Despite trade uncertainty, persistent inflation, and global conflicts, the U.S. economy remained resilient. Growth slowed early in the year but recovered as AI-related business investment and inventories strengthened. Inflation remains elevated, leading the Federal Reserve to pause rate cuts, adopt a more hawkish stance, and signal potential rate increases in FY2027.
Global equity performance was highly uneven. AI-related sectors, particularly semiconductors, drove gains, while software companies facing AI disruption underperformed. U.S. equities posted strong returns, emerging markets benefited from semiconductor leadership in Asia, and developed international markets saw value lead growth.
Private equity showed improving, but selective, activity amid tighter credit conditions, geopolitical risks, and AI disruption. Fundraising became more concentrated among established managers and, although exit activity improved, a backlog of aging investments remained.
Hedge funds benefited from artificial intelligence, biotechnology, and macro trading opportunities, while real assets generated strong returns, supported by rising power demand, data center expansion, and geopolitical supply disruptions.
Fixed income produced modest positive returns despite rising Treasury yields, as resilient credit markets and narrowing spreads supported corporate and securitized bonds.
Macro/Monetary Policy
During the 2026 fiscal year (“FY 2026”), the U.S. economy remained resilient despite tariff and trade uncertainty, Middle East conflict, the Russia-Ukraine war, weak consumer sentiment, and elevated inflation.
Growth slowed to +0.5% in fiscal Q2, reflecting the 43-day government shutdown from October 1 to November 12, 2025, weaker consumer spending, trade drag, and a negative inventory revision. Growth rebounded in fiscal Q3, as AI-related business investment and inventories strengthened, while trade was a smaller drag. Estimates suggest fiscal Q4 growth remained broadly similar.
Inflation reaccelerated during the fiscal year, even as labor markets appeared closer to equilibrium. Lower-income households faced continued pressure from the K-shaped economy and rising prices, leaving growth more dependent on higher-income consumers and AI-related capital spending.
Monetary policy began the year on a gradual easing path before turning more hawkish. The FOMC cut rates by 75 bps across September, October, and December, then held steady as inflation remained elevated.
At the April 2026 meeting, three voting members dissented because they opposed retaining an easing bias in the statement. By fiscal year-end, Kevin Warsh had been confirmed as Chair of the Board of Governors and FOMC Chair, succeeding Jerome Powell after his term ended in May. The FOMC held rates steady, lowered growth projections, raised inflation expectations, and its dot plot signaled at least one potential hike in the first half of fiscal 2027.
Equities
Global equities posted another strong fiscal year, returning 23.6% and extending the double-digit return streak to four years. Beneath the headline result, performance varied widely by region, sector, and style. AI enthusiasm separated leaders from laggards: companies tied to the AI infrastructure buildout rallied, while businesses viewed as vulnerable to disruption sold off. This divide was most pronounced in the U.S. and emerging markets.
U.S. equities returned 22.7%, supported by a mid-teens gain in fiscal Q2. Technology (+38.2%) led the market, but sector strength masked a sharp split between semiconductors (+87.2%) and software (−22.2%). Industrials (+30.6%) also outperformed, while energy (+29.6%) benefited from oil price strength following the U.S.-Iran conflict. Healthcare (+23.4%) rose on favorable pharmaceuticals and biotechnology performance. Consumer staples (+5.1%), financials (+5.2%), and consumer discretionary (+8.6%) lagged, with single-digit gains. Megacap performance was mixed, with Alphabet (+103.4%) offsetting declines in Microsoft (−24.4%) and Meta (−23.4%). Small caps rebounded, as the Russell 2000 (+40.6%) outpaced the Russell 1000 (+21.9%), and non-earners materially outperformed profitable companies. The Russell 3000 Value Index (+27.7%) beat the Russell 3000 Growth Index (+18.2%), aided by semiconductor strength and index reconstitution effects.
Emerging markets (+40.9%) rallied on narrow, technology-led strength concentrated in North Asia. Korea (+213.8%) and Taiwan (+105.0%) benefited from AI infrastructure demand, with memory chip tightness, pricing power, and corporate governance reforms supporting Korea’s market. Samsung (+430.8%) and SK Hynix (+841.9%) were among the largest beneficiaries of hyperscaler spending.
Commodity-oriented markets such as Brazil (+26.6%) and South Africa (+30.2%) also outperformed as AI-related demand supported industrial metals and power infrastructure. China (−4.9%) lagged on slowing growth, property market stress, renewed trade tensions, and policy uncertainty, while India underperformed due to softer earnings and less direct exposure to the AI rally.
Developed non-U.S. equities (+20.1%) had less direct exposure to AI beneficiaries. Technology (+63.8%) still led, but cyclical and traditionally lower-quality sectors such as financials (+28.1%), materials (+29.2%), and energy (+29.2%) had a larger impact on index results. Higher-quality areas, including consumer discretionary (+0.1%), consumer staples (+5.0%), and healthcare (+10.0%), lagged. Value significantly outperformed growth and quality, creating headwinds for active managers with quality-oriented approaches.
