In Brief: Outlook for 2026

The global outlook remains constructive heading into 2026, but we are clearly later in the credit cycle, while public equity markets now better reflect recent productivity gains. Not surprisingly, this reality also affects the way we are thinking about longer-term expected returns as well as dispersions across asset classes. Against this backdrop, we at KKR are recommending “High Grading”, or raising the quality, resilience, and capital efficiency of portfolios while staying fully invested. History shows that during major innovation waves, investors who upgraded portfolio quality and focused on major long-term drivers, not those who chased speculation, outperformed, a lesson that is especially relevant amidst today’s AI enthusiasm. Upgrading is also inexpensive in today’s markets, and our expectation for above-consensus growth in the United States, Japan, and China should support portfolio repositioning, we believe. For financial advisors, we think the road to follow across the private markets is clear: focus on disciplined deployment, targeted structural themes, and investments that can generate operational alpha rather than beta plays. In particular, we see compelling opportunities in strategies that allow us to underwrite targeted corporate carve-outs, collateral-based cash flows, operational improvement, and emerging capital-light models across Private Equity, Real Assets, and Private Credit. 

Henry McVey’s Outlook Dashboard

Macroeconomic Forecasts

Economic Growth: Despite ongoing geopolitical tensions, economic momentum remains positive and we maintain an above-consensus outlook for 2026, supported by constructive policy developments and strong tech-driven investments. However, global growth is becoming increasingly K-shaped and reliant on fiscal spending, AI capex, and household wealth—three correlated tailwinds that could weaken together—reinforcing our High Grading thesis that investors should upgrade quality and bolster portfolio resilience as the cycle matures.

Inflation: Labor scarcity, geopolitical fragmentation, and higher input costs reinforce our view of a higher resting inflation rate, though the global narrative is more mixed. The U.S., U.K., and Japan show structurally elevated inflation, China is in deflation, and Europe remains balanced. We favor assets with inflation pass-through—Real Assets, Infrastructure, Asset-Backed Finance, and high-quality yielding Credit.

EXHIBIT 1: We Are Above Consensus on Growth Except for the Euro Area in 2026 and 2027, Where We are In Line With Consensus. Inflation Remains More Asynchronous, But We Still Expect Developed-Market Inflation to Settle at a Higher Baseline Than in the Prior Cycle.

Interest Rates: Even with easing likely in 2026, stronger growth and a higher inflation trend imply structurally higher long-term rates. We expect more volatile bond yields and fewer hedging benefits than in past cycles. Real Assets and Private Credit can help bridge that gap.

EXHIBIT 2: We Remain in the Camp That Interest Rates Will Remain Higher Than the Consensus Expects

KKR GMAA 10-Year Interest Rate Forecast and Probability, %

U.S. Dollar: We believe the dollar has peaked for the cycle, but near term it is likely to trade flat to slightly higher, supported by strong portfolio and FDI inflows and narrowing rate differentials. Longer-term structural headwinds remain, but history suggests any sustained downtrend will unfold gradually.

Oil: We expect WTI to hover near $60 in 2026, rising to $65–70 in 2027–28 as the market tightens. Slowing demand, strong non-OPEC supply, and the unwind of OPEC+ cuts justify a cautious near-term view, with a more balanced market emerging after 2026.

Expected Returns

Our five-year return outlook points to a tougher portfolio-construction environment, with elevated valuations, tight credit spreads, and structurally higher inflation, dampening returns. To meet performance targets, we favor moving from the traditional 60/40 model to a more diversified 40/30/30 mix anchored by Private Equity, Real Assets, and Private Credit, which we believe offer the most compelling medium-term return potential.

EXHIBIT 3: In Our View, Private Equity, Real Assets, and Private Credit Stand Out as Some of The Most Attractive Sources Of Return Over The Next Five Years

Expected Returns (%)

Changes from 2025 Mid-Year Outlook

Our Glass Half Full thesis of the past few years—rooted in a productivity boom strong enough to lift markets and offset some macro headwinds—remains relevant, but investor sentiment now looks increasingly stretched, particularly around AI enablers, even as credit markets flash signs of caution. In this late-cycle environment, we believe High Grading—moving up in portfolio quality at low cost while staying invested—is the discipline individual investors should prioritize.