Hello, everyone, and welcome. I'm Tim Hill, head of the US and European Client Group. We're excited to bring you to our 2026 perspectives, our year ahead outlook from Principal Asset Management. We're fortunate to have Seema Shah, our chief global strategist, leading today's discussion, along with a fantastic panel of our investment leaders.

As we look ahead to 2026, there's no shortage of important questions around inflation, interest rates, and what that shifting dynamic means for markets. You'll hear our team dig into what's shaping the landscape today and how they're thinking about the year ahead.

Just a reminder, if you have questions during the webcast, you can submit them at any time through the Q&A window on your screen. We'll aim to address as many of those as we can. OK, let's get started. Seema, take it away.

Good morning, everyone. Good morning, everyone. Thanks for being with us. Really pleased to be here with you to talk about the outlook for 2026. This year, we started with a lot of policy upheaval, trade concerns, worries about inflation, geopolitical fractures.

In the end, though, the economic picture actually turned out to be a lot more robust than people were anticipating. That was due to a number of familiar factors, very strong household and corporate balance sheets, active policy making, but also, the new angle, the new dynamic, I should say, of AI CapEx. That shaped the economy in 2025, and it will be key to the contours for 2026 too.

We're expecting household wealth to continue to rise to enable consumer spending to stay fairly strong. Corporate profit margins are very elevated, and that provides a cushion for companies to deal with the various headwinds that may hit in 2026.

And at the same time, even as consumer resilience may be waning a little bit, AI CapEx is coming in as a new engine of growth. It is also adding some fragility to the markets, and that's something that we're going to be talking about today.

Policymakers have been very, very important through 2025, and next year, we're also going to have fiscal policy coming into play. So tax refunds, tax incentives for businesses, these will be really important for driving stronger growth through the first half of the year and potentially, driving it also, in the second half as well.

So this is a fairly benign outlook. Of course, the Fed is important, and we will be discussing that today as well. The market may be a little bit more difficult to read, and my investment leaders here are going to be helping us work through this. So we are going to dig into everyone's view on markets and investing in 2026. But to kick us off, let's see where each of you are starting from.

So in as few words as possible, what market or asset class do you think has the best opportunity to outperform in 2026 and maybe even underperform? Can I come to you first, George?

How are you, Seema?

Great to be here with you again, George.

Good to be here. So from my perspective, I think, look, equity markets have had a significant run. Globally at this point, I continue to think that conditions are attractive for equity markets. I think we'll see an evolution where it's been a primarily growth-driven market in the US. I expect that to shift towards a valuation-driven market as a consequence of the liquidity that's out there.

Interesting, when you get outside the US, it's much more of a value-driven market. Even though it's been a strong market, I expect that to persist going forward as well.

Over to you, Todd.

Yeah, in as few words as possible, digital real asset strategies, I think on the upside, 60 seconds of context on that, however. Specifically, I'd be looking at data center development opportunities and then infrastructure, energy support to that digital sector as having upside.

And it's really methods of hard asset investing that are going to be backed by longer term contractual income streams. That's a method of really taking out some of the volatility that may be present if you're going for I themed strategies, say, in the public sectors where investor sentiment is certainly showing some signs of volatility, kind of on a daily basis now with headlines that are coming out.

But when you think about the demand side profile that we're going to have from cloud computing, from AI going forward, and the related energy demands, we really feel like those sectors are going to really be set to deliver high levels of both income and appreciation over the next year.

In terms of where there might be risks-- and I'll stay in private markets, and I'm not necessarily looking at downside here in terms of negative returns, but maybe less, if you think about real estate, the recovery is real in terms of appreciation starting to come back to the real estate sector.

However, it is a bit uneven. And as I look at property types, like self-storage, like life sciences, these are asset types that probably don't have the same degree of income growth potential over the next year, as maybe some of the other sectors where we might see 5%, 6%, 7% NOI growth potential in 2026.

Amazing. Thank you very much, Todd Everett. And so I'm going to go from Todd Everett over to Todd Jablonski, who's our CIO of asset allocation. I should have introduced everyone first. And I should say that George is our CIO of equities. We have Todd Everett, who is our CIO of private markets and real assets. And I'm going to be going later on to Mike Goosay, who's our CIO of fixed income.

