In today’s Goldilocks economy, carry is a key driver in equities and fixed income

2026 started on a very positive note, with market momentum strong despite rising US geopolitical risks. However, Q4 earnings results have recently changed sentiment: the growth of AI is generating volatility in some segments and growth in others. Despite these crosscurrents, our fundamental outlook across equities, bonds and select commodities remains positive. In a Goldilocks economy, AI is evidently redistributing opportunities. 

Read also: Balanced growth, balanced returns in 2026

Continued growth, subdued inflation support equities and bonds

Continued improvement in economic growth is evident in the US, where 130,000 US jobs were created in January and capex from AI hyperscalers alone is expected to reach 2.3% of total US GDP¹. In Europe, economic data increasingly shows an uptrend, while Japan's reflation journey continues. Figure 1 illustrates the revision to real economic growth among regional blocs since the beginning of 2025, showcasing the improvements.

This increased growth is not adding to inflation, creating a Goldilocks environment that benefits bonds and equities. Yet, we acknowledge the presence of risks, including capex, Japanese Prime Minister Sanae Takaichi’s fiscal plans and nominated Federal Reserve chairman Kevin Warsh's ability to continue cutting US interest rates. Consequently, our optimism relies on a combination of stronger investment and demand, with a controlled interest rate trajectory. Any policy mis-steps could lead to sharp market repricing.

FIG 1. Regional real GDP growth revisions since 2025²

Carry to lead the way in fixed income and equities

Return drivers that have lagged in recent years are now in focus. In fixed income markets, harvesting carry has become more attractive for one key reason: investors do not anticipate any significant contraction in spreads or long-term yields. Spreads are already tight for good reason, although fiscal and inflation uncertainty weigh on duration prospects. Notably, in the current environment, we see spread widening as an opportunity to add credit exposure rather than reduce it.

Similarly, within equities, value stocks are outperforming growth companies globally. Figure 2 shows the difference in earnings yields between world value and world growth indices, which has now reached an elevated level. While the 3% premium offered by value may be lower than its peak, it is still significant. Across both bonds and equities, carry is a factor that should not be ignored in 2026, in our view.

FIG 2. The difference in earnings yield between value and growth stocks³

Read also: Fixed income in 2026: expect a soft landing, but be ready for alternative scenarios

Rotation, not recession (redux)

Once more, US policy, global fiscal plans and the evolution of AI are reshaping markets – and preserving the uptrend. Significant rotations include European equities outperforming the US for significant periods since early 2025⁴, software stocks declining while hardware holds firm, and the Japanese yen showing surprising resistance to the government's fiscal plan. Figure 3 illustrates the damage inflicted by AI to its own ecosystem, with the software sector lagging hardware. 

Is this a paradigm change? It's difficult to say definitively, but in our view the investment landscape remains attractive even as it is reshaped by shifting market sectors.

FIG 3. Rebased performance of the MSCI software and hardware sectors⁵

Positioning across asset classes

Our long-only investment teams maintain risk-on approaches combined with regional tilts, in the belief that this rally could have further upside, with market declines providing opportunities to increase positions.

Multi asset. The All Roads team is constructive, with market exposure residing at around 150%, with its allocation remaining well balanced between protection at 60% and cyclical assets at 40% (rebased to 100%).

Fixed income. Our Global Fixed Income team remains neutral, with an underweight to sovereigns, favouring Treasury Inflation-Protected Securities (TIPS) over nominal US Treasuries, and an overweight to emerging market (EM) hard-currency debt. Within credit, exposures to investment grade and high yield (HY) are neutral overall but feature selective tilts. Our Asia Fixed Income team maintains a preference for defensive HY and remains overweight India, commodities, insurance and EM HY sovereigns.

Convertible bonds. The team is positive on the US, China and Japan, and neutral on Europe. It remains constructive on equities globally, focusing on key themes such as AI, where positioning has shifted to Asia, semiconductor equipment and infrastructure software; US onshoring; and European exporters, industrials and electrification firms. 

Equities. Our Global Equities team is overweight Europe and Asia at the expense of the US. In terms of sectors, it remains overweight consumer staples, consumer discretionary and technology, media and telecoms. The Sustainable Equities team retains a strong exposure to the AI infrastructure buildout theme, rising demand for power in Europe, and healthcare, where US political pressure has diminished. Our Swiss Equities team is overweight the healthcare, information technology and industrial sectors, and underweight communication services, consumer discretionary, consumer staples, real estate and utilities. The Asia Equities team remains overweight China and Hong Kong, and underweight India, favouring IT and consumer discretionary stocks.