Repricing Risk, Recalibrating Exposure
The prospect of further interest rate hikes across major economies is driving market repricing. While investors anticipate roughly 100 basis points of additional hikes, our Asset Allocation Committee sees it differently—and expects fewer.
In our recent 4Q 2026 Asset Allocation Outlook webinar, Jeff Blazek, Co-Chief Investment Officer, Multi-Asset, Maya Bhandari, Co-Chief Investment Officer, Multi-Asset, and Robert Dishner, Senior Portfolio Manager and Head of Trading London, discussed what the changing rate outlook means for equities, fixed income and alternatives.
Five Key Takeaways
- Strong earnings are making equities look cheaper. Earnings growth has brought valuation multiples down without a market sell-off, creating opportunities. But earnings durability and financing costs call for selectivity, while AI’s growing capital needs and heavier issuance argue for lower multiples, even if earnings remain strong.
- Geography matters. We favor U.S. large caps, Japan and China for their supportive fundamentals and valuations. Europe’s appeal depends on resilient earnings, a less restrictive ECB and easing political risk. A slowdown in AI spending could also disproportionately affect economies supplying the technology, extending the risk beyond U.S. markets.
- Higher rates could test growth. Rising real yields reflect economic strength, but higher borrowing costs could slow activity. We expect fewer rate hikes than markets anticipate, as easing core inflation could restrain the Fed while growth pressures could limit the ECB. Governments also face refinancing risks as low-cost debt matures.
- Credit markets are drawing sharper distinctions. Modest spread widening reflects growth concerns, with fundamentals outweighing technical factors. Balance-sheet strength and business-model resilience remain central to selection. The challenge is separating a cyclical slowdown from structural changes as AI alters industries.
- Diversification extends beyond bonds. We favor gold for its potential to hedge inflation and currency debasement, and copper for its role in the AI supply chain. In private markets, solid operating fundamentals coexist with weak distributions, creating opportunities to provide liquidity through secondaries, co-investments and capital solutions where we have clear visibility into underlying assets.