But first of all, Todd Jablonski.

Well, Seema, when I think about the year ahead in asset classes to be excited about, US equities remain at the top of the list. That group is up over 80%. As you heard George say, in the short term, over 80% in the last three years, you've achieved in US equities. And I hear a lot talk about bubbles. I hear a lot of concerns about earnings delivery. But the fundamentals look great to me.

As I look through the potential for sales and earnings growth across the different sectors in the US and I see the enormous CapEx spend that the Magnificent Seven are driving, we're still optimistic on US equities next year.

Perfect. And over to you, Mike.

Yeah thanks, Seema. Fixed income is, in general, we think, has a great opportunity for 2026. You have the opportunity for income. I mean, for the post-COVID era, we've been enjoying relatively high levels of interest rates, and investors have been able to enjoy income.

Previous decade, it was really hard to get income. And so investors now can be able to extract an even high-quality fixed income sectors, a reasonable amount of income. But as we go into this latter part of the economic cycle, which, Seema, I know is one of the questions we're going to talk about today, you also have the opportunity for total return in fixed income.

And given some of the things that my colleagues talked about about quality of companies, earnings, improvements and the like, we still remain pretty optimistic around more credit sectors within fixed income. So things like high yield, even down into emerging market debt, where we do think that there's a real opportunity with some weakness in the dollar for some of these countries to outperform.

OK, great. So we've had the lightning round to try and understand, get at least a quick idea of their views. I'm going to be talking through a number of themes. We've touched on a few of them already.

But the first one, which I want to dive deeper into is that we're coming into 2026. The market has, again, had a really, really strong year. But George, I'm going to ask you first, do you think that there's a lot more upside, or are we almost underpricing some of the fragilities that may exist?

Well, I think there's both. I think there is still plenty of upside. It's liquidity driven. Monetary conditions continue to be quite supportive. We've had the shock and adjustment of a changed tariff regime.

But now, we're getting the benefits of a much greater degree of fiscal expansion. As you mentioned before, tax benefits. You're getting deregulation coming through. You're seeing liquidity with the exception of Bank of Japan, globally. And that's offset by Japanese fiscal policy also picking up.

So there's plenty of liquidity that's supportive. So there is plenty to go for, and there's lots of upside. And we're seeing earnings estimates on a bottom-up level look across the world in double digits. That's certainly supportive. And frankly, I don't think that that's overly optimistic on a bottom-up basis. That looks bright.

But you can also have-- I mean, if you've looked at the bolus of capital that's moved into stocks, on some of the hype or hyperbole that's out there, you've got to express some degree of caution. So I think the Oracle announcement from a few months ago where the stock was up substantially, up several hundred billion in a day, only to completely have that come off over the next month.

It highlights a little bit of a notion of, we can have all of this productivity, we can have all this growth and gains, but not everything is going to win. And we're still at an early stage, when we talk about AI of, we know this is going to create value. We don't exactly who's going to win from this.

And that's the lesson, I think, if you go back to the TMT period and the internet, the internet was cool. It did work. It was magnificent. But there's a whole cemetery of companies that weren't great. Your global crossings of the world. Your Lucents that didn't make it. For every Amazon, there were several failures.

So I think the market is going to be going through this period of sifting through who are the real winners or not in this giant productivity expansion.

Mike, same question to you. Are you trying to figure out the differentiating factors, or do you generally think that there's a lot more movement to come for the various parts of the credit sector?

So I think it's very interesting, period. Traditionally, when you get into the later part of the economic cycle, companies have re-leveraged up their balance sheets. Consumers have re-leveraged up. You start to reach to buy that new car, that credit card debt goes way up.

Same thing with companies, that they start to need to pay up to borrow money. Rates tend to be higher in the latter part of the economic cycle. This time, it's a bit different. The leverage in the system has shifted away from the corporate sector into the government sector.

So if you look at these balance sheets, as Todd and George were talking about, they're much healthier companies in the more traditional sense. AI, exception, we can talk about that separately. But the reality is that most of the traditional financial industrial utility companies are much better positioned than they traditionally are at this latter part of the economic cycle.

