from a currency perspective, look at it from a central bank perspective, and then look at differentials in growth, that to me is why there's so much opportunity in multi-sector fixed income coming into 2026. I think that the ability for investors to get comfortable with taking those defined credit and duration risks, marrying those together, that can really produce the alpha that I think we're looking to garner in this coming environment.

Anu Rajakumar: Absolutely. Thank you. That's a very clear value proposition. Maybe just sticking with you, in the piece we also speak about private markets. I want to transition to the illiquidity premium. Shannon, where are you leaning in for private markets? Where are you finding opportunities for that marginal dollar if people can be a liquidity provider?

Shannon Saccocia: I think that that's the foundation of what's attractive about private markets today against the backdrop of three very strong years in the public equity markets. The question we often get is, "Why bother?" Frankly, if you look at the slower pace of distributions over the last couple of years, if you look at the quality of the private company universe, there's only so many companies that are going public in this environment, and that has continued to slow and is likely not to accelerate significantly in '26 or '27. The quality of companies being able to diversify exposure, you have to extend your frontier to include private companies.

In this environment where those companies are staying private for longer, being a liquidity provider, particularly in areas like secondaries and co-investments, allows investors to take advantage of, again, a high-quality universe of companies that is not staying private because they don't have a competitive advantage or they're not growing their revenues. It's really because in this environment, it makes sense for them to remain private and continue to incubate, grow and strengthen their businesses.

Being able to provide that operating value as a liquidity provider, not just as a financial partner, but as an operational partner, as a partner who can enhance that business and then move towards a greater multiple when that transaction does occur, I think that's really important right now. You're seeing it especially in AI-adjacent industries. They know they need to continue to grow, they need to reinvest in their businesses, and so while there's this consternation and concern about, "I have a lot of AI exposure to my public equity portfolio, do I want to have that same level of exposure in my private equity and private credit portfolio?"

To us, that's actually a very diverse universe. There's significant diversification in the private markets. While that's an opportunity, it's just the tip of the iceberg in terms of the opportunities to be able to have diversified sector and industry exposure on the private market side. I would say we're not as concerned about that, and instead are looking at this as multi-year process whereby a lot of these private companies, yes, they will have transactions, they may become public, they may be acquired through an M&A transaction, but that's going to take a little bit of time given the backlog of how many companies are in that universe today.

Anu Rajakumar: I think just to add to that point, it's the recognition of private markets as a source for the funding of the AI boom is really important and can be a critical way that, again, liquidity providers can add value here. Maybe beginning to wrap up now, Maya, I'd like to just circle back to you. I think so far, you've articulated in this conversation and in your Solving for 2026 piece, a moderate growth environment for 2026. You've laid out some areas based on our asset class views of where we feel a little bit more compelled than others. What are the key risks to that view? What are a few things that you're keeping your eye on that could potentially shift some of the views that you've articulated today?

Maya Bhandari: Thanks. I'd perhaps flag two, maybe three risks first. We had a whiff of this between the middle of October and late November, is a hawkish policy misstep akin to say what we saw in the fourth quarter of 2018. We could see, for a time, asset markets moving in a very different direction to what we've just been discussing that we'd expect will occur. We could see, for example, higher bond yields, wider spreads, weaker risk assets if indeed we did land for a time in that setup.

I'd extend this away from just the US that, for example, as we discussed in Europe, we are more cautious at Neuberger on the growth outlook, and we do expect more central bank easing to be delivered as a result. Should this not transpire, we could certainly see worse macro and indeed market outcomes here too. That would be the first risk, I think, particularly important given those first two macro themes. The second perhaps, would be a DeepSeek-type moment for large tech US companies.

Although, as both Shannon and I have discussed, we're not concerned about the broader CapEx picture, which candidly is near the lows as a percentage of free cash flow, for example, even though it's quite high relative to GDP. There are legitimate questions on whether the return on this marginal CapEx is adequate, especially when we talk about areas like data centers, where there is a risk that a challenge from a competitor makes this CapEx more redundant faster than would otherwise be the case. Again, not our base case, but certainly a risk we're thinking about.

