Global Market Perspectives, 2Q 2026

Global market perspectives 2Q 2026

Hope for the best, ready for the worst

Our quarterly investment outlook highlights the themes and investment implications for the period ahead.

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Key themes for 2Q 2026

Macro Crosscurrents and risks confront the global economy

The latest Middle East conflict and energy shock are posing downside risks to global activity and upside risks to global inflation. As a net energy exporter, the U.S. is the least vulnerable. By contrast, Europe and Asia are very exposed.

Macro The U.S. economy is likely to cool slightly as consumers bear the brunt of higher oil prices

Although the U.S. economy still displays solid macro foundations, tightening financial conditions are likely to create challenges across the economy. Increased gasoline prices almost fully offset the benefits of the OBBBA tax refund.

Macro The Federal Reserve is still set to cut rates, while other central banks lean toward hikes

The labor market has softened, but inflationary concerns imply the Fed will delay rate cuts until late 2026. The ECB and the Bank of England target price stability, so they have less flexibility to tolerate upside inflation risks and will not cut rates this year.

Equities Equity market resilience is being tested

The path forward for U.S. equities is challenged, but the economy’s underlying resilience and the strength of corporate margins suggest that any drawdown should remain contained. While the recent outperformance of non-U.S. equities has stalled, once the conflict ends, international markets will offer compelling opportunities at attractive valuations.

Fixed income Fixed income: Tight spreads, but benefiting from robust macro tailwinds

Pricing out of central bank cuts is driving front-end sovereign yields higher, while longer-end yields should trend lower as economic activity slows. Solid balance sheets and stable leverage should limit credit spread widening.

Investment perspectives Focus on resilience and diversification

History argues against abrupt portfolio shifts in response to geopolitical events. While our constructive medium‑term outlook remains intact, the current environment reinforces the importance of resilience and diversification.

Macro

Another shock to test global growth resilience

Key takeaway

After navigating multiple cross‑currents in the first quarter, the global economy now faces a renewed growth risk from higher energy prices.

Last year, economic strength across key regions—the U.S., Europe, and China—defied expectations that tariffs, lingering inflation, and geopolitics would suppress growth. As 2026 unfolds, the global economy is once again navigating several macro cross-currents that are testing its resilience.

While the macro foundation remains solid, cracks are emerging. Concerns around trade policy, private credit, and AI-related disruption continue to curb sentiment. More recently, the Middle East conflict and resulting spike in energy prices have introduced a new layer of uncertainty and fear.

The U.S.’s status as a net energy exporter implies greater resilience to energy shocks. As a result, U.S. growth downgrades have been minimal. In comparison, as a net energy importer, the European growth outlook has deteriorated more significantly. China, while heavily exposed to the Middle East, benefits from sizable oil reserves, the ability to shift toward coal, and declining energy intensity, helping limit the impact on its growth outlook.

Yet, if the conflict extends, sustained elevated energy prices would push up global inflation, dampening global activity. More severe growth downgrades for key global regions— including the U.S.—would be expected.

Macro

U.S. macro strength at risk of disruption

Key takeaway

The economy’s ability to withstand numerous headwinds since last year underscores underlying resilience supported by a strong capex cycle and robust consumer spending.

The U.S. economy entered 2026 on a solid footing, following a firm 2.1% GDP print in 2025, which was broadly in line with the long-term 2000s average. Improving business sentiment and robust consumer spending have bolstered the outlook, and the acceleration in AI-related investment has provided the economy with an additional growth engine.

Despite broad resilience, the key segment yet to gain traction is employment, likely contributing to very depressed consumer sentiment. Policy uncertainty, affordability strains, and concerns about AI disruption are also weighing on confidence.

The path ahead for the economy now likely hinges on the duration of the Middle East conflict and how long energy prices remain elevated. A sustained shock can seep into economic fundamentals, potentially altering the Fed’s policy trajectory and heightening the risk of a downturn.

Indeed, the recent sharp tightening in financial conditions reflects waning expectations for Fed easing. Financial conditions are still meaningfully more accommodative than during last year’s “Liberation Day” shock but further tightening from here is likely and will create challenges across the economy.

