Equity Outlook 4Q 2026: Rising Rates Shift the Balance of Risks

Global Growth Is Staying Firm; AI Capex Is Spilling Into the Broader Economy

The global economy remains strong. We view global trade growth as a higher-frequency read on economic activity, and it is strengthening in both price and volume terms (top chart). Manufacturing backlogs, a gauge of future business growth, have grown at the fastest rate since 2022 and tend to lead global capex by about three months (bottom chart).

While we view AI as the main driver of private investment, we see the buildout spreading into the broader economy. AI-related technology investment is growing about 30% a year vs. 1% for the rest of business fixed investment, yet we believe AI capex carries an unusually large multiplier: UBS estimates that each percentage point of growth contribution from AI has generated about 1.5 percentage points of investment growth the following quarter, almost half of it in sectors outside technology and software.

Global Trade Is Rising, Reflected in Both Prices and Volumes

Order Backlogs Point to Firmer Capex Ahead

Source: Neuberger, UBS, J.P. Morgan, and FactSet. Data as of September 30, 2026. UBS Global Research, “Global Macro Chart of the Day (#160): Estimating spillover effects from AI-related capex,” September 25, 2026. AI-related categories are electrical transmission equipment, special industry machinery, computers, communications equipment and data centres (about 18% of non-residential fixed investment). Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

U.S. Economic Growth Is Running at Trend

U.S. domestic demand, gauged by growth in real final sales to domestic purchasers, is running near 2.3%, reflecting an economy expanding at trend capacity rather than one losing steam (top chart). Household consumption remains firm: Retail sales ex-autos are growing at 4% on a 3-month annualized basis, supported by strong nominal payroll growth.

Meanwhile capital investment is broadening beyond AI: U.S. capital goods orders less inventories are the highest since 2021 (bottom chart), and the Business Roundtable CEO and NAM surveys climbed in 3Q on stronger capex and hiring plans. The Atlanta Fed GDPNowCast forecasts 3Q real GDP growth near 3.6%.

The U.S. Economy Is Running at Trend Capacity

The U.S. Capital Investment Cycle Is Broadening Beyond AI

Source: Neuberger and FactSet. Data as of September 30, 2026. Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

The U.S. Labor Market Is Holding Firm

The U.S. labor market, in our view, continues to hold firm. The Kansas City Fed’s Labor Market Conditions Index, a composite of more than two dozen labor indicators, has moved higher over the past few months.

Cyclical employment, the segment of the labor market most sensitive to economic growth, is expanding after two years of contraction (top chart); meanwhile, supply-demand dynamics appear in balance, enough to support income growth without triggering worrisome wage inflation (bottom chart).

Cyclical Employment—the Segment Most Sensitive to Economic Growth—Continues to Expand

Demand for Labor Is Outstripping Supply, With Few Signs of Worrisome Growth in Wage Inflation

Source: Neuberger and FactSet. Data as of September 30, 2026. Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

Corporations Received a Stealth Stimulus Near 1% of GDP

Corporate cash taxes are running about $200 billion below their 2021 - 2023 trend as the OBBBA takes effect (top chart), with the cash tax rate down 5.4 points to 7.9% of profits. Tariff refunds have boosted corporate coffers by a further $155 billion (bottom chart).

Together, both measures amount to nearly 1% of GDP, a stealth stimulus that we believe may support broader corporate investment, the capex cycle and asset markets.

Lower Tax Rates Are Replenishing Corporate Cash Coffers…

…Alongside $155 Billion in Tariff Refunds

Source: Neuberger, Piper Sandler and FactSet. Data as of October 7, 2026. Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

Rate Hikes Are Precautionary, Not a New Tightening Regime

Fearing inflationary spillovers from the U.S./Iran conflict, global central banks have begun to raise rates (top left chart). We believe these actions are more precautionary than the start of a new tightening regime. In the U.S., expectations for the fed funds rate have swung by 150bps, from cuts to hikes, in the last seven months (top right chart).

The indicators we think Fed Chairman Warsh watches across the labor market and corporate fundamentals mostly point to above-trend economic growth. However, on inflation, we believe he remains concerned about the increasing share of PCE component prices that have been rising more than 3% (bottom chart). We think some of those reflect supply-driven shortages, which can prove temporary, rather than overheating broader demand.

