The incoming fiscal stimulus, when combined with an ongoing (though slowing) Fed easing cycle, declining energy costs, and significant potential for sentiment improvement, represents a nontrivial level of support to equity markets.

Our optimism is tempered by concerns regarding the labor market, weakness within housing, and the possibility of renewed inflationary pressure. 

We maintain a modest equity overweight, expressed through diversified exposure designed to benefit from improving market breadth. We balance this with high-quality fixed income, disciplined rebalancing, and a plan to reduce exposure should the economic landscape shift in a manner sufficient to alter our outlook.

The Fed Funds futures market has priced in more than two 0.25% rate cuts in 2026, which indicates the market is more concerned about growth than inflation. We expect the Fed to proceed slowly on further rate cuts with a base case of two 0.25% cuts in 2026.

Should inflation prove more persistent than expected the Fed likely would cut less than expected, and should growth and the labor market slow significantly, we would expect the Fed to aggressively cut its target rate.

We expect the broad macro-economic environment to remain positive for credit with continued solid economic growth powered by a resilient consumer and strong capital investment cycle. Risks remain, however, including a slowing labor market and increasing debt issuance in the credit market.

We are positioned neutral corporate credit risk versus our long-term strategy within broad fixed-income portfolios. We favor higher quality fixed income such as investment-grade corporates, securitized credit, and the higher rated tiers of high yield. We also favor high-quality collateralized loan obligations (CLOs) over leveraged loans.