The third I throw in there is geopolitics, whether it's tariffs, the Middle East, Russia and Ukraine, there's always scope for geopolitics to upset the apple cart in unpredictable ways.

Anu Rajakumar: Shannon, anything to add to that?

Shannon Saccocia: On the AI topic, I think one of the risks, and we see this in the run-up in utility stocks, for instance, is this need for power and this concern about power scarcity. We talk a lot about, is there oversupply? The challenge is, if this supply is appropriate, there is going to need to be a significant increase in power availability, and there are some natural gating mechanisms around that. As everyone knows, these facilities don't come up overnight. With the pace of innovation that we're seeing from the chip makers, for instance, this could be something that potentially thwarts or at least slows some of the progress that we've been anticipating.

The other concern that I have is Maya spoke about a potential fiscal or monetary policy mistake. There could be, too, a fiscal policy mistake in the US, as affordability concerns certainly played out in terms of recent elections. Looking at the potential for not only easing tariffs on consumer goods, which I think would be a positive, but also the potential for stimulus cheques and a more perhaps bold approach to thwarting some of those affordability concerns could create a bit of a negative impact in terms of the progress that we've made on inflation.

Then the last challenge is credit. We hear a lot about private credit in particular. We have been in a fairly benign environment for credit, and short-term dislocations in terms of credit and credit spreads have been, again, short-term in nature and quickly alleviated. The underpinning of the concerns about private credit, just the growth in that space and the potential for there to be something less idiosyncratic and more systematic in terms of weakness. While we don't see that in 2026, I do think it's something that could create short-term overhangs or a pall over credit in the coming year.

Anu Rajakumar: Excellent. Just to summarize, we have key risk, hawkish policy misstep, a DeepSeek moment that maybe makes people question CapEx spending, geopolitics, the power scarcity to support AI growth, and then just inflation and credit surprises. Thank you very much for sharing those comments and for this conversation today. Can't let you go without a quick bonus question, as I know you've both been on the show before, so this is not a surprise to you. My question, Maya, I'll have you answer this one first, is the weather is getting cooler here in New York, and I'm sure in London as well. I'd like to know what does a perfect winter day look like for each of you. Maya, if I can have you start first.

Maya Bhandari: Sure. We live in North London by Hampstead Heath, and I think one of my favorite things to do, as it gets cold, is to wrap up warm and go for a long walk in this beautiful park with family or friends, but always with my Labrador, Truffle, and with a hot chocolate as my reward when I'm done. There's this terrific café in the neighborhood that does old-school slightly spiced hot chocolates, and there's nothing quite like it. I'd say that's my perfect winter day.

Anu Rajakumar: For our listeners, what's the name of the shop that has it, in case anyone's in the neighbourhood?

Maya Bhandari: It's an Ottolenghi café that's terrific.

Anu Rajakumar: Thank you.

Maya Bhandari: Spiced hot chocolate.

Anu Rajakumar: Spiced hot chocolate. Never had that. Thank you very much. What about you, Shannon? What does a perfect winter day look like?

Shannon Saccocia: A perfect winter day, it has to be snow, and we have less and less of that every year in Boston. Going up north and driving a few hours, and then being able to be on the slopes with my kids for a few hours, and then letting them stay out on the slopes while I'll go back inside and have a hot chocolate and read a book is my perfect winter day.

Anu Rajakumar: Lovely. I hope there's a warm fireplace also involved in the picture.

Shannon Saccocia: Absolutely. Always is.

Anu Rajakumar: Great. Thank you very much for those thoughts and for your observations from Solving for 2026, and sharing some of those key themes that we know investors will be really paying attention as we shift into next year. If you'd like to learn more about Neuberger's outlook for 2026, you can find it on our website at www.nb.com/solving, where we've posted our full report and links to a webinar with our investment leaders. Once again, Shannon, Maya, thank you for being here.

Maya Bhandari: Thank you for having us.

Shannon Saccocia: It's been a pleasure.

Anu Rajakumar: To our listeners, if you've enjoyed what you've heard on Disruptive Forces today, you can subscribe to the show from wherever you listen to your podcasts, or you can visit our website at www.nb.com/disruptiveforces, where you'll find previous episodes as well as more information about our firm and offerings.

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