And so as we go into an environment where we do believe the Fed will be cutting rates, where we do think that the economy is good enough, there is some signs of weakness, which I'm sure we'll hit on later, that the corporate sector, traditionally, would start to struggle in normal economic environments.

But this feels different. This just feels like companies are able to weather. They've been able to refinance themselves at reasonable rates over the last 10 years. They've been able to put themselves in a good fiscal position.

Now, the government's balance sheet continues to deteriorate. And so if you were to be doing an apples-to-apples comparison on where you want to lend your money, A, AA corporate, or a government, which is seeing continued deterioration in its fundamentals, well, I know what I would want to do.

And so we think that as a result, the corporate sector can continue to outperform. It's hard to imagine a huge spread tightening from here. But as I like to jokingly say, and I get made fun of it for it is that investors eat yield, they don't eat spread. So that all-in yield remains attractive.

And so as we think about that in terms of investor appetite for income, investor demand for higher quality, assets at reasonable yields, we think that the credit sector can continue well into 2026, as being a staunch good performer.

Yeah, I'd like to jump in on what Mike was saying there. A key point is, corporate balance sheets are in good shape. I think we all agree on this. And in fact, the high end of the consumer balance sheet also looks pretty good.

The real weakness is in the lower half of the consumer. And it's typically, we start to worry late cycle, when you get close to some of event, and either an excess liquidity, either you have too much debt that suddenly precipitates some of event, some of action that leads to an excess that needs to be corrected, I'm not seeing excesses throughout the system. I'm not seeing those kinds of excesses that often lead to those painful pullbacks.

At the same time, we have a stimulative fiscal policy, and we're expecting three Fed cuts, maybe more next year. So we have a stimulative monetary policy, and we are not in a recession. It is very rare that you have, again, [INAUDIBLE] fiscal spending and an easing Fed, and we're not in a recession.

So I see a lot of tailwinds. Again, despite the higher elevated risk, despite the precipitous situation we are with high valuations, again, the threats are diminished, and some of the policy actions are there, I think, that can support a risk-on trade in '26.

And I'm sorry to keep going back and forth, but not to be Pollyanna, but the reality is that there are still-- Todd mentioned one of them-- the bottom end of the consumer sector is struggling. You see delinquencies and defaults rising in that segment.

Income levels haven't kept up with the pace of inflation for that lower income cohort. And so there it isn't a perfect beauty pageant, where everyone is beautiful from top to bottom. And so we need to be clear about that. There will be some sectors that will be more negatively impacted by that.

And that's our job. Our job is to comb through and figure out winners and losers, sectors that are going to do better than others. And so I think that there's-- not that this is supposed to be an advertisement for active management, but active management is really important in an environment like this, where you're going to have real differentiation. Whether that's George's example about AI and the implications of the winners and losers there, or even sectors that are apt to do better in an environment where you do have some bifurcation of the economy.

Yeah, and I think to your point, it's really key that I think one of the things that we're saying is that there's pockets of weakness, which we have to manage. That's what you guys are going to be here to do. But those pockets of weakness are not big enough to overwhelm the broader economy.

That's right.

I just want to come back to you, Todd, one point that you said, because I think it's important to clarify this, because there is a debate. Are we late cycle, or are we mid-cycle, or are there flashes of late cycle?

It's tough, actually, the traditional economic wave that we all grew up with is out of sync. In fact, by our regime model, we've been in the longest decline going back 20 years in terms of duration of time. In fact, I even asked Han in Hong Kong, when I saw this ramp up in economic activity earlier this year, are we out of this decline? And the answer was no. This is just economic activity ahead of Trump tariffs.

So I actually still think we're in the late cycle of a decline. And the major question is, what comes next. Is it a painful contraction, that hard landing we were talking about two years ago. Or do you go right back into that of expansion policy where we have been? Throughout history, you've seen the US economy come out of those declines and most frequently, just go right back into expansion. That's typically what happens, and that's our base case today.

So I think I'd call it mid to late cycle of a decline. I'd love to see that cyclical acceleration. We're not there yet, though. I don't see quite the deep value cyclical turn to be able to lean into the industrial's materials financials more cyclical end of the market. I would agree with George's point, however, value is gaining some attraction. It's been a growth-only story for a long time in equity markets. I think '26 might be a year in which value comes back to vogue a bit.

