Morningstar’s 2026 Investment Outlook is live, offering clear context on the forces that will shape the year ahead and beyond. If there’s one takeaway for investors, it’s this: Preparation beats prediction. Markets will keep shifting—tariffs, the Fed, geopolitics, and the rapid buildout of AI infrastructure—and trying to forecast every twist isn’t a strategy. Building resilient portfolios is. That’s why our outlook avoids bold predictions and instead focuses on rational, evidence-based decision-making across the issues that matter most to advisors and their clients.
Download Morningstar's 2026 Investment Outlook here: Morningstar’s 2026 Global Investment Outlook: Preparing for What Comes Next | Morningstar
(Stay tuned for additional important disclosure information at the end of this episode.)
Danny Noonan (DN): As the markets get ready to enter a new year, it’s clear the investment landscape is evolving. The rapid buildout of AI infrastructure has powered US equity markets, but with ten stocks now making up nearly 40% of the S&P 500, the question becomes: is the index turning into a concentrated bet on US tech? And does that mean investors should be looking for ways to diversify? International markets may be one answer—developed and emerging markets have both doubled the S&P 500’s return this year, something we haven’t seen since 2007.
At the same time, a new Fed rate-cutting cycle is underway. That could finally provide relief for industries that have struggled under higher rates—housing being one of them—and it raises important questions about the implications for fixed income.
With this backdrop, what actions make sense to support clients? The topics we’re discussing today align with the recent release of Morningstar’s 2026 Investment Outlook.
Hello, and welcome to Simple, but Not Easy, a podcast from Morningstar’s Wealth Group. I’m Danny Noonan—Senior Investment Writer for Morningstar Wealth and I’m delighted to be joined by a great guest today—Morningstar Wealth Chief Investment Officer Philip Straehl—who will help us unpack Morningstar’s 2026 Investment Outlook.
Philip, welcome back. Always great to have you on.
Philip Straehl (PS): Great to be back. Danny, thanks for having me.
DN: As brief background for listeners. You're almost a 20-year veteran of Morningstar. Prior to becoming Chief Investment Officer, you led our quantitative strategies team, overseeing systematic strategies and direct indexing. And prior to that, you were Global Head of Research. Given that extensive background, I'll throw you a softball to start. Where do markets finish in 2026?
PS: One thing, Danny, that's been drilled into me here over the past couple of decades, is that not to be overconfident. And, unfortunately, I don't have that crystal ball in terms of what exactly is going to happen in 2026 actually, one theme in our outlook piece that we released recently is that it's more important to have the right tools and the right principles to make decisions given any kind of uncertainty that might happen in markets. And so unfortunately, I don't know exactly what's going to happen in 2026 we do have some themes that we think will dominate 2026 but I can't predict where the S&P 500 is going to end at the end of 2026 unfortunately.
DN: Well, that was a test you passed, and I think you mentioned it, but one of the key themes of the Outlook itself is that preparation beats prediction. One of the examples that we use to highlight that right at the beginning of the outlook is just kind of some of the volatility we saw in April, where I think most Wall Street strategist across 10 to 15 different firms were predicting eight and 10% returns on S&P 500 for the full year 2025 during April, when markets corrected 20%, a lot of those strategists revised their price targets down, and then when during the subsequent recovery, you saw a lot of those price targets revised higher. So that's the reason we do things the way we do them, which we can't predict anything perfectly, but preparing is probably the best we can do. So, before we look ahead to next year, I'd like to briefly recap 2025. A lot happened this year, but in your view, what was the biggest surprise?
PS: Yeah, I'd say, looking back, and I think many investors will agree with that, I think that April volatility was a surprise to many investors. Going into 2025 we had a new administration in the White House. There was kind of positive sentiment in the market, there was an expectation that there's going to be a focus on sort of a pro business policy agenda lower taxes. And I think a lot of investors were taken off guard by the early focus on tariffs, and then kind of that announcement in early April into subsequent volatility, I would say, not a lot of people saw that coming, because the rates that were initially quoted there just took markets by surprise and then led to a sharp sell off, and ultimately, when the policy was pulled back, ultimately a sharp recovery as well. So I'd say, if I'd point to one, big surprise, it was the volatility there in April.
