Macro Pulse for November 15: 2027 Outlook - The Sweet Spot vs. Swing Factors

• October CPI rose 0.4% on the month, driven primarily by higher shelter, food, and energy prices. Short-term Treasury yields jumped as the report reinforced expectations for a December Fed hike. We still expect a quarter-point policy rate move in December. Beyond that, we think a broadly balanced labor market and the drag from higher energy prices and borrowing costs will limit the need for a more robust hiking cycle.
• Nvidia CEO Jensen Huang resigned on Thursday amid a scandal that has raised national security concerns, and the CFO has been named interim CEO. The episode adds to the expectations for higher AI-related costs and regulatory pressure resulting from the U.S. midterm elections and raises the risk of greater government oversight. As we discuss in our 2027 outlook and today’s note, we expect AI investment to prove resilient in 2027 but have conviction in a narrower AI investment playbook.

Key Note

Our 2027 outlook is now available!

We enter 2027 with a constructive outlook. Economic growth remains resilient, AI investment continues to expand, and companies have largely absorbed higher borrowing costs without a meaningful hit to earnings. This creates a favorable backdrop for markets – a sweet spot – but several swing factors may meaningfully affect how these conditions evolve. This week we delve into our 2027 outlook, revisiting what we learned in 2026, the factors underpinning our 2027 outlook, and the swing factors that could cause our expectations to shift.

Lessons from 2026

Investors came into 2026 expecting easier monetary policy. As higher energy prices from the Iran conflict worked their way through the economy, those expectations for Fed rate cuts gave way to Fed rate hikes. For households, that meant paying more for fuel and facing higher borrowing costs at the same time, but despite these headwinds, consumers were able to maintain spending levels. Similarly, corporate earnings remained strong, with S&P 500 earnings growth on track to exceed 25% for the first three quarters of 2026.

Despite higher financing costs and election uncertainty, the AI buildout continued to accelerate in 2026. The question for 2027 is when AI spending will begin generating returns and whether election outcomes could slow the pace of investment. At the same time, rising long-term yields across the globe put government deficits back in focus. As long as deficits remain elevated and growth and inflation stay firm, we expect investors to continue demanding greater compensation for taking on duration.

2027 outlook: conviction in the anchors, humility in the tails

As we look ahead to 2027, we’re focused on two questions: Which trends are likely to carry into next year, and what could alter the outlook? The trends in which we have the greatest conviction serve as our anchors, forming the foundation of our base case. But several swing factors introduce a wider range of potential outcomes. How these factors evolve could materially influence the pace of economic growth, the path of central bank policy, and the direction of bond yields.

Anchors of our 2027 outlook

• Rates remain restrictive. Persistent inflation means central banks are more inclined to tighten than ease. These factors, alongside substantial government borrowing, are likely to keep upward pressure on long-term yields.
• AI investment continues. Higher financing costs and policy constraints resulting from the Democratic sweep in the midterms are likely to make the next phase of the AI buildout more expensive. We expect markets to increasingly favor the narrow set of companies that can sustain positive free cash flow while funding continued investment.
• The U.S. maintains its lead. Stronger growth, greater energy self-sufficiency, and more exposure to the AI theme give the U.S. an advantage over other developed markets. Higher U.S. yields should also support the dollar, even as they may pressure equity valuations.

Swing Factors

• Iran and energy. We expected a prolonged stalemate to constrain traffic through the Strait of Hormuz and keep energy prices elevated - but the confidence interval between a diplomatic resolution and renewed military escalation is wide. The longer the disruption persists, the greater the pressure on businesses from higher diesel and freight costs. The extent to which companies pass on costs to consumers will help determine how persistent inflation becomes and how much pressure ultimately falls on corporate margins.
• Global policy uncertainty. As president Trump enters his final two years in office, we expect U.S. trade and foreign policy decisions to remain a source of market volatility. Among other developments in Europe, France's April presidential election could put upward pressure on French government bonds, particularly if the outcome raises concerns about public spending or relations with the EU. Leadership changes at the European Central Bank could also introduce further uncertainty around the path of euro area interest rates.
• U.S. fiscal thrust. Fiscal policy should remain expansionary in 2027, with tax relief from the One Big Beautiful Bill Act (OBBBA) continuing to support households and businesses. However, fiscal thrust could turn negative as the initial boost from OBBBA fades and the one-time tariff refunds of 2026 are not repeated. A bipartisan spending agreement could offset some of that drag, while higher tariffs would raise costs for consumers and businesses.
• U.S. debt ceiling. We expect the U.S. to reach its $41 trillion debt limit in the first half of 2027. Treasury's extraordinary measures could extend its ability to make payments into late 2027 or even early 2028. We expect Congress to reach a deal before that deadline, though a drawn-out standoff may increase market volatility and put upward pressure on yields.

Portfolio Strategy

Our constructive outlook for economic growth and corporate earnings advocates for staying invested in 2027. That said, the range of potential outcomes remains wide, reinforcing the importance of building portfolio resilience. 

In equities, we remain modestly overweight U.S. large caps, favoring companies with strong earnings quality. Within the AI theme, we favor hyperscalers that generate positive free cash flow. We're moving our U.S. small cap view to neutral, as elevated borrowing costs create challenges for smaller companies looking to refinance debt and fund growth. For new equity exposure, we see opportunities in materials and digital infrastructure. Outside the U.S., we favor Japan, where corporate reforms are likely to continue improving returns on capital, while moving underweight Europe given heightened political uncertainty.

In fixed income, we continue to favor shorter-maturity credit to limit exposure to interest rate volatility and manage credit risk. We've upgraded floating-rate bank loans to overweight given the resilient economic backdrop, with a preference for higher-quality borrowers that are better positioned to absorb rising borrowing costs. We continue to see municipal bonds as a duration-balancing pairing to short-maturity credit, taking advantage of steeper yield curves and strong credit quality.

Finally, we see a role for infrastructure, gold, and commodities in helping to diversify portfolios, particularly during periods when inflation or geopolitical shocks put pressure on both stocks and bonds. For qualified investors, we see lower middle market private credit and private equity as bastions of portfolio diversification. Given the long-term nature of private markets investments, we do not assign tactical overweight or underweight views to the asset class.