And the shifting dynamics has been really key. So some of the stuff that we've been typically looking at about economic cycles over the decades is starting to change. Now, one of those areas, I think, is the rise of private markets, which has been a real topic of conversation for, I think, for investors everywhere. So, Todd, how are you seeing things?

Yeah, and thinking about the economic cycle, I agree with Todd. I think, overall, we're probably in that middle to later. However, there are areas in pockets like in private real estate that I really think it's a new cycle in a lot of respects.

Commercial real estate here in the US, the only major asset sector that's actually corrected in valuations by 20%, 25% over the last two to three years while we were going through the Fed tightening cycle. Now, that we're kind of past that, we've seen stability in valuations. We started to see a bit of appreciation return to the marketplace, which is a great thing for that sector.

And in the process of going through the devaluation, we saw a major slowdown in new construction activity. We saw cap rates adjust appropriately, as they should have for the increased cost of debt. But with stability now-- and I don't think we'll have the recovery that we typically have. Normally, in commercial real estate, when you get a devaluation that's at 20%, 25%, you're going to see double-digit returns when you start to see a cycle like this, with the Fed starting to ease again.

I don't think it's going to be that strong, but I think it will be positive. And the reason I say it's not going to be as strong as what we've seen historically is that the long end of the Treasury yield, I think it's going to be fairly rangebound, and we will see short rates come down. That will prompt activity.

It will prompt activity. I love fixed income in terms of the investment opportunities that are going to exist there, I think will increase. Pressures that we might have started to see on high-yield companies or companies that were below investment grade taking more high yield debt should ease a bit in this type of cycle.

We've seen it in direct lending. The amount pick percentages are really starting to stabilize, if not come down as the short end of the curve comes down. For real estate, on the other hand, I think it will be more rangebound, and we will see appreciation, but it won't be like we've seen in prior cycles.

Then you think about infrastructure. There's a lot of runway left with respect to infrastructure, and you can talk about the energy needs related to AI. You can talk about the amount of just infrastructure we're going to need from a societal perspective. And then also, just replacing aging infrastructure in the US and throughout the world is really going to provide, I think, a longer runway. So I still feel like we're fairly early in terms of infrastructure in this cycle and again, I think a whole new cycle for commercial real estate.

But Todd, private credit has been on a run for a long time too. And for the first time this year, we finally got some maybe cracks or some dents into the credit picture there on the private space. How are you feeling about private credit? Can that continue its stellar run, or do you think that you could get tighter lending standards, better quality coming out of that pressure?

Yeah, I think the lending standards-- and you have to look at the markets. But I think for the middle market debt sector and the lower middle market, the lending standards are still very strong. 40% loan to value, strong covenant structures for lower middle market type lending opportunities.

Where I think we have seen a bit more risk being taken, and this risk that not all investors are going to totally understand, would be in the ABS marketplace and the noise associated with, do I have a perfected security interest? What we do in terms of middle market direct lending, we're doing UCC filings on any assets that we're taking.

We know day one of the loan closing, exactly what collateral we're getting, and we're in a secured protected position. But I will admit there are areas of the ABS marketplace looking at off balance sheet factoring, for instance, where you don't have those UCC filings, and there is financial engineering and risk that I don't know that all investors totally understand.

One of the things that I've been hearing from each of you, and I should say this, it seems to me it's a fairly constructive outlook across risk assets. There are nuances that need to be navigated. One of the key themes that keeps coming through in all conversations, we're hearing it from four of you today, is about AI. And actually, from my macro conversations, in a way that I don't think I ever used to have, AI is a topic of conversation in the labor market. Inflation, interest rates. Wherever you go, it's there.

But George, I'm going to come to you first, because there are question marks around AI. Is it something which is creating a productivity boom? Is it really having an impact, a positive impact on earnings, or are we creating more of a concentration risk, which could end up in tears?

So the answer is, we don't know. Anybody who tells you, they know what AI is going to lead to is flat out wrong. We're figuring it out as we play along. Right now, we've seen a tremendous, tremendous amount of capital that's gone into the whole AI ecosystem.

We've not seen real revenues come in yet. We've not seen productivity really pick up yet. Companies are talking about it, but nobody has got anything tangible to show. And I think from my perspective, everything is not all perfect and shiny out there.