DN: We'll get to tariffs in 2026 a bit later on in this episode. But I think the tariff saga broadly is a good bridge to one of the major themes from last year's outlook, which is that the idea is the idea that investors need to play both offense and defense, instead of making all in or all or nothing decisions, how did that manifest in the investment process this year for you and the team?
PS: Yet, as you mentioned, so last year, we sort of talked about, combining offense and offense and defense, and one of the areas of offense that we highlighted was non US stocks, and that actually worked pretty well, especially early on in 2025 when international stocks, especially in Europe, did quite well, there was optimism about fiscal spending in Europe, and so that's helped Europe in Q. One, and also was helped with kind of a weakening dollar as well early on. And then on the defense side, we identified some areas of defense at the time. We already talked about the concentration of us large cap stocks, and highlighted areas like Staples, for example, as being attractive. And so, as we entered into the volatile period in April, we were able to kind of shift focus and actually reinvest and sell some of the defensive exposures. And re engage with risk, if we will, both on the equity side as well as on the on the credit side.
DN: Yeah, there's old saying diversification always means you have to apologize for something. The idea being if you're diversified, you'll never own enough of the top performing asset. That was the case in many recent years where the S&P 500 was on top of all other major asset classes, as you already mentioned. 2025 has taken a different path. What stood out to you about market leadership this year? Was it the non-US outperformance?
PS: Yeah, I'd say that's definitely been a big shift. I think we can talk later about the AI leadership, which, of course, was again a dominant theme off of the April lows. But certainly diversification, you'd have to, you'd have to apologize less about being diversified this year than in prior years, because diversification, at least from a regional standpoint, actually worked out pretty well. That had to do with the dollar weakness that I pointed out as well, and then also emerging markets doing quite well off of the April bottom. I think that's been, certainly stood out as far as a theme that was different from prior years.
DN: Yeah, I'd love to get more into deeper conversation on non-US stocks. We'll do that when we transition to the 2026 outlook. But keeping it in 2025 the Fed is a big will they or won't they year in terms of rate cuts the first cut finally came in September, another rate cut in October. What took so long?
PS: Yeah, it obviously we had some cuts in 2024 when the cutting cycle started. But it was a view. And going back to kind of policy uncertainty, one of the drivers that delayed the cutting cycle was certainly kind of the conflict in the mandate that the Fed has in terms of price stability. So the inflation side of the mandate which there were questions about the impact of tariffs, and so the Fed took a wait and see approach. They knew tariffs were going to be initiated, and didn't quite know how exactly those price levels were going to be impacted by tariffs. And then, of course, there is the labor market, kind of full employment side of the mandate. And labor markets were sort of hanging in there for a lot of 2025 it was not until basically the July jobs report, where we've started seeing more of a weakening, which is when kind of the balance of risk shifted. That was ultimately acknowledged by Powell at the Jackson Hole meeting. And that's when we saw kind of that second rate cutting cycle starting up again with two cuts now, one in April and one in in October.
DN: This episode will be out before the December meeting. I won't ask you to predict anything, but what are the swing factors the Fed will be looking at before they make that decision?
PS: Yeah, it's a, it's a great question. I think there's another kind of wrinkle now to the conversation we talked about, kind of the dual mandate focus on the labor market and inflation data, and ultimately kind of how committee members will trade off the two information sets. Kind of determines what decision they'll make. As I mentioned, the Fed Powell has signaled concerns about the labor market and kind of the balance of risk shifting toward the labor risk, and that's why they were comfortable cutting now, one of the challenges in the fourth quarter, as we know, we had a government shutdown, and in the context of the government shutdown, we also had a data blackout, meaning that we're not going to get an October inflation report, we're not going to get an October jobs report. And so the visibility that the Fed has about what's happening in the economy is limited. And so I think that's one of the additional challenges that we have, we have to face that we have to deal with in this particular cycle. So the December meeting is on the 10th. We're not expecting an inflation report or a jobs report before that Fed meeting. And so it does look like ultimately, a cut will. Likely happen now, and that's less about the incoming data, but it's more about some of the Fed speak, if you will. So members of the FOMC committee having provided guidance ahead of time in terms of how they're thinking about the trade off, but it's a tricky one, just because of that data vacuum that's happening as a result of the government shutdown.
