Key takeaways

• US economic data continues to demonstrate robustness. This strength is supported by OBBBA[1] tailwinds providing a boost for continued consumer spending and increasing corporate capex, particularly in AI. Furthermore, US energy independence serves as more of a buffer compared to many energy-dependent countries that we believe are likely to face greater macro headwinds regarding inflation and growth.
• US Large Cap earnings continue to beat expectations. Realized first-quarter 2026 S&P 500 earnings have beat analysts’ expectations, and those analysts’ forward expectations have risen. This reflects a more resilient earnings environment, driven by secular AI trends where we don’t see meaningful signs of slowing. While valuations are not cheap, they have come down from the late 2025 highs.
• We are shifting US Large Cap from our previous slightly defensive tactical stance to align with our strategic allocation, reflecting the factors above.
• On the margin, we maintain our preference for intermediate duration within Core Fixed Income. We are trimming our Cash/Short-Duration Fixed Income allocation to balance out our shift in US Large Cap. We are leaving our Core Fixed Income unchanged, as the yield curve has un-inverted and pushed intermediate rates higher.

The macro (top-down) picture 

The structural advantage of energy independence. A key differentiator in the current macro environment is the growing divergence between the US and many of its global peers. US energy independence is currently serving as structural buffer against physical oil shortages and keeping natural gas prices in check. While many other international markets remain heavily reliant on energy imports—leaving them more vulnerable to external geopolitical shocks, sticky imported inflation, and constrained GDP growth—the US is better positioned to weather these macroeconomic headwinds given it’s a net exporter of oil and gas, meaning higher prices are benefiting those domestic companies’ earnings outlooks and keeping more of that money within the US economy. That said, the biggest “known unknown” risk, in our view, remains geopolitical risk related to Iran and re-opening of the Strait of Hormuz. While the US may be relatively more insulated, a protracted closure would likely weigh further on global growth expectations, so we remain vigilant in monitoring and assessing this fluid situation.  

US economic resilience and OBBBA tailwinds. The domestic economy continues to demonstrate remarkable robustness, defying earlier expectations of a broader slowdown, as seen by first-quarter 2026 GDP rebounding to 2%. We see sustained momentum supported by the OBBBA fiscal tailwinds, which have provided a meaningful boost to both consumer balance sheets and corporate capital expenditures. Personal incomes and average wages rose in March, supporting robust retail sales despite geopolitical concerns. This fiscal impulse has helped bridge the gap between policy uncertainty and actual economic output, keeping the US on a stable growth trajectory.

Corporate capex and the AI supercycle. Beyond the consumer, the structural growth narrative is being heavily driven by corporate investment. We are seeing a sustained wave of capital expenditures, increasingly concentrated around AI infrastructure and broader technological integration. We believe this secular trend provides a multi-year underpinning for broader economic activity and has the potential to bring meaningful productivity gains. That said, given the torrid pace of AI innovation as seen by the rapid rollout of new models, tools, and products, it is also bringing increased uncertainty over the potential winners and losers. Semiconductors and AI hardware have been big winners year to date, while software has been under pressure on disruption fears. Furthermore, the second-order effects on broader business adoption, acceleration, and disruption are evolving quickly and we expect these to have meaningful impacts on the ultimate size and duration of this capex cycle. Developments in this area remain a key focus for us looking forward across both macro and micro opportunities and risks.   

The micro (bottom-up) picture

US large cap: valuations cool as earnings deliver. We are shifting our US Large Cap position back to its neutral strategic weight, removing the 2% tactical underweight that had been driven by higher valuations. Corporate earnings are validating this shift as they have helped to bring down valuations from the prior peaks. Realized S&P 500 earnings through first-quarter 2026 are on track for mid-teens or higher earnings growth, alongside forward estimates for the remainder of the year in the high teens, both continuing to beat expectations. We believe this represents a relatively healthy corporate earnings environment more insulated from the aforementioned macro risks and more supported by secular AI trends and strong corporate balance sheets.

A shift to neutral, not overly bullish. While US large cap next-12-months (NTM) P/E valuations are certainly not cheap at around 21x as of late April, they have cooled from their late-2025 peaks closer to 23.5x. At current levels, valuation alone is no longer a sufficient catalyst to warrant an underweight stance against the current fundamental backdrop. It is important to emphasize that this move reflects a neutralized view and the 2% allocation increase is not an outright bullish or aggressively risk-on posture. We are simply realigning with our strategic baseline.

Fixed income: maintaining duration preferences for intermediate. To fund our 2% shift back to neutral in Equities, we are reducing our Cash/Short-Duration Fixed Income allocation by 2%. We elected to draw this liquidity from cash rather than our other fixed income buckets because we continue to prefer intermediate duration on the margin versus short duration. The intermediate portion of the taxable yield curve un-inverted post-Iran War, meaning intermediate duration now offers a modest yield pickup over shorter-duration, something we haven’t seen meaningfully since 2022. Given relatively tight credit spreads as one moves out in credit risk, we maintain a slight underweight to Credit Risk Alternatives, but continue to see some select opportunities within credit.  

Tactical considerations 

We believe the economic backdrop supports optimistic earnings growth expectations and thus maintaining risk assets at strategic levels is prudent for long-term investors. That said, the world is not without risks, and we remain vigilant regarding geopolitical risks, policy-driven volatility, and still modestly cautious on elevated valuations.