Q3 2026
The Short and Long
CIO Introduction
The past quarter of uneven market moves, evolving policy expectations, and persistent geopolitical risk underscores the importance of a disciplined, diversified, and dynamic approach to portfolio construction. Viewed through that lens, recent data and market behavior point to a few important conclusions:
- First, the global growth story remains resilient. Despite the volatility created by the Middle East conflict and the temporary closure of the Strait of Hormuz, global economic activity has proven remarkably resilient. While growth momentum has softened in parts of Europe and Asia, the broader expansion remains on track.
- Second, the investment cycle continues to strengthen, led by AI-related technology, supply chains, and critical infrastructure. Business spending remains robust, supporting both technology and the physical infrastructure required to power a more digital and energy-intensive economy. In The Short and Long | Q2 Macro Investment View, we highlighted investment in energy security and infrastructure. This quarter we highlight another durable theme related to building operational and business resilience: cybersecurity.
- Third, despite a sharp repricing of monetary policy, higher rates have not derailed risk assets. Markets have climbed a wall of worry, repeatedly looking through concerns around rates, geopolitics, and growth. This suggests that episodic policy-driven volatility, which will likely continue in 2H26, is not by itself a sufficient reason to alter our risk stance.
Taken together, these observations reinforce our bias to remain constructive in the second half of 2026, even if the path is unlikely to be smooth. Rate volatility is likely to remain elevated, geopolitical risks have not disappeared, and the bar for earnings delivery is high.
We would also be remiss not to highlight another key lesson from the first half of 2026: Fear of Missing Out (“FOMO”) and “fade the news” remain very much alive in markets. Over the past several years, periods of market weakness have become shorter, rebounds have become sharper, and the cost of staying on the sidelines has grown higher.
In an environment where liquidity remains abundant and recoveries are increasingly compressed, investors may need to be nimbler, stepping in before conditions fully stabilize rather than waiting for an extended dislocation to add risk.
We enter the second half of 2026 with the same discipline that guides our asset allocation process: diversified in our risk exposures, dynamic in our implementation, and anchored to fundamentals rather than headlines.
Growth remains resilient, the investment cycle is strengthening, and policy-driven volatility is likely to remain a feature of this environment. In our view, that is not a reason to retreat. It is a reason to stay constructive, stay selective, and treat dislocations as opportunities to improve portfolios.
Macro Overview and Focuses for Q3
The global economy continued to exhibit remarkable resilience to negative shocks during the second quarter.
Though forecasts for global growth are modestly lower in aggregate, surveys of purchasing managers indicate output is expanding. Global manufacturing grew faster in June than in February, before the Middle East conflict began.
The conflict’s impact on inflation also appears more muted than feared, which has important implications for monetary policy and markets. Measures of global headline inflation moved sharply higher following the oil-price surge, but we expect the pace of overall price gains to moderate as energy prices retreat.
Price growth outside of energy did not accelerate materially (Figure 1), and there is little evidence of a broadening in inflationary pressures.
In early June, interest rate futures markets anticipated roughly 0.75% of European Central Bank (ECB) rate hikes in 2026. The ECB raised its policy rates by 25 bps to 2.25% on June 11 in response to higher overall inflation but, following subsequent benign inflation data, markets only anticipate one additional quarter-point tightening in the region this year rather than two hikes.
In the U.S., expectations for Fed rate hikes have also recently declined. We believe the Fed’s next policy action is more likely to be a rate hike than a cut, but we do not think a hike is imminent. The Middle East conflict has not created significant additional inflationary risk that would require a tighter monetary policy stance.
However, the Fed had not achieved price stability before the conflict, and progress toward its inflation target stalled following 175 basis points of rate cuts in 2024 and 2025. This suggests policymakers likely need to tighten monetary policy eventually to durably return inflation to 2%.
Though worst-case inflation scenarios in the wake of higher oil prices and supply-chain disruptions did not materialize, inflation in most major economies remains above central bank targets. Policymakers underscoring their commitment to price stability reinforces our expectations for higher-for-longer interest rates.
