Capital Market Outlook

Summary

• U.S. economic data indicates moderate growth with steady inflation, while interest rates remain contained within a three-year range.
• Concerns regarding destabilizing interest rate increases center on heavy government and corporate debt issuance alongside potentially softer foreign demand for Treasury securities.
• Private-sector underpinnings remain healthy, allowing for scope to gradually reduce fiscal deficits without dire effects on economic growth.
• Credit spreads have remained narrow consistent with an extended expansion and surging profits.
• The era of abundant, cheap capital is fading and giving way to an age of capital competition driven by the Five Ds: Debt, Defense, Digitalization, Demographics, and Deglobalization.
• Large structural deficits, the end of the post-Cold War peace dividend, capital-intensive AI buildouts, aging populations, and supply chain reorganization are driving competition for capital.
• This shift is expected to result in structurally higher real interest rates and favor leaders in power generation, defense, industrial automation, and other capital-intensive industries.
• Real consumer spending is on track for approximately 2.5% to 3% annualized growth in Q3 2026, following growth of +0.5% in Q1 and +3.5% in Q2.
• Business investment in equipment and intellectual property accelerated strongly in the first half of 2026, with manufacturing activity improving due to surging AI investment.
• AI investment in the U.S. is projected at around $600 billion in 2026, $850 billion in 2027, $950 billion in 2028, and over $1 trillion in 2029.
• Approximately 70% of AI spending is directed toward equipment, most of which is imported, meaning only around 50% of projected U.S. AI investment directly helps the domestic economy.
• The 2026 deficit is likely to exceed the Congressional Budget Office's February projection by about $200 billion, with publicly-held debt projected to rise from 101% of GDP in 2026 to 120% by 2036.
• U.S. debt is dollar-denominated with approximately 70% held domestically, supported by deep capital markets and the dollar's global reserve currency role.
• The 10-year term premium has returned to pre-global-financial-crisis levels following a lagged response to previous monetary tightening.
• Portfolio considerations favor diversified equity exposure extending beyond Growth to Value, Small- and Mid-caps, Non-U.S. Equities, and dividend-focused strategies.
• Investors are advised to adjust portfolios toward strategic durations given attractive elevated nominal and real yields, with value in high-quality bonds, particularly longer-dated municipal bonds.
• Broader portfolio diversification is recommended across industrial metals, energy, Real/Tangible Assets, Hedge Funds, private markets, and global strategies to capture themes from AI, reindustrialization, and infrastructure growth.
• Commodities are viewed as a potential portfolio addition to mitigate sharp rises in inflation or yields, especially if accompanied by a weaker U.S. dollar.
• A new interest rate hiking cycle where short-term rates rise consistently suggests a defensive tilt toward lower-volatility and higher-quality equity areas.
• If short-term rate rises are minimal, a mixture of Value and Growth Equities, laddered bonds, commodities, and thematic investments is considered appropriate.
• Equity market data as of August 28, 2026, shows the S&P 500 at 7,711.76 with a 13.5% year-to-date return, while the Russell 2000 posted a 20.6% year-to-date return.
• Fixed income yields as of August 28, 2026, include a 2-year yield of 4.34%, a 10-year yield of 4.72%, and a 30-year yield of 5.21%.
• The Bloomberg Commodity Index returned 30.9% year-to-date, with WTI Crude at $83.40 per barrel and Gold Spot at $4,455.11 per ounce.
• Economic forecasts project real U.S. GDP growth of 2.1% for 2026 and 2.2% for 2027, with CPI inflation expected to average 3.2% in 2026 and 2.0% in 2027.
• The Fed funds rate is forecast to end 2026 at 4.38% and remain at that level through 2027.
• The Chief Investment Office maintains a neutral to overweight view on Industrials, Consumer Discretionary, Financials, Information Technology, Energy, and Materials sectors.