DN: thinking past December and looking out a few years you mentioned the dual mandate between price stability and the labor market. It's an interesting world we live in right now where AI and the potential for job loss creates challenges for the labor market, and how the Fed has to forecast that. And then secondarily, you have inflation, which has moderated from a few years ago. But there's lots of questions about what tariffs and the impacts those will have potentially next year? What do you think will be the bigger challenge between those two for the Fed, as they as they balance their policy over the next few years?
PS: Yeah, it's a, it's a great question. In the near term, I think it's going to be probably the labor market. And I think that impact of AI, for example having, having more of an impact, and perhaps being broader based, we've also seen some signs of the economy slowing. Our expectation is that in in 2026 the economy will likely economic growth will decelerate. And so, I would say the labor side is probably a bit more of a challenge. At the same time, we also expect tariff impact, tariff impacts to be felt going into 2026 as companies have delayed passing on those, those cost increases to consumers. But I do think the Fed is right to initially think about the impact on the labor market side and the growth side. I think arguing about the
DN: Fed has become a sport in certain ways. You hear a lot of commentators doing it. So, if I asked you to play professor, what grade would you give the Fed and the job they're doing?
PS: It's a tough one. I don't really feel like I'm in a great position to give Mr. Powell a grade here. And obviously it's, the Fed's been quite politicized as well. A few things I would kind of think about in terms of assigning a grade. If somebody does that, I think people will focus, of course, on the high inflation period that we've seen. So we've seen the highest inflation rates in many decades, effectively in 2022 and 2023 and so I think, somebody looking at that would say, well, that's, well, that's not really what we would characterize as price stability. So I think that's something that needs to be that needs to be incorporated at the same time, I think the Fed leadership, despite recent political pressures from the White House, has remained steadfast, and I think they attempted to do the right thing, for the economy ultimately. I think that is more of a more of a positive sign, but, but, yeah, there's definitely some puts and takes there.
DN: For listeners at home, I'm going to score that as a passing grade. We won't put a letter on it, but passing grade is, I think, result there. How about the same question, but for the economy, what grade would you give it?
PS: I mean, the economy has been robust, and I think a lot of economists expected more of a negative impact from tariffs on economic growth. We have seen economic growth slowing, but we've not seen a recession. We've not seen a meaningful slowdown, and recession risks have sort of been pushed back because of the resilience of the economy. So we are expecting the economy to slow in 2026 but at this point, a recession is not our base case, and that speaks to the resilience that we've seen in the economy in recent years, and so I think the economy is doing pretty well given some of the shocks that it's been facing of late.
DN: Okay, let's turn our attention to next year. I think 12 months from now, nobody knows where the market will be, but what we can do is define the environment and help set expectations. I think it's often said that markets have a personality. Sometimes they're happy, sad, bashful, euphoric, starting with the US define the market's personality as you see it.
PS: It's a great question. I don't think I've ever answered this type of question, I think it's, I would characterize it as kind of a split personality at the moment. And I think it often has that trade. Andon the one hand, you can look at some parts of the market where, say, the market is euphoric about, the new technologies, things like that. But then there's other parts of the of the market, healthcare, some of the consumer names, where you could argue that the evaluations at the market is a bit more depressed. So obviously, there's a long, history of people like Ben Graham kind of talking about the emotional swings that markets have over time. And I think the key, according to Graham, is to make sure that, you make sure that the market and those emotional swings are there to serve you and not really to guide you. And so being aware of kind of areas of euphoria and areas of where maybe the market is a bit too pessimistic, I think, is really helpful to be a good long-term investor.
DN: That's right, a voting machine in the short term, weighing machine in the long term. A little bit of voting going on in some certain areas of the market, though, what about same question outside the US market personality?
PS: yeah, I think it's, it's moved, I think, from a more depressed state, probably at the beginning of the year, to being a bit more optimistic. And so, I talked about the strong performance in pockets and parts of the non US market. And you've also seen a kind of an AI story play out in parts of international markets, especially in emerging markets, and so I don't think things are looking quite as , valuations aren't as high as they are in the US, despite some of the Positive backdrop that we've seen. So, we still see some pockets of opportunity in non-US markets, despite the strong performance so far this year.
