Mid-Year Outlook for 2026: The Divergence Conundrum
Joseph Chamberlain’s warning in 1902 regarding Britain’s position amidst intensifying nationalistic competition feels especially relevant today, as the blurring of geopolitics and economics intensifies and the global economy is moving from a low-cost, efficiency-first model towards one where redundancy, reliability, and resilience matter more. Two new realities, more strategic geopolitical chokepoints and greater demand for critical AI inputs, are likely to contribute to increased volatility. Against this complex backdrop, however, our base case remains that the cycle continues because the current global productivity boom persists for longer than expected. The offset is that intensifying strategic competition will likely make economic growth more concentrated across fewer industries and, at times, more extreme than anything we have seen since the start of the second industrial revolution in the 1870s. We are calling this environment the ‘Divergence Conundrum,’ an investing landscape where certain segments of the economy and markets are starved for capital, while others are flush with attractive financing options. This reality is contributing to further bifurcation across sectors, societal cohorts, political and monetary views. For investors, the implication is to stay up in quality, adding more non-correlated exposures, and diversifying into assets that are linked to nominal GDP. This approach leads us towards more corporate carve-outs, more collateral-based cash flows, deeper penetration in power and energy markets, more linkages to national security, and more exposure to Asia.
The weary Titan staggers under the too vast orb of its fate."
Where Our Thinking Has Evolved
1. The ‘Divergence Conundrum’ is manifesting itself as K-shaped outcomes across growth, markets, and asset prices.
2. We have more conviction in our Regime Change asset allocation framework, which includes a ‘higher resting heart rate’ for inflation in the near term.
3. Our ‘Security of Everything’ theme is bigger and broader than we originally thought.
4. The easing cycle is fading, and the next debate may be more about how long policy stays restrictive.
5. Just as the equity cycle is broadening beyond the narrowest leadership, the global bond selloff is broadening across countries, albeit for different reasons.
6. We think that investors and executives are mistaking where the productivity tailwinds have come from so far. We find that services, not goods, are driving productivity gains this cycle.
7. We feel less good about the supply/demand setup for equities than we did a year ago, even as credit technicals remain more supportive.
8. Capital structure flexibility has gone from a ‘nice to have’ to a prerequisite in industries undergoing change.
Continue Reading Where Our Thinking Has Evolved
KKR vs. the Consensus
Growth / GDP
Above consensus in the U.S.; more selective abroad.
Inflation / CPI
Higher-for longer inflation, except China.
Central Banks / Policy Rates
The easing cycle is fading, even as the Fed likely stays patient.
Long Rates
Higher long end yields will remain a pressure point.
Oil
The futures curve is still underpricing the risk premium.
Equities
Constructive, but will be increasingly dependent on earnings durability.
Currency
The dollar has peaked, but we expect no disorderly unwind.
Regional Views
Dispersion, reform, and policy supported capex matter most.
U.S. Jobs / Productivity / Unemployment
Hiring is bifurcating at the sector level, not cracking in aggregate, but productivity is doing more of the work.
Key Asset Class Tilts
1. We still think Asia will continue to outperform across both private and public markets.
2. We do see steep yield curves in the U.K., Japan, and the U.S., but we would not treat them as one uniform signal linked to excessive government debt and runaway long-term yields.
3. We still want to own more assets linked to nominal GDP.
4. We continue to think Private Markets’ success, especially Private Equity, will tilt much more towards operational improvement, not financial engineering.
5. We remain bullish on Structured Equity/Capital Solutions.
6. Underwritten correctly, current dispersions across Credit are creating more opportunities for active management.
What Could Go Wrong?
1. Valuations for trophy private sector investments that IPO turn out to be disappointing at a time when productivity slows.
2. Inflation could increase even faster than our already above-consensus forecast, government deficits continue to increase, and long-end bonds come under further pressure.
3. Unemployment rate gaps up, defying our belief that we are just in a slow growth hiring cycle.
4. Aggregate earnings could fall.
5. What if the biggest risk to the productivity cycle is not technology, but politics?
Variant Perception
1. The productivity boom is now extending to margins, not just revenues.
2. Goods inflation is becoming more structural
3. The global economy is increasingly diverging into ‘K-Shaped Everything’
4. Europe is bifurcating, not collapsing
5. Japan and Korea corporate reform remains underappreciated
Key Themes
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The ‘Security of Everything’The biggest shift we are seeing on the ground is that ‘security’ is no longer a standalone line item. It is becoming a core operating assumption for CEOs and policymakers, especially as it relates to the durability of supply chains. In an environment of heightened geopolitical rivalries, this mega theme may start with defense and physical security, but now extends across cyber, data, shipping lanes, food and water, energy, critical materials, components, and processing capacity.