Investment Themes and Opportunities
Cybersecurity in the AI Era: Resilience requires a new Digital Defense
Cybersecurity is a continuation of one of our high conviction themes: resilience. Cybersecurity is evolving from protecting devices and corporate networks into protecting the digital infrastructure, proprietary data, and autonomous software that drive value creation for modern business.
In our view, cybersecurity could become one of the most durable areas of enterprise technology spending over the next decade. This is due to AI simultaneously raising the value of what needs protecting and providing tools that make attacks faster, cheaper, and more sophisticated.
Every major technology cycle has created new security requirements, but AI is unique because it benefits both attackers and businesses. For businesses, proprietary data and intellectual property are becoming core moats in the age of AI.
As advanced AI models become available to everyone, the models themselves confer less of an edge. Differentiation shifts to what a company uniquely owns: its data, business context, workflows, and domain expertise.
At the same time, agentic AI increases vulnerability by giving software greater access, more permissions, and broader ability to act. Simultaneously, AI lowers costs for cyber criminals, accelerating the pace and complexity of attacks.
Natural Resources and commodities can potentially play a valuable diversification role in multi‑asset portfolios, particularly in elevated inflation environments.
We focused on Natural Resources as an investment theme in December 2025. We view the recent pullback in natural resources and commodities as a potential opportunity to add exposure, not a reason to abandon the theme.
Commodities and natural resources can play a valuable diversification role in multi-asset portfolios, particularly in elevated inflation environments, and we believe the structural drivers behind them remain intact even as near-term positioning has washed out.
The diversification case starts with correlations. The traditional 60/40 framework relies on bonds to offset equity risk, a relationship that held when inflation was contained.
Since 1970, stock‑bond correlations were near zero in strong growth environments and negative in weak growth environments when inflation was low. In contrast, during high‑inflation periods, those correlations turned decisively positive, limiting the diversification benefit of fixed income.
Other Outstanding Themes
Energy security and infrastructure
We believe the new post-COVID world order will continue to be characterized by multi-polarization and persistent supply chain vulnerabilities. Driven in part by the rapid build-out of AI datacenters, the global trend toward demand for electrification is forcing a reconsideration of energy sources. We believe nations will accelerate investment in their domestic energy production and infrastructure through robust industrial policies. The capex cycle supporting this theme continues to strengthen, with core capital goods orders up 15% in the first half of 2026. We maintain this theme.
Physical AI
Physical AI refers to technologies focused on performing tasks in the real world (e.g. robots, drones, or autonomous vehicles). We believe these technologies are nearing a commercial inflection point, shifting from experimentation into real-world deployment with commercial and industrial uses.
Natural Resources
We stay constructive on global upstream natural resources due to the cyclical outlook for commodities and their unique role as a portfolio diversifier when inflation is high.
Cybersecurity
A continuation of our focus on portfolio resilience, extending from physical and supply chain resilience to digital defense in the AI era.
Risks on our radar
Earnings and AI spending plans for the 2Q26 reporting season. Any material deterioration in fundamentals would likely see markets retrace. Earnings results and guidance will be an important focus.
Why this matters:
- Strong earnings have driven equity returns and allowed markets to look through conflict, rising oil prices, and a hawkish repricing of the policy outlook. However, the earnings bar and expectations have been set high.
- Softer AI spending plans could pressure capex beneficiaries, including semiconductor companies.
Broader inflation pressures lead to a stagflationary environment. Inflation has overshot central bank inflation targets for several years. Policymakers’ tolerance for worsening inflation risks is likely to be low. While the repricing of policy during the second quarter did not derail risk assets, an aggressive policy tightening would be more challenging for markets.
Why this matters:
- Broader inflation pressures, like those seen in 2022, would prompt tighter monetary policy from global central banks, slowing growth, and creating a stagflationary environment.
- Stagflation is a difficult environment for both equities and bonds, presenting performance and diversification challenges.
Political and fiscal policy uncertainty. Midterm elections are approaching in the U.S. The U.K. will transition to its seventh Prime Minister in the last ten years. Brazil will hold a general election in a tightly contested race.
Why this matters:
- Leadership changes in some countries and a new U.S. Congress could set the stage for different policy paths.
- In an environment of unsustainable fiscal trajectories, government policies matter for markets.
See our Short and Long quarterly report for more details