DN: So part dollar story, part AI. I'd like to unpack that a little bit dollar first. Periods of dollar weakness have historically been good for non-US stocks. Any views on the dollar's direction going forward?
PS: Yeah, look, if we look at the various factors that we think will impact FX rates, and our starting point as long term investors is kind of the valuation dimension. And even though we've seen dollar weakness so far in 2025 we are still looking at it in terms of the long-term valuation picture, we still think the dollar has room to fall. And so that is one element that we're considering. There's also some, some other, pieces that we that we look at. For example, one of the things that we've seen in 2025 is that more foreign investors started hedging their US, dollar assets. And if you were a pension fund in Europe, for example, and you would have just let your equity portfolio ride over the past five to 10 years, you would end up just having a lot of dollar exposure. And it didn't really worry people, until you see some of the underperformance from an FX standpoint. And so more institutional investors have started hedging their their currency back into, let's say, euros or Swiss francs or Sterling, and that's actually putting pressure on the dollar. And so that's certainly something we've seen. And then structurally, there's some concerns about, the debt that we have in the US. And if you look elsewhere, other countries, emerging markets in particular, their fiscal picture looks more attractive. And then there's also potentially reduced foreign investment as well. And so, there's several factors in our mind that could point to continued dollar weakness in the years to come.
DN: I think one of the factors that we often hint to is the valuation argument. Prices have been cheaper in non-US stocks for a number of years now, but the earning, our earnings argument has been a little bit weaker outside the US. , us, earnings have been consistently stronger than other parts of the globe. Is there any reason to believe that could change next year?
PS: Yeah, I think it's a great point. I think as we look forward over the next five to 10 years, and the forecasts that we make tend to be longer term, we actually still think that both profitability and growth are likely to be higher in the US. But I think what's important is to make sure that you must look at what's priced in, what kind of expectations are priced in into markets. And so yes, we think US growth rates, US profitability rates are likely continue to going to be higher than non US stocks, but we think that's reflected in valuations, that's reflected in the fact that the S&P trading at 23-24 times earnings, whereas a lot of these non US markets are trading at much lower multiples and so, yeah, so on that basis, we still think that non US stocks have room to outperform US stocks here in the years to come,
DN: what about AI? We'll get to what's happening in the US next, but specific to other parts of the globe. What's happening in AI?
PS: yeah, I think that's been one of the defining themes of 2025 as well. Thinking back to kind of the chat GPT moment, and then in, 2022 when Nvidia really started to show some significant growth. Life you can argue that the AI story was kind of, in many ways, kind of a US focused narrative. And at the beginning of the year in 2025 we had kind of the deep seek moment where, kind of a small Chinese firm showed some really interesting and promising results around, kind of the model that they've developed with much less resources than the big players in the United States. And so in some ways, that was a starting point for kind of the AI narrative. And that rally to also manifest itself outside the United States. You also have, obviously, a lot of CapEx investment going into AI in that overall ecosystem, and you have firms that are in emerging markets or elsewhere outside the US, US that are important players in that AI ecosystem. So if you look at emerging market performance in 2025 there's five stocks, Taiwan, semiconductors, Samsung, SK Hynix, Alibaba and Tencent that made up a large proportion of the return of emerging markets in 2025 and all these players have are part of the AI supply chain, different kind of pieces of the supply chain. But I would say that's one been one of the defining themes of the emerging market outperformance in 2025 is the fact that that AI rally has spread to non-US markets.
DN: Yeah, it's a great point. I think my sense would be that most US investors tend to believe that us is the only game in town when it comes to winning the AI race. And I think, that's kind of the mindset that permeates through Silicon Valley, is the winner take all, or winner take most type markets. But it does seem like there's a lot of burgeoning competition elsewhere. And, I think when you can access it from cheaper valuations, whether it's, China or other parts of the globe, ASML and Taiwan, semi, I think that makes good sense, pivoting to the US when we talk about the market environment, the impact of AI is probably the most important topic in terms of what's been driving market performance. At the top of the market this year, I think it's obvious to say that expectations are very high. What should investors know? What's priced in?