One of the big nuances, there's been so much capital that's gone into AI, whether it's been public markets, private markets, et cetera. And we're starting to have to figure out, well, what's the return on that investment? And the return on that investment looks a lot more concerning, given a lot of the enthusiasm that went and supported this.

And you're starting to see the markets react to it. I think the fixed income markets helped lead. We've seen the CDs spreads on things like Oracle, which I mentioned previously, start picking up. The equity markets are noticing this. The equity markets are also noticing that what drove the Mag Seven in that ilk for a long period of time was this unbelievable free cash flow generation. Capital light cash.

All of a sudden, this is really capital intensive cash. They look like industrials. They don't look like necessarily balance sheet-free technology companies. That's a pretty substantial change. And it's unclear, if we don't get pretty quickly the use cases that are showing revenues or efficiencies by end-use customers, whether we're going to have the kind of demand that is embedded in Altman's ChatGPT numbers in 2030. I mean, nobody knows.

And so we're there. I will share with you, we're seeing efficiencies. We're seeing stuff that's cool. But how cool? I'm not terribly sure. And then we've gotta understand the convexity between are we going to be hiring more people or losing more people, or what are the jobs going to transition? This is all something we're going to be figuring out as we get in.

And then, by the way, once we start figuring that out, let's be clear, we're going to be on to quantum. And quantum computing is an entirely different disintermediating factor. Whatever disintermediation we think is happening with AI, it's going to be on steroids with quantum. And so there's a lot of disruption that's out there, and I think we have to be very nimble with respect to our thinking and understand that you can't just think like everything is going to be all glorious and everybody wins here. We're going to have to see how this all plays out.

And George, as I think about it, the Mag Seven, I love the demand of the Mag Seven in terms of signing a long-term lease, 10, 15-year lease. They're AA rated credits, even if the credit slips a little bit, I've still got, likely an investment-grade credit over the foreseeable future backing the assets that we're investing in.

But yet, I don't have to worry about what is the next quarterly earnings going to look like, and how is the market reacting to that, which is one of the reasons why we're excited about AI and the prospects, particularly when it relates to things like infrastructure and real estate, the hard asset elements of that.

Yeah, I guess your area is where you see the tangible, rather than the almost, in a way, a bit of a leap of faith, which is going on for--

I think they're related, though. The tangible investment is predicated on the leap of faith today. If that leap of faith doesn't occur, that tangible investments will come in. The market will force that discipline. Companies will force that discipline. You're starting to hear companies start to talk a little differently now than they were even earlier in the year.

There is a greater degree of recognition of we had better be able to generate cash-on-cash returns in a relatively reasonable time period than we were in the past. And I'll give you an example, and this has happened quickly, and it's important to understand the significant shifts in this. And fixed income is leading equities in this.

About a month ago, Alibaba announced they were going to spend $50 billion in AI. Nothing else. That's all they shared. Stock was up 8%. That's just the market telling you, yeah, just spend the damn money. Go here. Meta reports earnings, talking about spending money, the stock gets hammered. Really great results.

Why? I mean, fantastic results. Better than expectations. Tremendous growth. Why? The markets change that narrative to hey, every spend on AI is awesome too. What is the cash-on-cash return? Start getting more tangible here, because right now, we're seeing a declination in your forward returns on capital, and we're not going to pay the same multiple for that before.

And what does that mean? It likely means, if I'm at Meta or if I'm at any of the Mag Sevens, I'm starting to think a little bit differently about how am I spending. Do I have a tangible business case here. It's very similar to what we saw in the TMT bubble.

And so I'm not saying this is bad. I'm saying this is going to shake out, and we're going to have to see how this spending goes. But I hear everything you're saying in that tangible investment is certainly helpful. I think we've gotta be careful. There is a linkage. All that money going there is predicated on this is the gift that keeps going that you hear Jensen Huang say, hey, the more money you spend on this, the more money you make.

That is a break from economic reality at the limit. That can happen at some point, but you don't have positive marginal returns or something called diminishing marginal returns. OK. I mean, we've got thousands of years of humanity that hasn't happened at the limit before, but it's happening now. OK.