Private Equity
Private equity delivered an uneven but constructive FY 2026. The recovery after the spring 2025 “Liberation Day” tariff disruption gained momentum in the second half of 2025 before fresh uncertainty slowed activity in early 2026. By fiscal year-end, sponsors were navigating AI-driven disruption risk in software, tighter credit conditions, and geopolitical volatility tied to the Iran conflict.
Deployment recovered meaningfully but selectively, and primarily in larger transactions. Market data are reported on a calendar-year basis. Although fiscal-year data are unavailable, U.S. PE deal value exceeded $1 trillion in calendar 2025 for only the second time on record, with the second half contributing $632.2 billion across 4,560 deals. Through the first six months of 2026, activity totaled $410.2 billion across 3,765 deals, indicating an open market running below the strongest periods of 2025.
Fundraising became more concentrated. The top 10 U.S. PE funds captured 40.3% of 2025 fundraising, above the five-year average of 36.2%, and their share rose to 48.2% through the first five months of 2026. Experienced managers gathered 87.3% of capital through May, while only 18 first-time funds closed during the period.
Sponsors favored smaller, more digestible transactions. Platform LBOs fell from 21.0% of deal activity at the end of 2025 to 18.8% through May 2026, while add-ons rose to 74.7% of buyout activity, the highest level since 2023. This shift reflected caution around software exposure, wider credit spreads, and a preference for transactions that rely on existing platforms rather than new large-scale financing.
Exit activity improved but did not clear the backlog. U.S. PE exits reached $728.1 billion across 1,619 transactions in 2025, up 90.1% in value and 17.0% in count from 2024, according to PitchBook annual data. First-look figures through June showed $293.7 billion across 764 exits – a meaningful level, but still insufficient to resolve the inventory overhang.
Alternative liquidity tools did not build on the 2025 peak. Continuation fund exits reached a record 159 global transactions in 2025, but PitchBook tracked 64 through May 2026, below the 73 recorded a year earlier. The decline suggests sponsors often preferred waiting for better conditions over transacting at discounted valuations.
The venture market also showed headline strength with narrow breadth. NVCA Venture Monitor data indicated record-setting deal and exit figures in early 2026, but a small group of foundation model companies and mega exits accounted for most of the value. Activity outside AI remained muted. Early-stage investing was a bright spot, with first financings on pace for a record year.
The IPO window reopened meaningfully in the first half of 2026, led by AI, defense, space, and fintech issuers. SpaceX’s debut alone generated more exit value than the prior decade of venture-backed IPOs combined, and PitchBook estimated that listings from the largest private technology companies could eventually produce more exit value than all venture-backed IPOs this century.
The industry enters FY 2027 with more than $1.1 trillion of dry powder, but a narrower path to outperformance. Aging portfolios, concentrated fundraising, tighter credit, AI disruption risk, and macro uncertainty leave the asset class in adjustment. A durable recovery would likely require broader exit activity, more stable credit markets, greater clarity on tariffs and geopolitics, and continued evidence that GPs can create value through execution rather than financial tailwinds.
Flexible Capital
Hedge funds posted another strong fiscal year, but dispersion was unusually high because directional technology and biotech/healthcare equity strategies generated outsized gains. The HFRI Fund Weighted Index returned 16.4%; equity-oriented funds led, with the HFRI Equity Hedge Index up 21.4%. The HFRI Event-Driven Index returned 13.6%, a notable result given tight credit spreads.
Top-performing long/short equity funds were dominated by momentum and AI exposure, although security selection remained central to manager returns. Managers expressed the AI theme through semiconductors such as NVIDIA and TSMC, memory names including Sandisk, Micron, and SK Hynix, and related power, infrastructure, and construction/labor beneficiaries. Lesser-known companies such as Carpenter Technologies and MasTec more than doubled on AI/data center demand. Hyperscalers remained prominent across growth and value portfolios, but performance was mixed: Alphabet outperformed, while Microsoft and Meta posted negative returns.
As the AI trade shifted from speculation to implementation, managers reassessed exposure to software companies facing AI disruption. Funds that retained legacy software holdings such as Salesforce and Adobe experienced sharp drawdowns as the “SaaSpocalypse” theme drove a rotation within technology. Hedge fund net exposure to software reached a multi-year low by mid-2026. Software weakness created short opportunities, but short alpha was pressured as low-quality, high-beta stocks outperformed, weighing on many value-oriented managers.
The other bright spot was biotech, where the S&P Biotech Select Index surged 92.0% for the one-year period. M&A activity rose as cash-rich pharmaceutical companies facing patent cliffs sought to rebuild drug pipelines.
Results outside equities were also healthy, with credit and event-driven managers generally producing high-single-digit to mid-teens returns. Tight credit spreads and limited defaults were headwinds, but opportunistic managers found attractive merger-arbitrage and selective credit opportunities, particularly in EchoStar. EchoStar’s capital structure rallied after the company avoided default by selling spectrum assets, including an accretive sale to SpaceX. Its share price more than tripled as
it became a public-market proxy for SpaceX before the latter’s
June IPO.