PS: Yeah, it’s a question that everybody's wrestling with and including ourselves. And I think, first of all, I think we think AI and generative AI. I think it's a really important technology. I think it's going to be revolutionary. And oftentimes with these types of innovations, people rush in, they invest, both investors, as far as, people putting money into stocks and kind of bidding up share prices. But also, the players that the big hyperscalers, the Nvidias, that whole AI infrastructure side that we've talked about before, and so I think that's led to a situation in our mind where certain stocks have been bid up and probably look expensive relative to what realistic expectations of returns are. And so, when we look at kind of the AI ecosystem, and there's kind of hardware to software to, application type plays, the area that we think probably is the most, the one that probably has the most downside is the hardware side. So, if you think about the chip manufacturers, companies that are in that data center ecosystem, and it seems like that's been the part of the market that's been most rewarded so far with increased share prices, and also the area that is most vulnerable to a potential pullback in capex. And so as we think about portfolio construction, we definitely own AI related companies, and I think there's a lot of great value still to be found in some of those, in some of those stocks, but the area that we be more concerned about as far as a potential downside is on the hardware side, because if we do see a pullback or a recession, it's likely that that capex guidance, which going into 2026 is now over half a trillion as far as what some of these major players have committed to investing in the infrastructure side. And so if we do see a macro shock, if we see a recession, if we see, we talked about the deep seek moment where we see models that ultimately use less compute I think that will be an area that's going to be most impacted, if capex will be guided down vis a vis current expectations?
DN: Yeah, I think that leads nicely into my next question, which is, in our outlook, we contrast big Tech's capital spending compared to some of the US oil majors. Just Microsoft alone, their capital spending this year will be higher than Exxon Mobil Chevron and ConocoPhillips combined. And I think the narrative around big tech, for the long, for a long period of time here, has been that they are asset light businesses. Is that changing?
PS: Yeah, I think that's definitely been a one of the concerns that we've had with some of those businesses, where, if you look at it, looked at those companies a couple of years ago, high free cash flow, businesses, very capital light, as you as you pointed out, but with this new technology, because it requires investments in data centers and chips, etc, those businesses now are more capital intensive, which means that on an ongoing basis, there's a one-time kind of buildup of that. It's not actually a onetime buildup of that technology stack, you have to buy new chips on an ongoing basis and maintain data centers, etc. So we think that it’s a shift that's important. And so, if you look at earnings, net income versus free cash flows, you see that sort of wedge opening up. And so in some ways, you kind of have to believe that the investments that are being made are profitable. And if you focus on kind of the return on invested capital on generative AI, which is actually where our team has spent quite a bit of time on in terms of understanding that. The other thing I will say, so obviously, we've gone through different phases in terms of that build up in capacity. Initially it was mainly focused on just using internal cash flows. So the big hyperscalers using their existing earnings to finance these deals in recent months, one of the more concerning elements was the fact that there was more of a kind of cross financing. People call them circular deals, where one player is committing to buying the chips from the other, et cetera, and then also more of debt financing that's been happening in the space. And so those are two kind of new developments, and probably something that is a bit more concerning than using internal cash flows just because it makes the system more vulnerable to potential shocks.
DN: Yeah, it did seem like over the summer, we kind of reached a point where some of the circular deals that you mentioned, where companies were forming partnerships and they put out the press release. Out the press release, I think some people were jokingly referred to as the press release economy, right where you put something out and your stock gets 10, 10% spike just on the press release alone, without any fundamental drivers, which is interesting to see. But in terms of total spending, obviously, the numbers are staggering. It's hundreds of billions. Are there any historic parallels to what's happening right now?
