- Multi-Asset Strategist
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I’m excited to share my annual 10-step checklist, aimed at helping allocators define and document priorities for the year ahead and pave the way for greater impact. For each step of the checklist below, I offer a key takeaway to help make 2026 agendas as focused as possible.
2. Assess the near-term outlook
3. Consider your opportunity set
4. Try to understand the market consensus
5. Consider possible surprises
7. Spend some time in the alternatives world
8. Rouse your inner risk manager
1. Review the trailing year
I’ll start with a look back at market results in 2025 (through the end of November), as well as 2024 and 2023 (Figure 1). The overall complexion of these three years is quite similar: Returns were strong for equities, reasonable for credit, lower for government bonds, and a mixed bag for commodities. Looking more specifically at what worked in 2025, gold was the number two performer for the second straight year. Emerging markets were top performers, including China, as were non-US equities broadly. Of course, US equities still held their own, thanks in large part to mega-cap stocks.
What didn't work in 2025? That list includes oil, the US dollar, Japanese government bonds, and bitcoin.
Figure 1
I’d also highlight a few lessons from 2025:
- Policy paths are not linear — In January, it seemed the new US administration had a clear agenda. But the tariff path turned out to be a rocky one, catching the market off guard. Later, news improved with new fiscal stimulus and less noise around tariffs.
- Risk on and risk off are not necessarily incompatible — We saw that equities can do very well in a period when gold rallies as well.
- The US dollar is not a fortress — The dollar can stumble at times, as we saw in 2025, when it was under pressure for both market reasons and strategic reasons (i.e., the US administration’s desire for a slightly weaker US dollar to support trade).
- Betting on inflation and against tech can be costly — In other words, betting against the current cycle comes with risk (read more on this topic).
- “Buy the dip” is still a rule — It remains the case that when markets sell off, it’s often better to add exposure than to pare back.
Key takeaway: Be prepared for a world where current trends continue (even if you expect them to reverse in the long term).
2. Assess the near-term outlook
Our Wellington Solutions team maintains a 6- to 12-month outlook for tactical asset allocation purposes. As of December 2025, they have a moderately overweight view on global equities. While valuations are high, equity returns should benefit from lower global economic policy uncertainty, which has declined since the tariff-driven peak in April 2025, and central bank easing. Within equities, the team prefers Japan and the US, in that order, over Europe and emerging markets. They also have a moderately overweight view on developed market government bonds, a neutral view on credit, and a slight underweight view on commodities driven by a small underweight view on oil. Read more on the team’s views here.
Key takeaway: Following strong gains in 2025, the near-term outlook for equities remains upbeat.
3. Consider your opportunity set
To offer some perspective on areas of opportunity going forward, Figure 2 shows our capital market assumptions (CMAs) over a strategic (30 – 40 year) horizon, which is typically used to set asset allocation policy. Equity returns are expected to outpace fixed income, with non-US equities ahead of US equities — a somewhat different outlook than the 6- to 12-month view mentioned earlier. In government bonds and credit, expected returns are reasonably attractive, particularly compared to the 2010s.
Figure 2
The key factor keeping the equity CMAs from being more exceptional is valuations. Forward P/E ratios are well above the 20-year average for US stocks, but Japan, Europe, and emerging markets are somewhat expensive as well. High valuations are also a limiting factor for our CMAs in most credit markets.
Given the valuation challenge, our expected return for a typical 60% equity/40% fixed income portfolio based on our CMAs is currently a bit above 5% — below the historical average, which is closer to 6%. This may be reason to think about diversification and potential new sources of return. With that in mind, I’ll offer a few ideas for 2026:
- Get technology positioning in line — In a poll of more than 60 institutional asset owners we conducted earlier this year, almost 40% were underweight technology stocks. As I discussed in a recent article, whether asset owners are overweight or underweight technology and AI-driven stocks, they need to understand the size of their positioning, their confidence in the technology’s ability to keep driving growth, and their potential exposure if they are wrong.
- Revisit defensive equity strategies — While defensive equities may lag technology for a time, I think they have a role to play in a portfolio and could outperform over the long term. Given defensive equities are out of favor, this could be an attractive entry point.
- Look at other areas that have been out of favor — This could also be a time to consider positioning in non-US, small-cap, and value stocks.
- Spend some time on “niche” ideas — Areas that could be interesting include CLO equity, which may offer attractive return and income in a variety of credit environments; late-stage growth, where there are a lot of innovative tech-related or tech-enabled companies that need capital to keep growing; pockets of private credit that may still offer a compelling illiquidity premium, such as growth lending and real estate; and absolute return strategies focused on sectors seeing more volatility today, notably financials and technology.
Key takeaway: There may be ample opportunity for diversification in 2026.
4. Try to understand the market consensus
Another useful exercise is gauging the views already being priced in by the market. There’s some wisdom in crowds, but from a risk perspective it’s also worth being aware of what the market could be missing. Currently, I see the following as consensus views:
- Allocators like equities and gold, and they’re worried about a bubble.
- The market is pricing relatively low risk in government bonds and in credit.