That's where the market is coming back with. I don't know. Earlier in the year, shoot two months ago, the market was saying, yeah, that's great. Today the market is telling you, maybe not so much.

So Todd, I want to come to you, because and maybe you can also think about this as well. To your point, there's been a lot of noise in the last couple of months. But is this a narrative shifting, or is it a noise which then, as we've seen time and time again, it disappears, the market overreacts, people get really worried, and then it's something in the background? What do you think?

It feel a little more ebb and flow to me, Seema. It feels a little bit more ebb and flow of news cycle. I mean, some of these Mag Seven companies have been burning billions of dollars a year on self-driving cars that I haven't yet seen on the roads.

They've been burning tens of billions of dollars a year on virtual reality worlds, which are now, slowly being phased out in terms of those spend. They've had so much excess cash that they've been able to do projects and activities that basically, no other company would ever try to spend that much money on.

So can they be run better? Is there room for more effective management, more focused on profitability return on ROI on that spending? Yes, there's room for that. But at the same time, I see these companies as being quite durable, and I see their position as being quite strong.

I think cloud computing is what gave them the credibility. I was skeptical on cloud computing. I thought my network drive and PC worked quite well. It turns out, though, our company, every other company I know has moved every bit of their data into the cloud, and they're now paying to keep it there with a recurring check and regular cash flow on into the unknown future.

That's created just an incredible amount of cash flow that can keep being deployed. My tagline for this is, I've been investing other people's money for 25 years, and this CapEx cycle on AI is the biggest CapEx cycle I have seen in that entire 25-year history.

Hundreds of billions of dollars, being thrown at something. Again, the confidence of these business managers that this is the right step and the right activity is a little compelling to me. The certainty that you hear from leadership, that this is where the future is going, I didn't where cloud computing was going. I'm pretty happy with how it turned out.

I don't know where AI is going. Really, we are figuring it out as we go, but I'm pretty confident I'm going to be pleased with the results. And by the way, from a geopolitical perspective, China can manufacture. Technology giants too, they've got a track record of doing it. I like to think of these as a new mountain range that has erupted from the earth, and they don't fade quickly.

It took a while for the Appalachians to get smaller than the Rockies. They had to wear down over a few thousand of years. It's not going to take that long, but I think that these giants are going to stick around. I think the free cash flow profitability is remarkable. 70% ROEs on a group of stocks-- available, ubiquitous, cheap to access. All these things, I think, paint a pretty compelling case for mega-caps around the globe.

So everything you said I think is fair. The counter though, is the valuations on some of this. Sky high. And it's not that this is going to be cool as what's the market going to calibrate, eventually, in terms of what we're willing to pay for this? And I think that's an open question.

So there's no question that the Mag Seven, ME ilk are phenomenal set of companies. If you look at the free cash flow margins, you look at their growth historically, you look at their historical balance sheet light orientation of their businesses, if you look at what they've been able to do with all sorts of cutting-edge things, it's really funny.

Before cloud was software as a service, if we're going to continue, these are the kind of things that just happen over and over again. We're continuing to evolve. The creative destruction is massive, and it's happening quicker and quicker, and I think it's really profitable and productive for society. But what's the price you pay for that?

And I think there is a level of-- well, what's the calibration? The calibration earlier was, do whatever price it is. It's going to be amazing. And maybe that's right, but is it going to be amazing for everybody? Is it going to be as amazing as we think. The $500 billion on valuation on a ChatGPT, which is still negative revenue or something like that, there's a lot of faith in that.

And so I think there's going to be the ebb and take of markets with respect to that. And I think being very thoughtful and surgical in terms of how you invest-- and I'm not saying you're not, but I think that's going to be a big thing for markets. And so I think you can have great companies that, at times, can be risky from a valuation perspective.

Yeah George, I totally agree. You think about cloud computing, it's growing at, I think, about a 14% annual rate today. But if you're basing your valuation on something that's double or triple that, I think it's time for a reality check,

I think capital markets are also starting to change, or these companies are starting to change the way they look at capital markets. Previously, it was all equity financing. It was all free cash flow for their investing. We've had in the fixed income markets, huge deals, some of the biggest on record for some of these large-- Meta, Oracle, all the companies that we're talking about.

