In Brief: Mid-Year Outlook for 2026

At KKR, our 2026 Mid-Year Outlook reaches a clear conclusion: the cycle continues, but the rules of the game are changing. The global economy is moving from a low-cost, efficiency-first model towards one where redundancy, reliability, resilience, and control carry a higher premium. 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. For investors, the implication is not to avoid risk, but to be more disciplined in how that risk is owned.

We believe the ‘Divergence Conundrum’ is the defining feature of this cycle. For investors, we think this is a time to stay up in quality, focus on durable cash flows, and lean into managers and assets that can create value through operational improvement, productivity gains, and disciplined capital allocation.

The ‘Divergence Conundrum’ thesis encapsulates our view that the economy is no longer moving in one clean direction. Some areas, like AI, productivity, high-end services, and national security, are still attracting capital and driving growth. Other areas, like housing, lower-income consumers, old economy capex, and rate-sensitive sectors, remain under pressure. For investors, the question is whether the economic resilience they are seeing is increasingly concentrated in a few pockets of strength rather than broad-based. For policymakers, the challenge is setting monetary policy for an economy that is hot in some areas and cold in others.

Exhibit 1: The ‘Divergence Conundrum’ Is Poised to Become More Extreme as the Cycle Continues. Against This Backdrop, the Complexity of Economic, Societal, and Monetary Considerations Becomes More Challenging

The Divergence Conundrum

Key Drivers of our Divergence Conundrum Thesis:

Exhibit 2: Driver One: Economic Momentum Becomes More Concentrated in Tech/AI and National Security Issues

Capex Contribution to U.S. GDP Growth (LTM, %pts)

Exhibit 3: Driver Two: Critical Minerals and Oil Supplies Increasingly Become Chokepoints for Economic Leverage and Exacerbate K-Shaped Dynamics

Annual Energy Spend as a % of Pretax Income, by Income Quintile

Exhibit 4: Driver Three: Leverage Concentrates In Governments, Not Consumers

Fiscal Deficits (% of GDP, Positive = Deficits)

Exhibit 5: Driver Four: The Productivity Boom Likely Favors Capital Over Labor and Consumption

U.S. Large-Cap vs. Small-Cap Efficiency Gains, Real Revenue Per Worker

Productivity is the secret sauce extending the business cycle, but the benefits are uneven. For investors, the message is to focus on companies and strategies that can convert productivity into margin durability, revenue-per-worker gains, and operational improvement.

The global productivity boom shows no signs of abating. Importantly, services, not goods, appear to be driving productivity gains this cycle, while AI is still in the early stages of becoming an equally powerful tailwind. 

Exhibit 6: Services Are Experiencing a Boom Not Just in Consumption, But Also in Productivity

Annualized Growth of Real Output Per Hour of All Employees During Recent Expansions

The ‘Security of Everything’ Is becoming a capital allocation decision. For allocators of capital, this argues for more exposure to assets that provide resilience, reliability, and redundancy.

Security is becoming a core operating assumption for CEOs and policymakers. This mega theme began with defense and physical security, but now extends across cyber, data, shipping lanes, food and water, energy, critical materials, components, and processing capacity. From an investment standpoint, we think this argues for exposure to infrastructure and other Real Assets tied to this transition, business models that help companies navigate the adjustment, and management teams that are already ahead of the curve in managing supply chain complexity, resiliency, and security risk.

Exhibit 7: National Security Is Now Bundled With Rule of Law and Economics/Trade, and Wrapped in the Complexity of Digitalization

Blurring of Lines Across Economics, Rule of Law, and National Security

As part of our Regime Change thesis, we expect a higher resting heart rate for inflation this cycle. As such, we think portfolios need more nominal GDP linkage.

We have more conviction in our Regime Change asset allocation framework, including a higher resting heart rate for inflation. Goods inflation is no longer the persistent disinflationary force it was in the last cycle, while geopolitics, energy, tariffs, transport costs, and supply-chain disruption are keeping a firmer floor under prices.

Exhibit 8: We Have Moved Away From Structural Goods Deflation. We Expect Goods Inflation to Settle About 100 Basis Points Above Pre-Pandemic Levels

Annual Goods Inflation, Y/y %

We believe the relationship between stocks and bonds is changing. In a world of higher deficits, stickier inflation, and more frequent geopolitical shocks, investors should be careful about relying too heavily on long-duration Treasuries as safe havens.

For portfolios, this argues for adding differentiated return streams beyond traditional public equities and fixed income. The goal is not to replace public markets, but to complement them with exposures that can improve diversification, income, and resilience across a more volatile cycle.

Exhibit 9: Stocks and Bonds Continue to Offer Diminished Diversification Benefits

UST Performance During Prior S&P 500 Corrections

Expected returns are not unattractive, but they are becoming harder to capture across most asset classes. As a result, we believe investors should be more deliberate about the return streams they underwrite, the structures they use, and the managers they select.

Broad beta, multiple expansion, and falling rates are likely to do less work than in the last cycle. In our view, the advantage will go to investors who can identify not just where return exists, but also whether those returns are durable, diversified, and repeatable.

Exhibit 10: The Expected Return Differential Between the Best and Worst Performing Assets in a Portfolio Remains Tight

Maximum - Minimum Expected Return Differential

Exhibit 11: We Continue to Think Expected Returns Over the Next Five Years Will Look Quite Different Relative to the Past Five Years

Expected Returns (%)

Private Markets investors should tilt towards operational improvement, not financial engineering. We are constructive on corporate carve-outs, public-to-private opportunities, and situations where investors can control outcomes.