- The “Fed put” is alive and well, with the Fed still expected to protect markets in the event of a sell-off.
- Allocators remain fairly apathetic about emerging markets, even if some portfolio managers are becoming more interested.
- Value, quality, and small caps seem likely to remain out of favor with allocators.
One way to judge consensus views is to look at where earnings are expected to be in the year ahead compared with realized earnings. In Figure 3, note the shift in small-cap stocks: Realized earnings were negative over the past three years, but expectations indicate nearly 50% earnings growth. The caveat is that these forecasts can tend to be overly optimistic, but even if small cap disappoints meaningfully, this data suggests we could still finally see a return to earnings growth.
We also see fairly heroic recoveries expected in Europe and emerging markets, and expectations remain quite healthy for the US. In Japan, on the other hand, very little improvement is expected.
Key takeaway: Markets are already assuming continuity, so any surprises could be quite unsettling.
Figure 3
5. Consider possible surprises
This is an exercise made famous by the late Byron Wien, who defined surprises as events to which the average market participant would assign a probability of 30% or less but that he saw as more likely than not (50% or higher probability). My definition is more flexible — events that are generally viewed by the market as unlikely but in my estimation have at least a reasonable chance of occurring. With that, here’s my list for 2026:
- US core CPI for the year is greater than 3%.
- US job creation exceeds 2025 levels.
- The Fed pauses rate cuts for the first six months of the year.
- The European Central Bank hikes rates at least once in 2026.
- A major cyberattack hits a key piece of US infrastructure (power, communications, food/water).
- At least three of the “Neural Nine”1 end 2026 with even higher P/E multiples than on January 1.
- US investment-grade credit spreads end 2026 even tighter than at the start of the year.
- Private credit fundraising declines versus 2025.
- The spot price of crude oil breaks below US$50 at some point during the year.
- The USD/JPY currency pair hits a new record above 175.
Key takeaway: Be prepared for stronger growth, higher inflation, and surprises on the policy front. (Though, in the interest of full disclosure, only two of my 10 surprises came to fruition last year, so take all of this with a grain of salt!)
6. Think about the long term
Turning to long-term portfolio opportunities, we found in a recent poll we conducted (Figure 4) that the top areas institutional asset owners were planning to add to in 2026 included hedge funds, infrastructure, private credit, private equity, non-US developed market equities, emerging market equities, and return-seeking fixed income. The area they were most likely to reduce was, by far, large-cap US equities.
Figure 4
In thinking about how to frame longer-term opportunities, my focus is very much on the current cycle. Many of its characteristics have been in place since the end of the global financial crisis, including slow and steady growth, fiscal and monetary support, technology sector leadership/market concentration, and significant capital flows to private assets. I think there are reasons to believe the cycle has room to run (e.g., strong AI-driven capex) but also factors that could bring it to an end (e.g., inflation). Allocators, therefore, need to be mindful about the extent to which they're positioned for the cycle to continue or to reverse.
But I think there are also strategies that could work either way:
- Market concentration plays — There is growing interest in extension (130/30 or 140/40) strategies, portable alpha strategies, and what I’ll call “core 2.0” strategies, which are disciplined in how they use their risk budget and manage factor risk. Some of these core 2.0 strategies are strictly quantitative, but they can be diversified with similar strategies driven by fundamental insights.
- Dynamic fixed income strategies — Total-return-oriented, opportunistic, and multisector strategies could all be well positioned to navigate relatively tight spreads and low interest rates and to pivot as market opportunities emerge.
- Hedge funds — More dispersion in economic outcomes (think about China versus Japan versus Europe today) and security-level results could benefit hedge funds, including multi-strategy, macro, and equity long/short strategies.
Key takeaway: Favor strategies that are cycle-agnostic rather than make a big bet on whether the current cycle continues or turns.
7. Spend some time in the alternatives world
Alternatives represent a significant area of exposure for many allocators and warrant a dedicated review to begin 2026.
- Hedge funds — As a colleague and I discuss in a recent paper, allocators should consider multi-strategy hedge funds as a diversifier in a world where stocks and bonds may both struggle at times. We also think equity long/short funds can play a role at a time when there’s concern about valuations and volatility.
- Private equity — As discussed in our 2026 private equity outlook, IPO and M&A activity are picking up, which should bode well for private equity distributions. From an investment perspective, I think allocators should look beyond the buyout space to niche-ier and perhaps more global strategies, including areas where valuations may be more attractive and demand for capital may outpace supply. I also think areas less directly affected by higher interest rates are worth a close look, including venture and growth investing.
- Private credit — The private credit opportunity set continues to grow beyond middle market direct lending, as discussed in our 2026 private credit outlook. The lines between private and public credit are also blurring, creating interest in crossover strategies. From a risk-management standpoint, allocators should be aware of their AI/technology exposure via private credit and make sure the upside opportunity is commensurate with the downside risk. Also remember that as long as liquidity remains ample, the risk of a major crisis may be low — or at least delayed.
Key takeaway: Alternatives may have a more prominent role to play in portfolios going forward, but make sure your approach is up to date for the current backdrop.
