As we head into 2026, lingering uncertainties stemming from macroeconomic, political, and geopolitical upheaval remain a driving force for both the global economy and financial markets. While central banks and fiscal authorities are navigating a delicate balance between policy normalization and support, US policy dynamics and sporadic geopolitical conflicts have added to a tumultuous macroeconomic landscape.

On the financial markets front, the combination of stagflationary headwinds and an elevated interest rate environment have reduced the expected returns for both stocks and bonds, in our view – and particularly in light of elevated valuations in the public markets space. Of note, mounting fears of an equity market bubble in the high-flying technology (Artificial Intelligence) sector are looming large should growth (productivity) fall short of expectations and/or should interest rates remain elevated. In bond markets, we expect long-term interest rates to revert higher on the back of inflation risks and the transition from monetary policy easing to fiscal expansion – which, when taken together, are likely to keep term premiums elevated.

As such, we expect a more challenging environment for financial markets in the coming 12-18 months, which poses some notable challenges to a traditional 60/40 portfolio of stocks and bonds, in our view. Somewhat worrisome is that government bonds may be less reliable in protecting downside in what could be a volatile financial market environment. That unfavorable outlook underscores the case for private markets strategies that are less exposed to potential macroeconomic or geopolitical shocks. Namely, non-traditional sources of income such as private credit and real assets provide a relatively stable return profile, lower volatility, and inflation protection – while private equity has demonstrated an ability to generate equity-like returns with less volatility.

In addition to these attractive investment attributes, their low correlations to traditional asset classes and their differentiated sensitivities to the economic cycle provide diversification benefits and a reduction of overall portfolio risk, underscoring the merits of allocating to non-traditional asset classes and enhancing the risk-reward proposition in the strategic asset allocation.