And they're not traditionally accessing the fixed income markets. They've never really used it. They didn't need to. And now, they're starting to manage their balance sheet a little differently, which, I take it as a good sign, because they're starting to think about their sources of capital differently than they had before.

Never worried about bottom line profits. And now, fixed income investors, we look at things differently. We're always looking for the problem. And so when we come to market, the expectation levels are different. And I view this, and you can see it in the behavior-- we mentioned Oracle couple of times now, but we can see it in the behavior of those bonds. Since they came to market, it's been a bit challenging.

I suspect this debate is going to be something that we'll be talking about next year, the year after that, et cetera. So some inspiration, some skepticism.

By the way, AI is going to be awesome. There's no question. The question is what price you pay for that. What does awesome look like? Who has the awesome, and what price you pay for it?

And I think the other thing is, it's become this catch all for all productivity, technology-based improvement. And so we all say AI. I don't even what it means, technically, but it just becomes this basket of things that is going to replace our jobs. It's going to replace the way that we do things.

We bank. We manufacture. And some of it's going to be real and right, and some of it's not. And some of it's just the normal trajectory of me using Lotus 1-2-3, 25 years ago and knowing every subcode on how to move around it to today, which is, you talk into a screen, and it does it for you. And so that's just productivity gains that have continued for the last 35 years.

OK, I'm going to go on to the next theme. So one of the things that we have been seeing from a macro side is we talk about AI, of course, we talk about balance sheets, but there's still policy. And at least in the last couple of weeks, even, policy continues to be a key driver for markets.

You hear about the Fed. It's going to cut the market, set the price and the market likes it. So the Fed is still really, really important. So for 2026-- and I'm going to come to you first on this one, Mike, the combination, I think that we're going to see from a fiscal stimulus side from a monetary easing side, does that provide a sustained economic support, or is this impact going to be fairly short lived?

So if we go back to a year ago, it's pretty much a year ago when we had the elections and Trump was elected, there was really the three-legged stool, which was, continuation of tax cuts, which really isn't new fiscal expansion, but it's just a continuation of the existing tax cuts. It was tariffs-- we fill the government coffers that were giving back in some of these programs-- and deregulation.

And so that stimulus we've seen some of it. We've seen tariffs, and that has certainly helped the balance sheet. We've seen the extension of the 2017-2018 tax cuts. But now, the next piece of potential stimulus is that deregulation and the economy. And I think that's, in 2026, one of the things that it could have a meaningful effect on the potential growth rate, potential inflation rate, which I think is coming around to your Fed question.

We do think the Fed will cut policy rates. We think the Fed wants to move down to a neutral policy rate. What is neutral policy rate is still an open question.

Very much so.

Our start could be 3%, 2.75%. It could be 3.25% There's all kinds of different numbers, and everyone has got an opinion. But the reality is that it's somewhere lower than where we are now. As monetary policy sits today at a bit more of a restrictive level, we think that the Fed will continue to move towards whatever they perceive to be neutral.

So we do think they'll be cutting policies in the next week. We'll see more in early 2026. And that will set us up for a reasonably healthy, stimulative, both monetary and fiscal policy environment.

At the same time, though, we can't ignore the fact that we're a part of a global economy. The ECB had already cut rates. They got ahead of the curve, and now, we're experiencing maybe stickier inflation than maybe they were expecting. Growth has been a little better than they were expecting. And so now, the risks are, especially with the ECB, which tends to be a much more aggressive inflation hawk. Central bank, there could be tightening of policy coming in the next 12 months.

Bank of Japan, similarly, are experiencing some upside risks to the first time and inflation in 30 years and potentially, could be hiking monetary policy in a meaningful way. So you're going to see this real bifurcation across the global central bank landscape. But at the end of the day, what we think is that the economy is doing OK. Inflation remains sticky, but OK. And the Fed needs to move policy down to what they perceive to be neutral.

One last thing I'll just say is now that all the stimulus is dumped in there, we are also an environment where we always had 2% as this inflation target. It's not written in stone anywhere that 2% is the right number. We're going to have a new Fed chairman in 2026. Certainly, somebody that's maybe going to be less rigorous around that 3%, 2%, whatever number, and just target stable and prices, which is what actually the Fed's congressional mandated objective is, is full employment and stable prices.