8. Rouse your inner risk manager
My list of risks to watch (downside and upside) in 2026 includes the US midterm election and the potential for more fiscal stimulus ahead of that election; the appointment of a new Fed chair; and optimism (and potential disappointment) about earnings, especially in technology. I would also highlight a few risks I think market participants are overlooking: liquidity risk; some speculative investing (in crypto, for example); and inflation, which I view as a medium-term concern given rising government debt.
How can all of this be brought into a risk-management process? I’d suggest two approaches. The first is scenario analysis — sketching out ways in which some of these things could go awry and gauging what that means for a portfolio. Scenarios we’re modeling in our own work include a “fiscal surge” in the US and globally (even if the economy is relatively healthy); a “balanced outcome” in which fiscal stimulus is sufficient to offset headwinds (e.g., fiscal support from the OBBBA offsets the impact of tariffs in the US); and an “economic soft patch” (e.g., a mild recession in the US).
The second approach is stress-testing portfolios with some extreme outcomes. If allocators are comfortable with the results, they’ll be better prepared to stick to their positioning. If not, it may be time to do some hedging or adjust current allocations. Among the outcomes we're currently using in stress testing: a US equity melt-up, with a strong influx of capital driving valuations even higher; a sell-off in private credit, which could have knock-on effects in public markets; a momentum reversal; and a stagflationary environment.
Key takeaway: Focus on risk management heading into 2026 and look beyond the risks making headlines.
9. Evaluate your liquidity picture
Every allocator should spend time thinking about what could change liquidity needs in the year ahead, whether that’s a market crisis (like we saw in 2022) or a shift in the needs of the organization or individuals a portfolio is intended to support. I also think it’s important to regularly stress test one- and three-year liquidity needs and to assess the state of market liquidity.
In the year ahead, our trading desk is expecting liquidity conditions to remain generally consistent with what we saw in 2025. Among their views:
- US markets will tend to be driven by the AI trade.
- Rate liquidity is likely to remain event-driven, with some big events on the horizon (e.g., change in Fed leadership).
- In credit, secondary market liquidity may be challenged by continued strong issuance.
Key takeaway: Liquidity stress-testing should be an evergreen agenda item for allocators.
10. Set a finite number of 2026 priorities
As a final step, I think allocators should narrow their priorities to a manageable list. Following are six possibilities, but be realistic — it may be hard to prioritize more than two or three in a given year:
Defense:
- Review diversifying assets, including hedge funds.
- Re-underwrite private credit exposures, given both the risks and the evolving opportunity set noted earlier.
- Make plans for a potential broad market sell-off (not my base case, but it’s worth thinking about).
Offense:
- Increase portfolio dynamism, given the likelihood we’re late in the current cycle.
- Research AI as an investment opportunity and a tool for improving productivity (topics covered here).
- Learn more about the “Total Portfolio Approach” (TPA) adopted by some large asset owners; it’s being defined in different ways, but several of the core ideas may be informative, including breaking down silos and being more dynamic.
Key takeaway: Whether you take some of my priorities or set your own, start the year with a few specific objectives around investment policy.
A final note: I hope this checklist is helpful. If we can be a thought partner on any of the topics discussed or help your organization set and implement specific objectives, we would welcome the opportunity for an in-depth discussion.
Best wishes to all for a happy, healthy, and profitable 2026.
1The "Neural Nine” include Nvidia, Apple, Microsoft, Alphabet, Broadcom, Meta, Oracle, Palantir, and AMD.
Important disclosures: Capital market assumptions
Strategic capital market assumptions reflect a period of approximately 30 – 40 years. If we developed expectations for different time periods, results shown would differ, perhaps significantly. Additionally, assumed annualized performance and results shown do not represent assumed performance for shorter periods (such as the one-year period) within the longer period, nor do they reflect our views of what we think may happen in other time periods. The annualized return represents our cumulative performance expectations annualized. The assumed returns shown do not reflect the potential for fluctuations and periods of negative performance.
This analysis is provided for illustrative purposes only. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares, strategies, or other securities. References to future returns are not promises or even estimates of actual returns a client may achieve. This material relies on assumptions that are based on historical performance and our expectations of the future. These return assumptions are forward-looking, hypothetical, and are not representative of any actual portfolio, or the results that an actual portfolio may achieve. Note that asset-class assumptions are market or beta only (i.e., they ignore the impact of active management, transaction costs, management fees, etc.).
The expectations of future outcomes are based on subjective inputs (i.e., strategist/analyst judgment) and are subject to change without notice. As such, this analysis is subject to numerous limitations and biases and the use of alternative assumptions would yield different results. Expected return estimates are subject to uncertainty and error. Future occurrences and results will differ, perhaps significantly, from those reflected in the assumptions. ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY AND AN INVESTMENT CAN LOSE VALUE. Indices are unmanaged and used for illustrative purposes only. Investments cannot be made directly into an index.
This analysis does not consider transaction costs, management fees, or other expenses. It also does not consider liquidity (unless otherwise stated), or the impact associated with actual trading. These elements, among others, associated with actual investing would impact the assumed returns and risks, and results would likely be lower (returns) and higher (risk).
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