The next leg of returns is likely to be driven by execution, governance, pricing, procurement, technology adoption, margin improvement, and revenue-per-worker gains, not by adding additional leverage.

Exhibit 12: We Think Value Creation and Exposure to Thematic Tailwinds Is More Important In a World Where Leverage Is Increasingly Less Helpful to Overall Returns

Value Creation Percent Contributions in Global Buyout Investments

Europe and Asia remain compelling long-term opportunities. Investors who remain overly U.S.-centric may miss out on what could be two of the more durable sources of long-term growth and diversification.

Markets still too often view Europe through the lens of Germany’s industrial slowdown, while underappreciating the resilience emerging across the periphery and the policy-supported investment cycle. Within Europe, we favor opportunities tied to domestic durability, infrastructure, defense, grids, energy systems, logistics, and the European periphery. Meanwhile, Asia continues to stand out across private and public markets, driven by corporate reform, intra- Asia trade, AI hardware and enabling infrastructure, and consumption upgrades. Japan and Korea remain important corporate reform stories, while India and Southeast Asia remain expressions of the Emerging Markets consumption upgrade.

Exhibit 13: The Periphery Is an Important Reminder That European Macro Is Not Uniformly Weak

Real Gross Fixed Capital Formation (2022=100)

Just as the equity cycle is broadening beyond the narrowest leadership, volatility in global bond markets is broadening across countries, albeit for different reasons. The drivers of yields differ meaningfully by region.

This broad-based decline in bond prices underscores our view that fixed income markets are being asked to offer more compensation, a trend we view as sustainable. Importantly, however, we do not think investors should treat the global bond sell-off as one uniform event.

Exhibit 14: While the Broad Yield Backup Has Been Global, the Underlying Mix Between Real Yields and Inflation Compensation Has Differed Meaningfully Across Countries

10-Year Rate Decomposition

We feel less constructive about the supply/demand setup for equities than we did a year ago, even as credit technicals remain more supportive. For investors, this does not make equities unattractive, but it does raise the bar for selectivity, quality, and earnings durability.

The reopening of IPO markets could make the public equity supply/demand backdrop less favorable than it was when issuance was scarce and investors were crowded into a narrower set of AI and growth proxies. By contrast, credit technicals remain more supportive, as corporate issuance is still relatively contained and demand from spread buyers remains firm.

Exhibit 15: Even Amid the IPO Surge, Our Capital Markets Liquidity Indicator Is Trending Only Back to Normal Territory, Not Overheated

Capital Markets Liquidity (TTM) as a % of GDP (IPO, HY Bond, Leveraged Loan Issuance)

‘High Grading’ still matters, and the cost to upgrade remains low. For allocators of capital, the message is to stay up in quality while continuing to diversify into assets linked to nominal GDP and operational improvement stories in Private Markets.

For multi-asset portfolios, that means leaning into companies, managers, and assets with stronger balance sheets, more durable cash flows, a greater ability to pass through cost increases, and greater control over outcomes. In Credit, it means emphasizing structure, collateral, documentation, and downside protection, not just headline yield. In Private Markets, it means favoring operational improvement stories and managers who can create value through execution rather than relying primarily on leverage or multiple expansion. Importantly, capital structure flexibility has gone from a ‘nice to have’ to a prerequisite in industries undergoing change.

Exhibit 16: Quality Equities Have Rebounded Since the Start of the Year, But We Think That the Trend Is Still Their Friend…

Relative Valuations: NTM P/E (MSCI AC World Quality* Index vs. MSCI AC World)

Exhibit 17: …While Relative Credit Spreads Are As Compressed As They Were in 2021. As Such, the Cost to ‘High Grade’ Is Quite Low

Relative Valuations: U.S. Credit Spreads (BBB -AAA Corporates)

Collateral-based cash flows are becoming more important as traditional diversification becomes less dependable. Beyond Energy and Infrastructure, this framework applies to Asset-Based Finance, Real Estate Credit, and Structured Solutions.

In a higher nominal GDP growth environment where dispersion is rising and traditional diversification is less dependable, we continue to favor return streams anchored in hard assets and collateral-based cash flows. These exposures do not eliminate volatility, but they can improve the controllability of outcomes through seniority in the capital structure, stronger recovery prospects, and cash flows tied to essential activity in the real economy.

Exhibit 18: Nominal GDP Growth Has Been Clearly Outpacing Policy Rates

Nominal GDP Growth vs. Policy Rate

In a lower-return, higher-dispersion world, manager selection becomes a larger part of the return equation, as the ability to underwrite durable cash flows, structure downside protection, and create value through execution can matter as much as the asset class itself.

This is particularly important in Private Markets, where dispersion across managers remains wide and where control, structure, sourcing, portfolio construction, and operational improvement can become meaningful differentiators.

Exhibit 19: Manager Selection Is a Key Driver of Outcomes in Private Markets and Can Add Material Value Relative to a Median Manager

Historic Manager Dispersion in Private Markets

Structural themes create differentiation, particularly in a flatter return world. For investors, the goal is to own themes that can translate secular demand into durable cash flows and attractive risk-adjusted returns.

In our view, the most attractive themes are those where demand, policy support, private capital needs, and the ability to withstand volatility reinforce one another over multiple years. The goal, we believe, should be to invest behind assets, companies, and managers that can convert those trends into long-term value creation.