2026 Year-Ahead Outlook: Macro, Equities, Funds, RMBS, CMBS and CLO Insights

• Although global risks remain, including geo-political, outright recession risks in the US and globally appear relatively low in 2026, and compelling evidence of bubbles in credit and equities is hard to find in conventional valuation measures.
• Equity fundamentals remain supportive, driven by resilient earnings which are expected to broaden outside of Magnificent-7, along profit margins near all-time highs and resilient consumer demand.
• Money Market USD funds dominated flows in 2025. U.S. investors diversified into Europe and Canada.
• Agency RMBS market is expected to remain generally resilient in 2026, supported by steady issuance, tempered housing price growth, and potential declines in mortgage rates. In a stable macroeconomic environment in 2026, further Non-Agency issuance growth may continue.
• Agency CMBS had a strong year in 2025 and the base case scenario for 2026 implies stable issuance, range‑bound spreads, and steady credit and prepayment performance.
• CLO fundamentals remain constructive in 2026 as further Fed easing, sustained investor demand, and stabilizing credit fundamentals provide a solid foundation for continued market growth.

Although there remain global risks, including geo-political, outright recession risks in the US and globally appear relatively low in 2026, and compelling evidence of bubbles in credit and equities is hard to find in conventional valuation measures. Global financial conditions have eased steadily since the tariff spike in April 2025,  and central banks have signalled they do not wish to shrink balance sheets to pre-GFC levels, to reduce financial stability risks. Inflation is still above some central bank targets, but there is little evidence of a return to a high inflation regime. Thus the US Fed has scope to ease policy further if required, should unemployment increase faster in 2026. In Europe, with ECB rates already at 2%, more active use of German fiscal policy is an important supplement to demand growth. Longer dated government bond yields near post-GFC highs, and above 5% in some maturities, also discount substantial debt/GDP ratios and funding burdens in the G7.

Looking ahead to 2026, fundamentals remain supportive, driven by a) resilient earnings which are expected to broaden outside of Magnificent-7, b) profit margins near all-time highs, c) potential operating leverage improvement as AI adoption drives productivity and cost efficiencies, and d) Fed Funds futures are pricing in two to three rate cuts this year.

A key risk outside of the macro risks highlighted above lies in investor patience with AI’s return on investment and whether hyperscalers are over-investing for uncertain payoffs. With valuations near levels last seen during the internet bubble, volatility around earnings and AI enablers could dictate equity price trajectories in the near term.

The LSEG Retail/Restaurant Index projects moderate growth for 2025, following two years of double-digit gains. Earnings are expected to rise 5.9% and revenue 4.6% for the year, supported by resilient consumer demand. Q3 2025 delivered 8.2% earnings growth, while Q4 is forecasted to slow to 1.1%. Looking ahead, 2026 growth momentum is set to accelerate, with earnings projected to climb 10.9% and revenue 5.8%, signaling a positive trajectory for the sector.

Money Market USD funds dominated flows in 2025. Their appeal persisted despite reinverted yield curves late in 2024, driven by the Federal Reserve’s high interest rates, which kept MMF yields above 4–5%, outperforming bank deposits. Non-US investors also favoured MMFs due to the US’ higher rates, despite dollar weakness in early 2025.

ETFs dominated equity flows (+$502bn), overshadowing mutual funds. Equity US funds fell from second place in 2024 to eighth in 2025, with inflows about 20% of the previous year, along with a huge rotation from mutual funds into ETFs in this classification. US flows were volatile, swinging from heavy outflows in May to strong inflows in November. European enthusiasm faded after late-2024 spikes, with large redemptions over the summer, while Asian investors remained consistently positive.

Equity Global ranked second in Europe and Asia but stayed negative in the US, while Equity Europe rebounded in 2025 after prior sell-offs, while U.S. investors diversified into Europe and Canada. Equity US Small & Mid Cap, suffered the worst redemptions, hurt by concerns over tariffs, high rates, and weak growth.

The Agency RMBS market is expected to remain generally resilient in 2026, supported by steady issuance, tempered housing price growth, and potential declines in mortgage rates. Recent policy initiatives, such as agency MBS purchases, restrictions on institutional buyers, GSE reforms, VantageScore 4.0 adoption, and mortgage portability, could influence affordability and liquidity, but their effectiveness and timing remain uncertain. Prepayment activity is expected to stay muted for deeply out-of-the-money cohorts, while in-the-money and modestly OTM cohorts may see some pickup if mortgage rates decline further.

Overall, the combination of stable issuance, supportive policy measures, and incremental improvements in affordability points to a cautiously optimistic outlook for the Agency RMBS sector in 2026.

2025 has been a very strong year for the Non-Agency public and private market with an increase in issuance by 42% compared to 2024 led by the uptake in the Non-QM sector. In a stable macroeconomic environment in 2026, further Non-Agency issuance growth may continue.

As the mortgage rates started to ease in the second half of 2025 we have seen increase in prepayments for the 2023 – 2025 origination vintages for Jumbo and Non-QM. This cohort has been originated in considerably higher rates and has greater incentives to refinance at the new interest rates. We expect increase in prepayments until mid 2026 especially for the Prime Jumbo mortgages. 

Credit risk has been stable in 2025 and with stabilization of inflation and a strong job market the outlook for the credit risk on the Non-Agency mortgages is stable for 2026

Agency CMBS had a strong year in 2025, with issuance rising more than 34% YoY amid rate cuts and benign financing conditions. Spreads were largely stable for most products, except a short-lived widening in April tied to tariff distress. However, multifamily property fundamentals were softer in vacancy and rent. Meanwhile, credit performance was generally resilient, and prepayment speeds remained muted in general given limited refinance incentives.

The base case scenario assumes gradual rate normalization, stable capital market demand, and slow improvement in fundamentals as supply recedes—implying stable issuance, range‑bound spreads, and steady credit and prepayment performance.

The CMBS market achieved post-GFC record issuance in 2025 on improved liquidity and sentiment in CRE, despite mixed macroeconomic conditions. CRE fundamentals continued the recovery though the momentum has slowed down in rent and cashflow growth and the recovery remained highly uneven. Meanwhile, property valuations have finally stabilized after three-year slide even though some credit metrics continued to deteriorate.

To frame the outlook for 2026, we anchor major CMBS themes to the expected rate path and broader economic conditions, with two key scenarios on focus:

1. A baseline scenario where the Federal Reserve delivers 1-2 additional rate cuts for the year and inflation continues to ease gradually with the labour market softening but remaining resilient
2. A stress scenario of stagflation where labour market deterioration accelerates and unemployment climbs above 5% while inflation remains sticky or even rekindles, putting Fed in a conundrum.

As we move into 2026, we see major headwinds including elevated inflation and input costs and a weakening labour market which may slow economic growth and pressure leveraged loan credit fundamental. While we expect continued rate cuts to support investor sentiment, lower policy rates may reduce demand for floating rate products. On the bright side, a resurgence in M&A and LBO activities will boost leveraged loan supply, supporting issuance and arbitrage. Additionally, deregulation in financial market may fuel bank demand.

Overall, we have a constructive outlook for the CLO market in 2026. Further Fed easing, sustained investor demand, and stabilizing credit fundamentals provide a solid foundation for continued market growth. Meanwhile, default and downgrade activities are expected to continue, albeit at a more moderate pace compared to recent years. Credit dispersion will remain a key theme with risks concentrated in selected industries facing tariff-related pressure or AI disruption, particularly among issuers with weaker balance sheets and elevated leverage. As such, asset analysis and manager selection remain critical for CLO investment with focus on tail risk mitigation.