There are three key macro topics that we are watching particularly closely as we move towards 2026. The first is everyone’s favourite topic of artificial intelligence (AI). The second is the overall health of the economy and what we expect to see from the Trump administration. And last but not least is private credit.
Why AI is not a bubble
First on AI, no, it is not a bubble. Yes, there will be some misallocation of capital and an ensuing market downturn sometime in the next five years just as we have seen with every new technology going back hundreds of years. We acknowledge the non-zero probability that large language models (LLMs) prove to be a dead end to true artificial general intelligence (AGI); however, we are also comforted by our meetings with companies that are citing use cases that are already driving significant cost savings.
We do not think AI is currently in a bubble, because ultimately it comes down to supply and demand. Unlike the commercial internet where you just dug a hole and laid some fibre, AI compute is infinitely more physically challenging to incrementally produce. To provide perspective, to produce a one-gigawatt (GW) data centre that will run LLMs, it requires six football fields of land along with over 200,000 tons of equipment such as cables, heating, ventilation and air conditioning (HVAC), transformers, etc.1
On the demand side, anecdotes suggest a waiting list of 20 different customers for each newly installed Nvidia graphics processing unit (GPU) at a data centre. We will continue to pay close attention to companies addressing key bottlenecks (such as Nvidia, Prysmian and Schneider) that are acting as a governor on the adoption of AI.
Running the economy hot: fiscal and monetary support ahead
Indications are that Trump is going to run the economy hot through the mid-term election later this year. We should expect significant tax refunds both for individuals and corporations in the first few months of 2026 due to the One Big Beautiful Bill (OBBB). We should also expect the US Federal Reserve and US Treasury to work both in co-ordination and independently in bringing down interest rates. All of this should be supportive of the economy and asset prices.
Exhibit 1: S&P 500 price return 12-month period following a mid-term election
Source: Strategas, as at 25 November 2025.
For the stock market, in the short term, liquidity is one of the biggest drivers of performance and we should expect other countries to get involved as well. We are starting to see signs that China will implement further initiatives to support the local property market, while Japan is proposing the most Federal spending since the pandemic. All of this is probably inflationary and one of the best defences is to own finite assets like equities.
2026 is a mid-term election year, which has historically brought about greater equity market volatility. The average peak-to-trough decline within the S&P 500 during an election year has been almost 20% going back to 1962. The good news is that these declines represent great buying opportunities as the 1-year return following these market troughs has averaged 31%.
Why we are steering clear of leverage in an uncertain credit landscape
Having gone through a couple of credit cycles in our careers, we have started to get a sense of déjà vu. What is different this time is that it appears that more of the risk has moved to cashflow-driven direct lending private credit and away from the banks (although banks may not be immune as roughly 10% of their US loans are now to non-bank financial institutions).2 Unfortunately, given not all private credit is transparent, this means that the market will have much less early warning if something is wrong.
Private credit is of course not all created equal. Some private credit and private equity houses have historically boasted about their high Sharpe ratios and low volatility in underlying asset prices. But in certain instances, this was a function of not having to worry about mark-to-market valuations.
Some private credit houses have also enlisted other questionable strategies such as payment in kind (PIK) and maturity extensions. Banks have never had that privilege and thus we started to see warning signs on credit in 2006 and 2007.
What we find concerning in pockets of private credit, along with the above tactics, is the potential conflict of interest as the International Monetary Fund (IMF) estimates that between 70% and 80% of private credit loans have the same private equity sponsor.
In a scenario where there is a downturn in credit, investors will be well served by avoiding excessive balance sheet leverage and owning companies with mission critical products and services that tend to be more immune to economic downturns.
Conclusion: Be prepared to benefit from disruption
In an environment defined by accelerating change and heightened uncertainty, we believe there will be a clear need for disciplined bottom-up stock selection, combined with a thoughtful macro-overlay. This should be focused on identifying companies that are both resilient and aligned with long-term structural trends.
By actively navigating opportunities in AI, remaining vigilant on economic policy shifts, and avoiding any hidden risks in private credit, our aim will be to capitalise on volatility rather than be constrained by it.
1Citrini, ‘Stargate: A Citrini Field Trip’, (7 November 2025).
2FitchRatings, ‘Rapid US Non-Bank Loan Growth Raises Risk of Wider Losses for Banks’, (20 October 2025).
Artificial General Intelligence (AGI): A form of AI with the ability to understand, learn, and apply knowledge in a way that is indistinguishable from a human.
Balance sheet leverage: The use of borrowed funds in addition to equity to finance the purchase of assets.
Bottom-up stock picking: An investment strategy that focuses on analysing individual stocks and their fundamentals rather than considering broader economic or market factors.
Inflation: The rate at which the prices of goods and services are rising in an economy.
Large Language Models (LLMs): A type of AI model that is trained to understand and generate human language text.
Liquidity/Liquid assets: Liquidity is a measure of how easily an asset can be bought or sold in the market. Assets that can be easily traded in the market in high volumes (without causing a major price move) are referred to as ‘liquid’.
Mark-to-market. Valuing an asset at its current market price (often daily), rather than at its historical cost.
Payment in Kind (PIK): A type of financing where interest payments are made in the form of additional debt rather than cash.
Pretend and Extend: A strategy used in credit markets where lenders extend the terms of a loan to delay recognising a problem loan as non-performing.
Private credit: Non-bank lending provided by private institutions, often involving loans to small and medium-sized businesses.
Sharpe ratio: This measures a portfolio’s risk-adjusted performance for the purpose of measuring how far a portfolio’s return can be attributed to fund manager skill as opposed to excessive risk taking. A high Sharpe ratio indicates a better risk-adjusted return.
Treasuries/US Treasury securities: Debt obligations issued by the US government. With government bonds, the investor is a creditor of the government. Treasury bills and US government bonds are guaranteed by the full faith and credit of the US government. They are generally considered to be free of credit risk and typically carry lower yields than other securities.
Volatility: The rate and extent at which the price of a portfolio, security, or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility, the higher the risk of the investment.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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