Notwithstanding the risks around the Iranian conflict, our macroeconomic outlook remains relatively optimistic, with risks tilted to the downside. The U.S. economy remains central to our global outlook in 2026. We believe it will be able to absorb elevated energy prices, in line with what we observed in 2023 and 2024, with the most likely outcome being a re-acceleration of growth, driven in part by technology-led productivity gains. We continue to expect U.S. inflation to moderate, although elevated energy prices have delayed that process, and we believe the Federal Reserve is likely to hike rates this year and have scope to ease monetary policy next year. Stickier inflation nonetheless remains a risk to this central view.
We favor a long duration position in portfolios, particularly at the front end of the U.S. curve, as well as in select emerging markets. However, given the potential upside risk to inflation expectations, we aim to retain flexibility to add to these positions should pricing become more attractive. Credit valuations have reversed much of the weakness in March and remain near the most expensive end of the historical range. We also believe dispersion across and within sectors could increase, which emphasizes the need for diversification and strong bottom-up fundamental analysis.
Given our central views, we maintain modest overweight positions across credit sectors, with a bias toward higher-quality sectors such as investment-grade corporates or higher-quality securitized assets.