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Power/Energy InfrastructureWe continue to believe that power and energy infrastructure will be one of the more important long-duration investment themes of this cycle. Unlike prior periods, when electricity demand was often driven by a single dominant force, today several secular trends are moving in the same direction at once. AI infrastructure, electrification, reshoring, and defense readiness are all increasing the need for reliable power, just as the supply side is constrained by permitting, interconnection delays, equipment lead times, and grid complexity.
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Collateral-Based Cash FlowsOur client conversations suggest that many investors remain underweight Real Assets, particularly Infrastructure and Energy, at a time when the need for inflation protection and portfolio durability remains elevated. Moreover, if we are right about the step-change in electricity demand tied to AI, then higher-growth Infrastructure assets across data centers, power, grid, logistics, and related bottleneck sectors look increasingly compelling.
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Consumption Upgrades in Emerging MarketsWe continue to believe one of the more durable themes across Emerging Markets is the shift in consumption from basic goods and towards higher-value services. As middle- and upper-income cohorts expand, discretionary spending is moving into healthcare, financial services, education, travel, sports, entertainment, and other experience-led categories where demand can be more recurring and margins more durable.
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Intra-Asia TradeOur recent trips to the region, including Beijing and Hong Kong this April, reinforced our view that Asia is becoming more Asia-centric. Conversations on the ground are increasingly focused on energy security, supply chain resilience, logistics connectivity, and domestic demand, rather than many of the Western macro concerns dominating investor discussions elsewhere, including software disruption and Private Credit.
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Productivity/Worker RetrainingWe continue to believe that skills upgrading will be a critical investment theme. Demographic-driven labor scarcity, AI adoption, reshoring, and higher wage floors are all forcing companies to do more with less, particularly in sectors where skilled labor is already in short supply. With skills requirements rising and wages remaining sticky, productivity gains will likely be needed for corporate margins to hold. We do not think AI eliminates the need for retraining. In many cases, it accelerates it.
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Transitioning Companies from Capital-Heavy to Capital-LightMany investors like capital-heavy businesses with low obsolescence risk. So do we. However, in Private Markets, the more interesting opportunity is often in operational improvement, particularly in a world of higher capital costs and greater volatility. That pressure is changing CEO behavior. Management teams are being pushed to show cleaner returns on invested capital, simplify portfolios, divest lower-return or more cyclical assets, and redeploy capital into businesses with higher margins, more recurring revenue, and the ability to withstand input-cost inflation. The clearest sign of this shift is the surge in corporate carve-outs as multinationals streamline portfolios and reduce complexity.
Picks and Pans
We offer our updated asset allocation picks and pans for investors to consider.
Frequently Asked Questions
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What Are the Global Bond Markets Telling Us?
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Have Expected Returns Changed Enough to Alter Asset Allocation?
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Where Is Relative Value Most Attractive Today in Credit?
Global / Regional Forecasts
United States
Euro Area
China
Japan
Capital Markets
Interest Rates
S&P 500
Oil
U.S. Dollar
About the Authors
Henry H. McVey
Partner, Head of Global Macro and Asset Allocation and CIO of KKR‘s Balance Sheet Global Macro and Asset Allocation New York
David McNellis
Managing Director, Co-Head of Global Macro, and Head of Portfolio Construction and Multi-Asset Strategies for Private Markets Global Macro and Asset Allocation New York
Aidan T. Corcoran
Managing Director, Co-Head of Global Macro Global Macro and Asset Allocation Dublin
Changchun Hua
Managing Director Global Macro and Asset Allocation Hong KongAcknowledgements
Kristopher Novell, Lauren Goodwin, Brian Leung, Rebecca Ramsey, Tony Buckley, Richard Bullock, Christian Olinger, Bola Okunade, Rachel Li, Thibaud Monmirel, Yifan Zhao, Asim Ali, Patrycja Koszykowska, Koontze Jang, Coco Qu, Miguel Montoya, Allen Liu, Alexandre Caduc, Wayne Shen, Amy Dai, Lucy Siegel
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