Macro

Federal Reserve: Delayed, not derailed

Key takeaway

Inflation concerns imply the Fed will be more cautious about proceeding with its rate-cutting cycle. We expect the Fed to delay its next cut to September, if not December.

Since the oil shocks of the 1970s and 1980s, the Fed has generally avoided tightening rates in response to supply-driven inflation, aided by inflation targeting and improved central bank credibility. However, the Fed was widely criticized for responding too late to the inflation surge following Russia’s invasion of Ukraine, and, with inflation having remained above target for five years, its sensitivity to persistent energy shocks is likely to have heightened.

The Fed’s dual mandate implies strong consideration of both inflation risks and demand destruction. Continued labor-market softening and affordability pressures argue for an eventual return to a neutral fed funds rate.

Yet, with inflation still elevated and now facing upside risks from both tariffs and energy prices, the Fed is likely to proceed cautiously and will require clear evidence that core inflation has moderated and inflation expectations remain anchored before it cuts. As Chair Powell recently noted, without visible progress on inflation, cuts are off the table.

We expect the Fed to delay its next cut to September–if not December–with a second 25bps cut pushed into early 2027. This is a more dovish outlook than market expectations, which have already fully priced out rate cuts this year.

Equities

U.S. equities: vulnerable, but a relative global safe-haven

Key takeaway

Renewed macro uncertainty underscores the importance of diversification, with stocks backed by secular drivers and resilient fundamentals better positioned to absorb shocks.

Prior to the geopolitical escalation, market leadership had broadened beyond U.S. big tech, underscoring a risk-on backdrop favoring cyclicals. International equities ground higher, reflecting strength across Europe, China, and Japan, coupled with concerns over concentration risk in the S&P 500.

The tone shifted in March. The energy shock rattled equity indices across energy-importing regions, notably Europe and Asia. Meanwhile, the S&P 500 reemerged as an equity safe-haven, supported by the U.S.’s status as a net energy producer and its concentration in profitable, high-growth companies favored by investors when growth becomes scarce.

The path forward hinges on whether U.S. corporate margins can continue to absorb shocks, and whether further geopolitical flare-ups create broader economic spillovers and a potential shift in the Fed’s policy trajectory. Such conditions would likely prompt investor caution, as the landscape would no longer offer broad support across markets.

The uncertain backdrop underscores the importance of diversifying sectoral exposure amid various macro cross-currents. Industries poised to capture AI cost savings or with durable macro drivers, like pharmaceuticals or defense, may provide an important buffer should macro headwinds persist.

Fixed income

Credit resiliency in a challenging backdrop

Key takeaway

A robust earnings environment and healthy corporate fundamentals point to corporate credit weathering the multiple shocks that it is facing.

Recent downside shocks have added to headwinds, triggering a risk-off environment that has widened credit spreads since the start of the year. Yet, provided the earnings environment remains robust, healthy margins should continue to underpin credit markets, limiting spread widening. Fundamental drivers such as solid balance sheets and stable leverage should also provide buffers against risks.

Concerns have risen about private credit, especially amid several high-profile lender bankruptcies and amid AI disruption that is spotlighting software exposure among lenders. However, these risks remain largely idiosyncratic, supported by the still-constructive macro foundations. Moreover, despite private credit’s linkages to the traditional banking system, spillovers to financial stability should be manageable, as banks today are much better capitalized than during prior crises. There is also little sign of stress passing through into other parts of the credit market.

Emerging market debt has outperformed since Inauguration Day, as a weaker dollar and Fed rate cuts have preserved relative value opportunities within the space. However, the energy shock could limit EM central banks’ policy space to continue easing and disproportionately weigh on growth.

Investment perspectives

Resilience and disciplined diversification

Key takeaway

The underlying strength of the global economy suggests that any drawdown should remain contained.

Market sentiment had already softened early in Q1 amid AI-related uncertainty and private credit concerns, leaving risk assets vulnerable. Against this backdrop, the energy shock has triggered a synchronized global risk‑off move.

Even so, the underlying strength of the global economy—supported by resilient household and corporate balance sheets and continued earnings momentum—suggests that any drawdown should remain contained. History also argues against abrupt portfolio shifts in response to geopolitical events. While our constructive medium‑term outlook remains intact, the current environment reinforces the importance of resilience and diversification across asset classes and regions.