Our Neuberger Fixed Income team expects a slow, coordinated hiking cycle and that markets are likely overstating both the number of hikes and the terminal fed funds rate. If inflation data proves stubborn, we would expect Warsh to grow more hawkish and we would likely revisit our equity positioning.

Prolonged U.S./Iran Conflict Has Central Banks Tightening Policy

The Market Has Repriced from Cuts to Hikes

Inflation Watch: Prices are Rising for a Growing Number of Goods

Source: Neuberger and FactSet. Data as of October 8, 2026. Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

The U.S. Economy Can Handle Higher Rates

Economic growth in the U.S. is still outpacing the cost of money, giving the economy room to absorb higher interest rates without derailing the expansion, in our view. We see the rise in yields since late 2025 as normalization toward stronger nominal growth, with real rates—not inflation expectations—driving the increase. As we highlighted last quarter, the 10-year Treasury yield tends to gravitate around long-term nominal growth, the sum of real potential growth and trend inflation (top chart).

Nominal GDP growth still exceeds 10-year yields by roughly 100 basis points in the U.S.; Germany and Japan are also growing faster than bond yields, unlike in the U.K., Italy and France (bottom chart). In the U.S., we believe private-sector balance sheets provide more cushion, with both corporate and household leverage ratios near multi-decade lows.

Meanwhile, other variables may push global rates higher, including rising oil prices, broad-based monetary tightening and reduced central bank bond buying. Potential fiscal unsustainability, hyperscaler debt issuance and a wave of mega-IPOs have increased competition for capital, increasing the risk premium.

The 10-year Treasury Yield Has Historically Been Anchored Around the Economy's Long-Term Growth Trend

Not All Economies Have Been Growing Faster Than Their Cost of Money

Source: Neuberger and FactSet. Data as of October 8, 2026. Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

Rising U.S. Stocks and Treasury Yields Can Coexist—To a Point

If the economy can absorb higher interest rates, the next question is whether the equity market can. History says yes, up to a point.

Over the past 70 years, the correlation between the S&P 500 Index and the nominal 10-year Treasury yield has been positive until yields hit roughly 5%; above that level, equity returns begin to suffer (top chart). The intuition: Bond yields rise reflecting improved growth prospects until inflation begins to weigh on demand, hurting equities.

Different regimes can yield different results: In periods when earnings growth runs significantly above trend (like now), the yield-inflection point moves higher than 5% (bottom chart).

Rising Equity Returns and Bond Yields Can Coexist Until Yields Hit an Inflection Point...

Average Correlation of S&P 500 Returns vs. 10-Year Treasury Yield
at Different Ranges of 10-yr Treasury Yield (1954 – Current)

In Hotter Earnings-Growth Regimes (Like the One We’re in Now), the Yield-Inflection Point Can Be Higher

Source: Neuberger, J.P. Morgan, and FactSet. Data as of September 30, 2026. Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

Global Earnings Are the Cornerstone of Our Constructive View

Analyst earnings revisions have been running against their usual annual pattern: While optimism often prevails in the early months, analysts tend to trim their estimates as the year unfolds. Instead, we find that analysts have been raising their 2026 and 2027 estimates (top chart). Granted, the Technology sector is doing most of the work, helped by accelerating AI demand, with higher commodity prices lifting Energy sector estimates as well. However, we also see positive revisions in the Industrials and Financials sectors.

While the AI buildout and rising commodity prices have been the biggest contributors to earnings growth, we see signs that growth is broadening as the long-awaited global manufacturing rebound continues. Analysts currently expect EPS growth for the MSCI ACWI Equal Weighted Index to rise more than 18% year over year (bottom chart).

In a Typical Year, Analysts Cut Their Earnings Estimates Over Time, But in 2026 They Have Been Revising Them Higher

MSCI ACWI EPS Estimates (USD)

The Average Stock’s Earnings Growth Is Running Above Trend

Source: Neuberger and FactSet. Data as of September 30, 2026. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

Hyperscalers’ Capex Strain Peaks in 2027

Will AI infrastructure spending pay off for hyperscaler shareholders? The hurdle is high: Goldman Sachs estimates hyperscalers need roughly $300 billion a year of AI revenue to break even on their capex spending. As capex continues to grow, near-term cash flow will suffer, with free cash flow expected to turn negative in 2027 and both debt and equity issuance likely having to fill the gap.

