A global macro outlook for 2026: patience

Quick read:

• The last three quarters of 2025 were characterized by a relatively boring, low-volatility rally. We view the current market equilibrium as somewhat fragile. Flows and pricing insights point to signs of market complacency, and we enter 2026 with limited directional equity exposures, short positions in long-dated government bonds, and short the US dollar.
• Diverging earnings, balance sheets, and fiscal policies have increased cross-country dispersion into year-end, creating a rich opportunity set for the high-breadth macro investment approaches of the Tactical Opportunities Fund.

Taylor Swift’s release of Life of a Showgirl might rank as one of the more interesting events of the last 150 days of market trading. After a tumultuous first 63 trading days that included DeepSeek, German Fiscal Emergence, and “Liberation Day”, markets then went on to spend three quarters climbing higher in a relatively boring, low-volatility rally. Global risk assets currently embrace a Goldilocks mindset toward One Big Beautiful Bill Act (OBBBA) tax cuts, European rearmament, US dollar weakness, Federal Reserve dovishness, and artificial intelligence (AI) capex. But below the surface, macro risk continues to be a meaningful driver of regional stock and bond returns that offers a rich opportunity set for those able to capitalize on economic divergences and price dislocations.¹

As we look forward to the upcoming year, we believe that unbalanced positioning and high prices create a fragile market equilibrium. The broad risk rally of the last two years has crowded-in many investors and our flow and pricing insights show signs of complacency. The recent AI-enthralled market narrative rhymes with the US exceptionalism euphoria that characterized markets in late 2024; correspondingly, we hold minimal directional positions and maintain a relatively contrarian portfolio focused on the more attractive risk-return opportunities available in relative-value, cross-country positions.

Three market insights that inform our current tactical positioning include:

Balance sheet confusion

In the month of December 2025, the Federal Reserve (Fed) managed to both end its second Quantitative Tightening program (QT2) and also quickly initiate a new set of asset purchases. QT2 accomplished little in terms of tightening overall financial conditions in the US and the Fed’s ownership share of outstanding government duration actually increased throughout 2025.² The chart below shows this counterintuitive loosening of US financial conditions juxtaposed against the material balance sheet tightening delivered by European central banks. Our interpretation is that the European Central Bank and Bank of England have successfully unwound the delivered quantitative loosening from their pandemic-related asset purchases whereas the Fed and Bank of Japan have de facto delayed a balance sheet normalization.

European central bank balance sheets tightened throughout 2025 whereas the Fed added to its duration holdings share and loosened net financial conditions

The rising politicization of central bank balance sheets combined with a diffuse range of stated goals and objectives makes us think that asset holdings, sales, and potential purchases are likely to remain important for markets in 2026.³ The Q3 collapse in US commercial bank reserves that triggered the end of QT2 has set of complex drivers that are likely to remain persistent headaches for the Fed. A more accommodative balance sheet policy combined with more hawkish actions and speeches by non-US central bankers have motivated a shift in our bond shorts into European, Australian, and Canadian sovereign markets. We position directionally short duration with sticky, target inflation and hawkish monetary policy outside the US. US Treasury Secretary Scott Bessent describing the current “balance sheet function, which I can tell you no one understands,” makes us optimistic that dispersion in competing monetary transmission channels can remain a source of durable alpha.

Exponential margin growth?

Equity markets in 2025 benefitted from margin expansion and profitability growth aided by looser fiscal policy across major developed markets. OBBBA raised margins in the US, Europe was buoyed by the hopes of a German fiscal regime change, and Prime Minister Takaichi’s LDP victory in Japan priced the possibility of Abenomics 2.0. However, these improvements in margins and profits have been unevenly distributed across firms. The plot below compares results for S&P 500 companies vs. a broader economy-wide set of companies, represented by the National Income and Product Accounts (NIPA). We note the degree to which the larger, listed, S&P 500 companies have been disproportionate beneficiaries.⁴

S&P 500 profit growth accelerated in 2025 and margin growth for large, listed US firms has diverged from economy-wide profit margins

Equity market forecasters and valuations have extrapolated some of 2025’s margin boosts into forward-looking estimates of S&P 500 profits, but the more muted trajectory of economy-wide metrics gives us pause. Equity indices are historically concentrated and our positioning signals indicate that market sentiment has become relatively one-sided in terms of its view on the cost-benefit of artificial intelligence deployment (AI) to future equity returns. The finance literature is replete with historical episodes of capex overinvestment, and we enter 2026 neutral directional stocks and with reduced exposure to US equities in the cross-section.⁵

Country selection is back!

Our investment process is built on identifying dislocations between macro fundamentals and market prices. A prerequisite for our ability to deliver uncorrelated alpha is heterogeneous macro fundamentals (like the aforementioned divergences in central bank policies, fiscal spending, and corporate earnings) that translate into asset price dispersion across countries. Today, that environment is clearly in place. As the charts below show, country-level equity returns and policy rates have broken out of the more synchronized, rate-suppressed environment that defined the 2010s and now look more like the early 2000s. In short: the backdrop for country selection has returned, and that creates a rich opportunity set for a high-breadth macro investment approach.

Country-level return dispersion across equities and cash policy rates has normalized

So what does it all mean for portfolios?

We enter 2026 with the Tactical Opportunities Fund positioned to capitalize on a high breadth set of relative value opportunities across countries. In government bond markets, the portfolio is long US Treasuries and Korean government bonds versus UK Gilts, Australian, and Canadian government bonds. Across equity markets, we favor under-owned countries like France and the UK against shorts in more crowded markets like Germany and high-flying emerging markets like Brazil and India.

From the perspective of advisors constructing diversified portfolios for their clients, the Tactical Opportunities Fund has served as a way to actively navigate and capture opportunities beyond the US – particularly as the average client portfolio remains tilted towards increasingly concentrated domestic equities. Against a backdrop of elevated uncertainty and unreliable stock-bond correlations, we also continue to see advisors seek out new sources of return and diversification in client portfolios, and the fund remains well positioned to help deliver those outcomes in 2026 and beyond.

Good luck and Happy New Year!