Investors today are being challenged from all sides. Interest rates remain elevated, policy uncertainty and geopolitical shocks are clouding the outlook, and artificial intelligence is reshaping markets while intensifying concentration risk. These aren’t abstract concerns or distant possibilities; they’re forces unfolding in real time, changing how investors assess risk and identify opportunities. Four investment leaders recently gathered in New York City to discuss what has changed, where risks may be mispriced, and how they are navigating a market that’s only growing more complex.
The session included Rich Hill, Global Head of Real Estate Research and Strategy; Mike Goosay, Chief Investment Officer, Fixed Income; and Emily Foshag, Equities portfolio manager, all of whom spoke with Principal’s Seema Shah, Chief Global Strategist.
Rich Hill: The world looks very different from earlier this year. Inflation was expected to move lower, growth appeared to be on a good trajectory, and central banks seemed likely to ease. Today, rates may remain higher for longer. A 10-year Treasury yield of 6% is possible, even if it is not our base case. The bigger problem is not necessarily the level of rates; it is uncertainty and volatility. Markets can adapt to a stable 4.5% or 5% yield. What they need is greater confidence about where policy is headed.
Mike Goosay: Markets have absorbed higher short-term rates, tariffs, war, and policy uncertainty remarkably well. Credit spreads have barely moved, and equities remain near their highs. That suggests the economy can tolerate higher rates better than many expected. The inflationary impact of an oil shock may be less important than labor costs and the prices of goods and services, which are more central to the Federal Reserve’s outlook.
“Investors are once again being compensated for duration and credit risk.”
Emily Foshag: The decisive issue is earnings. The S&P 500 has delivered seven consecutive quarters of double-digit earnings growth, an extraordinary run. Even if growth decelerates, it would be slowing from a very high base. At roughly 20 times forward earnings, equities may look fairly valued against a 5% Treasury yield, but continued earnings growth should be able to support continued returns. The job market is OK, the consumer is OK, and we’re in a war, which can create investable opportunities.
So as long as earnings growth comes through, we expect that there is further room to grow. Also remember that the U.S. economy may now be less rate-sensitive than it once was, given the balance sheet strength of large technology companies and the fact that many homeowners are locked into low mortgage rates.
But rather than making one broad macro prediction, we look for companies with durable cash flows, pricing power, and limited sensitivity to refinancing costs.
“Some established portfolio biases may deserve another look.”
Rich: While commercial real estate has underperformed for several years, investors have moved beyond waiting for lower rates to rescue valuations. The focus is returning to the fundamentals of the asset class, especially net operating income growth.
Public REITs and private real estate performance have improved, transaction volumes are rising, and debt markets are open. Yet interestingly, dispersion across property types is significant. While fast-growing property types can produce attractive total returns even with 5% rates, slow-growing assets remain vulnerable. That dispersion makes asset selection critical. If investors choose the right property type in the right market, this could prove to be an exceptional vintage. Remember, commercial real estate existed before 2010 and performed well.
Mike: We are finally able to generate income in the fixed income market. Investors can earn attractive yields in Treasurys, mortgages, and high-quality credit without reaching as aggressively as they did when policy rates were near zero.
We also see opportunities in high-yield and securitized credit, both of which offer an attractive risk/reward profile. Spreads are tight, but that’s for a reason. The quality of the high-yield market has improved meaningfully over the last 15 years, an important development that supports lower default risk.
Emily: Such an environment could create a sharp short-term air pocket, particularly if the market loses confidence in the economics of leading model providers. But lower compute and token costs could also stimulate broader demand in a multi-model world. To account for that risk, we prefer longer-duration infrastructure assets, such as data centers and power, while remaining aware that hardware economics can change quickly.
Rich: It’s important to remember that data centers are not a one-way trade. Hot money will lead to mistakes, particularly when investors build the wrong asset in the wrong market or use weak lease structures. As such, we favor facilities in established availability zones, with tenants already in place, closed-loop cooling, and, increasingly, behind-the-meter power. We are also more comfortable with cloud and AI-inference demand than with speculative facilities built to train models for uncertain future demand.
Emily: For a long time, equity managers were comfortable being underweight energy and materials because it worked in the 2010s, often using these sectors as funding sources. But recurring geopolitical shocks, constrained commodity supply, and a potentially weaker dollar may challenge that long-standing approach. A neutral or overweight position in energy, materials, or gold miners could provide both attractive cash flows and a useful portfolio hedge. Gold miners, for example, are now generating more free cash flow than many technology companies! It’s just a good reminder that some established portfolio biases may deserve another look.
Rich: The same idea applies to commercial real estate. Investors spent years assuming lower Treasury yields would eventually support valuations. If that tailwind isn’t coming, then you have to figure out other tailwinds that drive commercial real estate. We think that is done by getting back to basics: Which property types and markets can actually deliver durable net operating income growth? Overall, it seems that the market is returning to what matters across all markets: growth.
“The market is returning to what matters across all markets: growth.”
Rich: U.S. housing offers compelling opportunities, but the issue is a mismatch rather than a single nationwide shortage. Build-to-rent, manufactured housing, senior housing, and selected student housing may offer stronger growth than commodity-style apartments in oversupplied markets.
Mike: Fixed income broadly is attractive because investors are once again being compensated for duration and credit risk. High yield and selected securitized assets stand out to me.
Emily: We see opportunities in energy, selected software—especially cybersecurity—consumer companies whose share prices have weakened more than their fundamentals, and small-cap businesses tied to capital spending. Across the market, the common thread is selectivity: emphasize durable growth, understand the structure of the risk, and avoid relying on lower rates to make the investment case work.
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Risk considerations
Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal invested. Equity markets are subject to many factors, including economic conditions, government regulations, market sentiment, local and international political events, and environmental and technological issues that may impact return and volatility. International investing involves greater risks such as currency fluctuations, political/social instability, and differing accounting standards. Asset allocation and diversification do not ensure a profit or protect against a loss. Investment risk may be magnified with alternative investment strategies due to their use of arbitrage, leverage, and derivatives. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.
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