We believe strain should peak next year. Capex is expected to reach 115% of cloud revenue in 2027 before falling to 73% by 2030 (top chart). Meanwhile, hyperscalers now trade near their smallest premium to the S&P 500 Index since 2020, suggesting to us that much of the risk may already be priced in (bottom chart).

Hyperscalers’ Capex Intensity Is Expected to Peak in 2027, Then Fall

Hyperscalers Now Trade Near Their Smallest Premium to the S&P 500 Index Since 2020

Source: Neuberger, Goldman Sachs, J.P. Morgan, BNP Paribas, Ramp AI Index, and FactSet. Data as of October 8, 2026.
Hyperscalers are Alphabet, Amazon, Microsoft, Oracle, Meta and SpaceX. Ratio is consensus capex divided by cloud segment revenue; Meta has no cloud segment, so its total revenue is used. SpaceX included from 2026. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

Fading Global Liquidity Could Be a Headwind to the Global Economy

Liquidity is the cash and near-cash that underpins global credit creation, and it tends to price risk before earnings do: As liquidity expands, multiples can stretch; as it fades, valuations can compress.

China’s credit impulse, a key indicator that tends to lead global manufacturing activity by a year, has rolled over (top chart) and could be pointing to a broader economic slowdown, which in turn could weigh on equity markets, in our view.

We also believe heightened bond volatility could hamper liquidity and pressure equities. As we noted in a 2025 report, Treasuries often serve as collateral in global financing arrangements, meaning that higher bond volatility (gauged by the MOVE Index) can reduce the amount of credit offered against the same collateral. Our analysis shows that there’s a strong inverse correlation between bond volatility and equity returns (bottom chart). If this trend persists, we fear it could portend downward pressure on equities.

China’s Declining Credit Impulse May Point to Slowing Global Manufacturing Activity

Bond Volatility Has Set the Tone for Equities Since 2022

Source: Neuberger and FactSet. Data as of October 8, 2026. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

U.S. Midterms: A Blue Sweep Could Shift Equity Leadership

U.S. midterm election years have historically seen lower equity returns and elevated volatility. Since 1950, the S&P 500 Index has returned an average 4.6% during midterm years versus 11.2% for the rest, with almost all gains coming after the results are in (top chart). So far in 2026, the S&P 500 Index is up 14%, outrunning its historical average in midterm years, but trading in a narrow band since May. We see the soft-yet-volatile autumn tape as a seasonal bellwether rather than a signal to sharply cut risk.

Prediction markets currently peg a Democratic sweep as the most likely outcome, with more than a 60% probability (bottom chart). In that scenario, we expect market volatility would spike initially as investors digest the possibility of stiffer regulation, particularly on the AI and financial industries. We also believe equity leadership could rotate toward defensive sectors, including Staples and Health Care, and away from Technology, Semiconductors, Industrials and Financials.

Pre-election Market Weakness Tends to Be the Norm, Not a Signal…

Average S&P 500 Index Return (1950 – 2025)

…Yet Investors Still Face an Unknown Policy Landscape

Polymarket 2026 Midterm Election Odds

Source: Neuberger, MacroBond, J.P. Morgan, and FactSet. Data as of October 8, 2026. Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.

Rising Debt Service May Keep Pressure on Yields

U.S. net interest payments are the highest in the developed world at about 4% of GDP and are set to keep rising through 2027 as more debt rolls into short-term bills at higher rates (top chart). Net interest payments now absorb close to 20% of federal revenue (bottom left chart) and are expected to account for most of the deficit through 2030 (bottom right chart).

We believe fiscal credibility and flexibility may become a bigger concern for equity investors: Heavier Treasury supply and doubts about fiscal sustainability may keep term premiums aloft and yields elevated, potentially capping equity multiples.

U.S. Debt Service Levels Are the Highest in the Developed World

Government Debt Net Interest Payments as % of GDP

Interest Payments Now Absorb Nearly 20% of U.S. Federal Revenue…

…and Now Account for Most of the U.S. Federal Deficit

U.S. Fiscal Balance as % of GDP

Source: Neuberger and FactSet. Data as of September 30, 2026. Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Portfolio Managers’ views may differ from those of other Portfolio Managers as well as the views of Neuberger. See Disclosures at the end of this presentation.