We’re excited to share our latest Market Outlook for 2Q 2026, titled “Back to the Future“. The title reflects a market that has largely come full circle. The Iran conflict temporarily flipped the script on oil, rates, and the dollar, but as the ceasefire took hold, the dynamics we identified heading into 2026 have reasserted themselves. The physical economy is winning, earnings remain strong, and dispersion has created a stock picker’s market unlike anything we’ve seen in years.
Key Themes We Explore
- The Rotation is Real: Capital moved out of big tech and into energy, materials, industrials, and defense well before Iran.
- AI Infrastructure Over Software: AI agents are becoming utility-like infrastructure, disrupting incumbent software. Own the builders, not the disrupted.
- Dispersion at Historic Levels: S&P 500 stock dispersion touched the 98th percentile in Q1. What you own matters more than it has in years.
- Defense as a Structural Theme: 100% of NATO now meets the 2% GDP threshold, and the 2026 NDAA approved ~$900B in spending.
- Fixed Income — Move Up in Quality: Spreads near historically tight levels leave little room for error.
- BDCs are a Structure, Not a Strategy: Redemption pressure and rising non-accruals make manager selection critical.
Our View
Our view heading into 2Q remains constructive but selective.
- We favor the physical economy (energy, materials, and industrials) as multi-year structural beneficiaries of the AI buildout, reshoring, and geopolitical rearmament.
- Within equities, we prefer AI infrastructure and semiconductors over software, and U.S. over international, though we have added selective international exposure where the earnings case is compelling.
- In fixed income, we moved up in quality and extended duration, as the next move in rates is more likely down than up.
- In private markets, manager selection has never mattered more.
