2026: A Year of Uneven Outcomes, Selection Starts to Matter Again
The Rithm Take
2025 will likely be remembered less for what broke and more for what refused to. Despite persistent tariff uncertainty, tighter financial conditions earlier in the year, and elevated geopolitical noise, both corporate earnings and consumer activity proved resilient. An accommodative Federal Reserve stance at the margin, combined with sustained AI-related capital expenditure, provided a durable tailwind to risk assets.
Looking into 2026, the question facing investors is no longer whether growth can persist, but how it expresses itself. The environment is transitioning from one dominated by high correlations and broad beta capture to one defined by dispersion. Sectoral outcomes, product design, balance sheet positioning, and asset manager skill are set to matter more than asset class labels. In that regime, selection is likely to trump allocation.
The factors that rewarded a heavily passive approach over the last several years are shifting. Inflation volatility, policy transmission uncertainty, and uneven productivity gains are increasing dispersion across assets and within them. For institutional portfolios, this raises the premium on alpha generation, structural underwriting, and control, rather than reliance on market direction alone.
2026 Factors in Transition
Inflation Isn’t the Anchor Anymore—Tolerance Is
Markets are increasingly focused less on point inflation prints and more on policymakers’ revealed tolerance. The signal is not whether inflation is above or below target in a given month, but how persistently above target it can remain without provoking a restrictive response. Inflation breakevens have remained relatively anchored despite the Fed’s preferred measure of inflation, Core PCE, being above the 2% target since February of 2021. According to FOMC’s latest summary of economic projections, the median member doesn’t expect inflation to return to 2% until 2028. This reframes inflation from a destination variable to a constraint variable, with implications for term premia, real rates, and asset valuation dispersion.
A K-Shaped Economy, With the Possibility of a “V”
Consumer outcomes remain uneven across income cohorts. Higher-income households continue to benefit from asset appreciation and wage resilience, while lower-income cohorts face tighter affordability. That said, lower energy costs and targeted fiscal measures create scope for partial convergence rather than continued divergence. The Wall Street Journal reported that President Trump believes his efforts could help lower oil prices to his favored level of $50 a barrel. Additionally, the CBO estimates that the OBBA, which includes no tax on tips and overtime, will boost real GDP by 90bps in 2026. What’s more, 19 states implemented increases to the minimum wage on January 1, increasing wages for 8.3 million workers. The path is uneven but not locked into a one-way bifurcation.
Rate Cuts Don’t Guarantee Easier Conditions
Financial conditions are starting the year at the easiest levels since mid-2022, at the onset of Fed tightening. Against this backdrop, too aggressive easing could lead to higher long-end rates, and rising term premia. Furthermore, Treasury supply dynamics can offset front-end cuts. In this environment, the Fed can ease while financial conditions remain flat or even tighten, underscoring why duration, structure, and funding sensitivity matter more than headline policy moves.
A Labor Slowdown That Defies Easy Interpretation
Employment is cooling, but without a corresponding surge in layoffs or claims. The labor market is settling into a low-hire, low-fire equilibrium. The transition risk lies in misreading this signal—interpreting it either as hidden weakness or as continued strength—when it may instead reflect structural frictions, skill mismatches, and productivity shifts rather than cyclical stress. As employment gain have been concentrated in the healthcare and education sectors of the economy, we think a boost will be provided to the construction sector as the AI infrastructure buildout shows no signs of slowing down.
Banks Have Capital, and Transition to Deployment
Bank balance sheets are sound, but asset allocation behavior is in flux. Early signs of renewed M&A activity suggest animal spirits are not revived. Incremental shifts in how banks deploy capital—toward or away from certain loan categories or risk transfers—could have outsized effects on credit availability and pricing.
Credit Has Moved From Abundance to Scrutiny
Capital remains available. The year has kicked off with record investment grade issuance, the highest levels last seen during the pandemic. Issuance is only likely to rise further, including leveraged loans, as M&A volumes rise. The lesson from 2025 is clear, discipline is back in focus. Underwriting standards, structure and collateral merit added consideration. The marginal buyer is no longer paid simply for providing liquidity. Differentiation across sponsors, documentation quality, and control mechanisms are widening, even as headline spreads remain compressed.
Potential for Crossover, Real versus Corporate Assets
Across spread (risk) assets, the regime for valuations has been dictated by corporate credit investment grade and high yield. Real assets, using public securitized assets, have followed on valuations. This has reversed in late 2025, most notably with the most liquid benchmark Agency MBS, where spreads tightened relative to investment grade spreads. Supply conditions are diverging between higher corporate credit and stable securitized assets, potentially furthering this trend. Private takeouts of segments of the public securitized assets only further this supply divergence.
CRE, Discovery to Recovery
Equity markets are hovering near all-time highs, but commercial real estate is still 10% below 2022 levels. If agency MBS and CRE remained as the last two sectors dislocated by the post-pandemic regime, normalization is now back. If 2023 and 2024 were the years of “extend and pretend”/ “amend and extend,” then we believe 2025 started the “discovery to recovery,” which should accelerate in 2026.
AI Optimism Meets Return Discipline
The investment phase of AI is well underway. The next transition is from enthusiasm to accountability. Dispersion will emerge between firms where AI-driven productivity translates into earnings leverage and those where capital intensity dominates returns. This is less a macro story than a selection problem.
The Conversation
Taken together, these signals point to an economy that is still growing, but doing so with less uniformity and less mechanical policy transmission. The consensus narrative remains constructive, yet is increasingly reliant on averages that mask dispersion underneath. Inflation tolerance, labor market ambiguity, and credit selectivity all argue against treating “the market” as a single trade.
Behaviorally, different actors are responding in different ways. Corporates with pricing power and balance sheet flexibility continue to invest, particularly in automation and AI. Consumers at the top of the income distribution remain a stabilizing force, while lenders are reasserting discipline after a period of abundance. Policymakers are signaling intent, but outcomes hinge on execution and market reaction rather than announcement.