2026 Multi-Asset Strategies Outlook

Understanding Today’s Complex Market Environment

Fueled by shifts in U.S. domestic and foreign policy, geopolitics, massive capital spending on artificial intelligence (AI), and expectations for AI-driven disruption, uncertainty seems to be growing. This unease affects financial markets and the real economy.

We aren’t suggesting that the sky is falling, but this uncertainty and its sources are affecting U.S. and non-U.S. equities, bonds and commodities. Assumptions about how changes in one asset class affect another are being challenged, with these relationships shifting in complex, sometimes unexpected ways.

We believe the following two topics will influence and reflect this uncertainty and investors’ decisions in the coming months:

1. What a New Fed Chair Could Mean for Monetary Policy

In roughly two months, Kevin Warsh will (barring unforeseen developments) take over as Fed chair from Jerome Powell. Many market watchers were relieved when President Donald Trump chose Warsh over other candidates who seemed likely to push aggressively to lower the fed funds rate. Such cutting could risk reigniting inflation. History supports this view, as high inflation has historically been highly correlated with a lack of central bank independence.

Yet, despite hawkish comments Warsh made when serving on the Fed board during and after the 2008 financial crisis, he wouldn’t have been nominated to be the new chair if he weren’t in favor of cutting rates. So, we find ourselves wondering if the incoming Fed chair is a dove in hawk's clothing.

It’s a particularly tricky time for the Fed. Not just because of the president’s unorthodox attempts to interfere with the central bank’s independence, but because the Fed’s dual mandate to maintain both full employment and price stability is truly being challenged.

Some “hard” data points have been improving recently, and soft data such as consumer sentiment — which has been dismal — has ticked up a bit. On the other hand, we see a lot of “yes, buts…” in the latest economic news.

While the pace of job creation in January was much better than expected, it was almost entirely due to hiring in the health care sector. Unemployment is holding steady, but revised numbers show job creation for all of 2025 was negligible.

Inflation in January was lower than expected, but while prices for eggs, used cars and gasoline dropped, the cost of air travel, coffee, washing machines and new cars rose by more than 5%.

Consequently, Warsh might not find much support among the other voting members of the FOMC for more than one or two rate cuts this year. If he pushes too hard, he will likely lose credibility. The Fed’s ability to achieve its inflation target partly relies on convincing people it can (known as “anchored expectations”).

We really don’t know how losing over 1 million people through forced and voluntary deportations will affect the U.S. labor market or consumer spending (which drives the U.S. economy). Add to the mix the fact that many expect tariffs to push prices higher in the coming months. According to the Adobe Digital Price Index, online prices showed the largest monthly increase in 12 years in January, with notably higher prices for electronics, computers, appliances, furniture and bedding.

Taken together, it’s possible that the fed funds rate is currently “neutral.” If so, Warsh’s best move might be to take no action.

2. Shifting Dynamics in Non-U.S. Equity Markets

In 10 of the 12 years from 2012 to 2024, equity investors were better off not diversifying outside the U.S. However, in 2025, the tables turned, and in U.S. dollar terms, U.S. equities underperformed other developed markets and a mix of developed and emerging markets by a wide margin.¹

While we don’t expect this to become the new normal, there are solid reasons to believe markets outside the U.S. could perform better than they have. These include a weaker U.S. dollar, which may benefit U.S.-based investors with non-U.S. holdings.

Additionally, other countries are willing to invest more in defense and infrastructure to support their growth. We’re also seeing new trade agreements among countries besides the U.S. that will likely boost their exports.

This isn’t just about U.S. investors boosting non-U.S. allocations; investors outside the U.S. are also likely to reduce their exposure to U.S. equities. Concerns over policy instability are prompting some non-U.S. investors to seek opportunities elsewhere. Tariffs are decreasing exports to the U.S., leaving fewer dollars abroad and limiting the natural flow of these dollars into U.S. assets.

Add to this the fact that valuation multiples in the U.S. remain notably higher than in other markets. Flows into Europe, Japan, South Korea and emerging markets have picked up, which we view as a healthy rebalancing rather than a wholesale retreat from U.S. stocks.

Looking Ahead in a More Interconnected Market

Returns across asset classes reflect the actions of investors worldwide as they process information and make imperfect decisions about how to achieve the best risk-adjusted returns.

While hindsight may suggest that diversification isn’t always the best option, investors can only focus on the future. Therefore, we believe that focusing on the long term and maintaining a diversified investment approach could be the best strategy.

^{¹Dan Lefkowitz, “Why 2025 Is the Year to Invest in International Stocks,” Morningstar, August 20, 2025.}