Despite adverse headlines and events, risk markets have remained constructive this year, but the rally has become narrower, stronger in some areas than others, and increasingly dependent on a limited set of market leaders. That has created meaningful opportunities, particularly where earnings strength and AI-related optimism coincide. But it also raises an important question for the second half of the year: How robust can markets be when so much depends on momentum continuing unchecked?
The challenge is that the macro backdrop is not becoming simpler. Far from it: Growth has been resilient, but inflation remains unsettled. Policy paths are diverging and bond markets are paying closer attention to fiscal conditions. Meanwhile, geopolitical risks, especially those linked to the Middle East and energy supply, have escalated. Markets may continue to move higher, but the range of possible outcomes is wide, and leadership may become less stable.
That is why we think this is a moment to return to first principles. Rather than relying on the assumptions that shaped portfolios in an earlier regime, investors may need to be more deliberate about portfolio design: clearer on where returns come from, more adaptable as conditions change, and more thoughtful about how diversification is built. In our view, that means focusing on three practical priorities: focus, flexibility, and resilience.
In a more macro-driven and structurally unsettled market, taking large active risk positions becomes more challenging. Leadership can change quickly, relationships can become less reliable, and headline-driven markets can create more whipsaw risk.
Within equities, that strengthens the case for being deliberate about the equity exposures you are taking. The goal is not to eliminate active risk, but to align it more closely with manager skill and market opportunity rather than unintended macro, factor, or benchmark-relative positions.
What this means in practice: Continue to focus on quality but do so in a disciplined way, targeting market segments with promising potential. Asian quality equities are a case in point: They can provide exposure to some of the more exciting parts of today’s equity universe without sacrificing quality (Figure 1). Being deliberate and selective may help to optimize the risk/return equation even further.
Figure 1
While outcomes still appear range-bound in the face of heightened geopolitical uncertainty, the market’s original 2026 consensus for synchronized global growth and higher earnings can no longer be the overarching baseline expectation (Figure 2).
A more volatile world is likely to reward investors who can be nimble. Within fixed income and multi-asset strategies, the case is increasingly for rotation over rigidity. The ability to move across sectors, quality buckets, duration profiles, and segments of the capital structure as conditions change, rather than relying on a large, static allocation to do the whole job, may be helpful.
Figure 2
What this means in practice: Consider rotational fixed income strategies that can shift across credit, rates, and quality as the opportunity set changes.
If diversification is becoming less predictable, resilience must be built more deliberately. That means adding exposures designed to behave differently across regimes, especially when inflation, geopolitics, or policy shocks weaken the reliability of traditional diversification (Figure 3).
This is where regime-aware diversifiers can play a clearer role. Hedge fund strategies can offer differentiated return drivers with less dependence on broad market direction, while commodities may play a more structural role when inflation, supply shocks, or geopolitical stress are shaping the backdrop.
Figure 3
What this means in practice: Consider adding diversifiers, such as liquid alternatives, to broaden return streams and strengthen portfolio durability across different shock environments.
This is not just a new set of market questions. It is a different investment landscape. Growth still matters. Inflation still matters. Geopolitics and AI still matter. But increasingly, they matter through their mutual interaction, and through the way they reshape policy, diversification, and the distribution of market outcomes.
The next phase of the cycle is unlikely to reward simple assumptions. It is more likely to reward portfolios built with focus, flexibility, and resilience.
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional or accredited investors only.
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