Portfolios should remain positioned for global growth, while maintaining exposure to assets that tend to perform well during periods of heightened risk aversion. These include high‑quality assets, selective commodities, and sectors such as defense that typically benefit from elevated geopolitical tensions. As a net energy exporter, the U.S. economy is also relatively less exposed to higher oil and gas prices.

In an increasingly fragmented and volatile global landscape, disciplined diversification remains one of the most effective tools for navigating uncertainty while staying aligned with long‑term objectives.

Principal Global Insights team

Seema Shah

Seema Shah

Chief Global Strategist

Brian Skocypec

Brian Skocypec, CIMA

Director, Global Insights & Content Strategy

Christian Floro

Christian Floro, CFA, CMT

Market Strategist

Jordan Rosner

Jordan Rosner

Sr. Insights Strategist

Magdalena Ocampo

Magdalena Ocampo

Market Strategist

Benjamin Brandsgard

Benjamin Brandsgard

Insights Strategist

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Learn more about the factors impacting markets and portfolios in the quarter ahead by downloading the full PDF.

Macro views

Asset allocation

Equities

Fixed income

Index descriptions

Bloomberg U.S. High-Yield Corporate Bond Index is a rules-based, market-value-weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable and corporate bonds.

Bloomberg U.S. Corp High Yield 2% Issuer Capped Index is an unmanaged index comprised of fixed rate, non-investment grade debt securities that are dollar denominated. The index limits the maximum exposure to any one issuer to 2%.

Bloomberg U.S. Corporate Investment Grade Index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity and quality requirements. To qualify, bonds must be SEC-registered. The corporate sectors are industrial, utility and finance, which include both U.S. and non-U.S. corporations.

Bloomberg U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. Treasury bills are excluded by the maturity constraint. STRIPS are excluded from the index because their inclusion would result in double-counting.

MSCI ACWI Index includes large and mid cap stocks across developed and emerging market countries.

MSCI Brazil Index is designed to measure the performance of the large and mid cap segments of the Brazilian market.

MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs).

MSCI EAFE Index is listed for foreign stock funds (EAFE refers to Europe, Australasia, and Far East). Widely accepted as a benchmark for international stock performance, the EAFE Index is an aggregate of 21 individual country indexes.

MSCI Emerging Markets Index consists of large and mid cap companies across 24 countries and represents 10% of the world market capitalization. The index covers approximately 85% of the free float-adjusted market capitalization in each country in each of the 24 countries.

MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe.

MSCI Europe Banks Index is composed of large and mid cap stocks across 15 Developed Markets countries in Europe. All securities in the index are classified in the Banks industry group (within the Financials sector) according to the Global Industry Classification Standard (GICS^®).

MSCI Germany Index is designed to measure the performance of the large and mid cap segments of the German market.

MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market.

MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market.

MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market.

MSCI USA Growth Index captures large and mid cap securities exhibiting overall growth style characteristics in the U.S. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.

MSCI USA Index is a market capitalization weighted index designed to measure the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in the United States.

MSCI USA Large Cap Index is designed to measure the performance of the large cap segments of the U.S. market.

MSCI USA Mid Cap Index is designed to measure the performance of the mid cap segments of the U.S. market.

MSCI USA Quality Index aims to capture the performance of quality growth stocks by identifying stocks with high quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. The MSCI Quality Indexes complement existing MSCI Factor Indexes and can provide an effective diversification role in a portfolio of factor strategies.

MSCI USA Small Cap Index is designed to measure the performance of the small cap segment of the U.S. equity market.

MSCI USA Value Index captures large and mid cap U.S. securities exhibiting overall value style characteristics. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.

Standard & Poor’s 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market.

U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies.

Market indices have been provided for comparison purposes only. They are unmanaged and do not reflect any fees or expenses. Individuals cannot invest directly in an index.

Disclosure

Risk considerations

Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. Equity investments involve greater risk, including higher volatility, than fixed-income investments. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Asset allocation and diversification do not ensure a profit or protect against a loss.

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