The HFRI Macro Index rose 15.1% as commodity price volatility, stubborn inflation, and sustained trends in rates and equities created trading opportunities.
Private credit faced growing pains as heavy exposure to software companies led retail investors in BDCs and interval funds to request redemptions above the 5% quarterly liquidity offered by managers. Direct lending performance remained positive, and the shift in sentiment may lead to more discipline and a more lender-friendly environment. Even so, private credit’s rapid growth phase
likely ended.
Real Assets
Real assets generated attractive FY 2026 returns, as cyclical and secular tailwinds renewed interest in both tactical and long-term allocations. Many categories outpaced broader markets, led by clean energy (+59.4%), metals and mining (+52.5%), resource equities (+30.3%), commodities (+25.3%), gold (+22.1%), MLPs (+21.4%), U.S. REITs (+21.1%), and infrastructure equities (+16.7%).
In February, the U.S.-Iran war triggered a historic supply shock that sent oil and natural gas prices to their highest levels since 2022.
In late June, a U.S.-Iran memorandum of understanding partially reopened traffic through the Strait of Hormuz, which carries roughly 20% of global oil supplies, causing spot Brent crude prices to retreat and finish the fiscal year up 9.3%. Energy equities ended the fiscal year up 28.9% as prices remained profitable and investors viewed the peace deal as fragile. Markets also appeared to price in the possibility that the supply shock pulled forward energy tightness originally expected in 2027. Energy infrastructure, including pipelines and LNG facilities, benefited from higher natural gas demand, with volumes supported by data center growth, electrification, heating and vehicle demand, and LNG export demand from Europe and Asia.
Clean energy equities returned 59.4% despite the One Big Beautiful Bill’s phaseout of long-standing industry tax credits. The sector benefited from power demand growth, with renewables playing an important role because they are often cost advantaged, modular, and faster to develop than natural gas plants. The S&P Global Clean Energy Index was also boosted by Bloom Energy’s return of more than 1,100%. Bloom rallied as its solid oxide fuel cells, which can be installed in months, began deployment alongside data centers. The technology’s long-term dependability and scalability remain unproven, but the company has signed several customers, including Oracle.
Infrastructure equities (+16.7%) benefited from long-term demand tailwinds and aging asset stock across power, energy infrastructure, transportation, water, and waste. AI-related data center growth increased power prices, supporting utilities. Airports and ports remained resilient as global tourism and trade recovered, while LNG-focused midstream energy companies benefited from demand during the Strait of Hormuz disruption.
The broader infrastructure universe was supported by record ETF inflows, attractive relative valuations, and a market shift toward “HALO” stocks, or heavy assets with low obsolescence risk. Private infrastructure strategies, particularly lower middle-market managers with a private-equity-like approach, appear positioned to benefit from secular demand and a deep buyer pool seeking exposure to the asset class.
Gold returned 22.1%, supported by the U.S.-Iran war, continued central bank buying, de-dollarization trends, and rising concern over U.S. debt levels. Metals and mining equities rose sharply as gold miners benefited from prices above $4,000/oz and long mine development cycles. Industrial metal fundamentals also strengthened. Copper prices rose 37.8% as demand from AI-related power and data centers, electrification, and defense outpaced supply.
Global REITs rose 13.2% and U.S. REITs advanced 21.1% as the cyclical sector continued to recover from a multiyear downturn. Space demand remained robust across most sectors, including select Class A office markets such as San Francisco and New York, while new starts fell sharply from 2021-2022 peaks.
Improved debt market access and lower asset prices have created a more attractive backdrop for fundamentals and asset-level income growth. Historically, CRE downturns have generated compelling entry points for REITs and private real estate strategies focused on high-quality assets owned by overlevered sellers.
Fixed Income
Treasuries began the fiscal year on constructive footing, as the Fed maintained an easing bias and Jerome Powell delivered dovish comments at the August 2025 Jackson Hole Symposium. After three consecutive rate cuts, the subsequent pause put upward pressure on yields. Pressure intensified after U.S.-Israel military action against Iran coincided with renewed inflation concerns and growing Fed hawkishness.
From the start to the end of the fiscal year, yields rose across Treasuries maturing in two years or longer: two-year notes increased 44 bps, 10-year bonds rose 21 bps, and 30-year bonds rose 14 bps. The curve flattened as the spread between two-year and 10-year Treasuries fell from 52 bps to 29 bps.
Despite higher yields and a flatter curve, aggregate Treasuries returned 2.7% in FY 2026, with only modest differences across short-, intermediate-, and long-duration segments.
Credit markets were resilient despite headwinds from software risk in private capital strategies, heavy hyperscaler issuance, and geopolitical events. Spreads narrowed across corporates and securitized investments. The 20 bps decline in high yield spreads supported a 5.9% return, while the 9 bps decline in investment-grade corporate spreads helped generate a +4.3% return. In securitized markets, Agency MBS returned 5.2%, outpacing asset-backed securities (+4.0%) and commercial MBS (+3.9%).
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