The monetary backdrop looks increasingly constructive. With inflation moderating – particularly in the sticky housing component – we expect lower interest rates to provide relief to the US economy.
This environment is highly constructive for alternative asset manager investments. While lower rates are a tailwind for transaction activity – a ‘thaw’ we are already seeing in deployment pipelines – we believe the market underappreciates the structural 'democratisation' of private equity.
These companies are seeing record inflows from private wealth and insurance channels that are driving growth independent of the economic cycle.
On the fiscal front, the environment is similarly constructive. The market is only now beginning to feel the tangible impulse of the One Big Beautiful Bill (OBBB), specifically the permanent 100% bonus depreciation, which incentivises immediate corporate reinvestment.
Our infrastructure-linked companies stand to benefit from a powerful dual tailwind: fiscal incentives driving new demand and lower interest rates unlocking a backlog of projects that were previously stalled by high financing costs.
While the real-world impact of tariffs is just beginning to manifest on income statements, we believe the combination of tax relief, deregulation, and potential ‘Tariff Dividends’ for households remains a net positive for the economy and equity markets.
However, we remain mindful that certainty is just as important as incentives and some have suggested that clarity on the tariff front could be the final key to unlocking pent-up industrial spend.
The sentiment paradox
Investor sentiment remains elusive, primarily because the economy itself has evolved into a K-shaped landscape. Wealthy consumers and asset owners are buoyed by record stock market highs and home values, keeping confidence elevated in certain segments.
Chief executive (CEO) confidence has rebounded into the new year, with leaders moving from a defensive posture to one of strategic execution as interest rate pressure eases and regulatory clarity improves.
While headline economic data suggests resilience, our research reveals a distinct bifurcation in the consumer economy with high-income households continuing to spend robustly, while middle-and lower-income cohorts are managing budgets through smaller basket sizes and a shift to private label products.
This 'trade-down' dynamic helps explain the disconnect between strong GDP prints and poor consumer sentiment surveys. The disconnect creates a ‘wall of worry’: while the economy performs well, many participants do not feel prosperous.
It is most evident when comparing ‘hard’ economic data – such as GDP, industrial production and retail sales – which consistently surprise to the upside, against ‘soft’ economic data such as sentiment surveys, which consistently surprise to the downside.
Scott Nuttall, co-CEO of global investment firm KKR, captured this dichotomy perfectly, noting that media narratives are constantly "looking for the next boogeyman" in private markets despite robust fundamentals:
"The noise is bad and the facts are good... We will leave it to you to decide which to pay more attention to,” he said.
We believe this dispersion between sentiment and reality and between the 'haves' and 'have-nots' creates a fertile environment for active stock selection.
The consensus trap
One of our primary concerns for 2026 is the striking uniformity of investor expectations we call the ‘Consensus Trap.’
The prevailing narrative – a ‘perfect soft landing’ for inflation, interest rates, and growth – has become so monolithic that the market is now priced for perfection.
We are reminded of Mark Twain’s warning: "It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so."
In a market convinced it ‘knows’ the path of inflation, interest rates and growth, the greatest threats are the ‘unknown unknowns’ – or simply the possibility that the consensus view is wrong.
When market participants are this crowded, even a slight deviation from the consensus view can trigger significant volatility as the market reevaluates its certainty.
Valuations are high; value looks relatively attractive
Elevated valuations further highlight the ‘priced for perfection’ environment and represent another factor that tempers our outlook. However, we continue to see compelling relative opportunity in value stocks.
While the Russell 1000 Value index ended the year trading at 16.7x forward earnings – a 24% premium to its long-term average – it appears attractive compared to growth stock valuations.
The Russell 1000 Growth index ended the year at 27.9x forward earnings, representing a 41% premium to its own history and a staggering 67% premium to the value index.
Maintaining value in an expensive market
While fiscal and monetary policies are supportive, elevated valuations and the ‘Consensus Trap’ temper our optimism. This environment has created a compelling opportunity.
Quality stocks – those with high returns on capital and steady earnings – have rarely been so out of favour relative to the broad market. We are aggressively capitalising on this historic dislocation.
Remarkably, the market is allowing us to acquire this elite profitability at a discount. This creates a portfolio with a rare balance of an exceptional margin of safety and upside potential – regardless of the economic path ahead.
Daniel Johnson is portfolio manager of the CG River Road US Large Cap Value Select fund. The views expressed above should not be taken as investment advice.