And so stable prices could mean 3%. It could mean 3.5% And so this is, to Todd's earlier point, is that as the Fed cuts policy rates, you may actually see that long-term interest rates don't fall really substantially. I mean, we look at 2025 as a base case of we've had a number of Fed rate cuts. The front end of the curve has rallied by between 60 and 75 basis points to 30 years, unchanged largely since the beginning of the year.

And so that environment is one that is somewhat worrying, as you start to think about some of the other factors, and particularly, in real estate.

And it's not just inflation, it's going to be the fiscal story as well, which could be putting that upward pressure. But Todd, you've mentioned the Fed a number of times when you were talking about private markets, real estate. Where are you sitting on this?

Yeah, we're thinking that the long end is going to be very rangebound, if not maybe even creep out a little bit in terms of levels, while the short end goes down, so steeper yield curve. But I think that is a bit of a flag for the overall marketplace.

Real estate went through several years of extremely historically low interest rates. And then we went through an adjustment period. And you've seen how painful it was during the last two to three years, when we actually realized we just cannot exist at these low interest rates forever.

I think of things about government debt and the debt level currently. How long can we go on with this? I agree, I think with the administration's support, the risks over the near term that we're going to see higher interest rates across the curve, probably relatively low, but it is maybe a little bit more of a risk on the long end of the curve.

That being said, I think we've already made our adjustments in valuations. Our trading levels are at reasonable levels today in commercial real estate, if anything. If you're buying today, you can probably buy below replacement costs. Existing lease, stabilized assets below where replacement costs are because we have seen inflation, particularly in materials and labor and the things surrounding building new.

That will, hopefully, keep the markets a bit in balance in terms of not adding to much new supply, because we will have shorter, and construction lending is done on a shorter term basis. But then once an asset is completed, stabilized, leased, then it tends to go to long-term financing.

And where that is at is really going to be what determines the long-term valuation in commercial real estate. But we do feel good, and we feel that income is now also strong. It's stable, and we get some appreciation return. Again, it may not be double digit, but an upper single digit core real estate return is not out of the question today.

Todd, when you've been talking, I hear you, one of the reasons that you're quite constructive about 2026 is because of this monetary and fiscal stimulus, which is coming in. But Mike mentioned about the inflation target almost drifting higher. Does that give you any concern, sir?

I think it's more of a secular theme around late stage Western democracies taking on a whole lot of debt. And that spans from the United States to the UK to France. You're starting to see governments in the West take on just extraordinary levels of debt. And the question then becomes, what's the easiest way out of that debt.

And for most governments, it's to inflate your way out. It's very simple. You inflate your nominal economy, then what you get is a less debt as a percentage of the GDP. That's the easiest way out. So I do note the incentive from the government side, at least, is a little higher inflation might not be that bad for managing debt levels.

On the other hand, it can be very politically unpopular. Just look at any President that's running for election. The cost of living is going to be at, I think, at the forefront in the next several years, because this inflation is really hitting. It's hitting the average American. It's hitting the average American pretty hard on everything from housing, to services, to food.

All of those things, I think, our part of a secular theme. Not helping in '26. This is going to take some time. These big-level debt question issues don't typically themselves out in a year. More of a long term, I think, issue.

And the Trump administration, we can hear in the last few weeks that going into midterm election year, affordability is the catch.

Oh, boy. He's doing everything he can, from bananas to daily other goods to make sure that the everyday human, hopefully, experiences a bit less inflation. But look, I do agree with Mike. I'm not sure 2 is the right number. Could be 3. I think that's quite possible that 2% 2.5%, 3% could be where we settle in. And that's enough room, I think, to not derail productive economic activity.

It's all about the certainty. When you set a contract, you'd like to what the pricing is going to be over the length of that contract. Maybe it compounds at 3, rather than compounding at 2.

I mean, the flip side of all this is-- and I started it by saying maybe inflation is OK at a higher level. The reality is that higher inflation is bad. We don't want--

Too high.

It's too high. Inflation is bad. No doubt about it. And so we do have to be careful. The implications for things like real estate, for equity prices, for traditional consumer spending is really impacted by high levels of inflation. So we don't want to be too dramatic in saying higher inflation is OK, because high inflation is not.