PS: Yeah, I think there's many historical parallels. And we tend to think of the capital cycle, and it's kind of a way to think about the world where you say you want to kind of stay away from industries that see significant build up in capacity, meaning that there's a lot of players investing a lot of capital, which, all else equal, if there's no really competitive advantage, will happen that the supply will increase of that particular good or service, whatever you're investing in, and ultimately drive down prices, drive down profits. And so that's kind of a cycle that tends to impact many industries. And so, you can go back to the 19th century railroad boom where there's been huge excitement, excitement, and kind of buildup of infrastructure. You can look at the 1990s the fiber build out. You can look at the mining boom that happened post the global financial crisis, and so there's many instances where companies collectively over invested in a new technology, which ultimately led to lower returns. I think the point I would emphasize here is just it's the aggregate effect. So, oftentimes the investment might seem rational from the perspective of an individual company, but oftentimes what's missed is what does that mean if 5, 10, 15 companies at the same time build up significant capacity, that ultimately leads to an aggregate effect which ultimately drives down prices? And so, I think we see something similar happening in on the AI side. And because of that, we think, as a result of the significant investment in infrastructure, we think that the cost of compute, or actually, the availability of GPUs and compute is going to be such that that price will fall. And so, it might be better for you to be a consumer of that compute than actually be the one making it available.
DN: I think every advisor is probably getting some form of the same question, which is, are we in a bubble?
PS: Yeah, I have to say I don't like that question. I kind of call it the B word. I'm trying to stay away from the from the B word. And the challenge with the bubble is that there's really not a universal definition of what a bubble is. And yet, I sort of see it in kind of different gradients of mispricing. And it's not clear when a mispricing moves into a bubble. And I think people have this, have these kinds of historical parallels, where they're trying to map what's happening today to exactly what happened in the 1990s and they want to find the next, pets.com, which obviously history does not repeat. History rhymes. And I think, kind of just trying to classify something in a bubble or non-bubble is not that useful, from my standpoint. Now, if I look at today's environment, I think the question is, do I see prices that are high relative to fundamentals? I would say yes. Do I see pockets of exuberance? Yes, I do see that. But again, classifying it into a bubble or not, not a bubble. It's, it's, it's not really kind of a clean dividing line, in my opinion.
DN: You mentioned pets.com. I think everyone is looking for those tangible examples of things where euphoria might be running a little bit too fast. And I know some of the, in the nuclear space, there's these small modular reactors where, I think, one of them seems, Oklo, and it has, it's pretty revenue. I don't think they're expecting to earn any revenue until maybe the 2030s and it has a $20 billion market cap. So when people talk about bubble behavior, I think they're pointing to specific parts of the market. Like that, rather than maybe just big tech broadly. But at the very least, I think there are pockets of euphoria out there. And when those exist, I think the most reasonable thing that a lot of investors can do is remain diversified. I know you and the team use a contrarian checklist to vet opportunities and make asset allocation decisions. How's that shaping some of the decisions you're making right now inside of portfolios?
PS: Yeah, it's a great question. So the contrarian checklist, you can use it both in terms of identifying areas where, people are just kind of crowding into trades. And then at the same time, you can also use it to say, "Look, this is actually, you see evidence that people have just moved away from something that's now mispriced and actually is attractively priced because everybody's basically abandoned a particular idea." And so in terms of kind of the initial setup, we think that markets work best if you have a diverse range of market participants. And so that is long-term investors people who do arbitrage, people with different investment philosophies, and well-functioning markets just have a diverse set of participants in them. But occasionally you see what we call a breakdown in diversity when fewer investor types are represented. And often that means that markets can move away from fundamentals because you don’t actually have different perspectives and you just have to momentum guys or the people who follow a particular systematic CTA trading type investment strategy. And so, the contrast checklist is really meant to identify some of those areas and just kind of ask the question, "Is there evidence that maybe a particular market is out of balance?" So, there's kind of three things that we tend to look at. One question is, are investors extrapolating medium-term returns and fundamentals into the future at a rate that's not sustainable? That doesn't make sense. That's not rational given what we can expect. And so, I think that's certainly one thing that we see in parts of the market. You mentioned some of these areas of euphoria that we see in the market. And so we do think that there is something going on where people are extrapolating returns and fundamentals into the future. Is there, what's the investor sentiment? Are people significantly over or underweight a particular asset? And so, we can measure that using portfolio data that we have that Morningstar in terms of how investors are positioned as well as expectations from the sell-side, for example, are people really optimistic about the prospect of a particular company? And then finally, looking at valuation spreads relative to history. Is there evidence that valuations are more extreme than what we would usually see? And so those are three points that we tend to look at when we try to understand whether something is crowded or maybe people have overly penalized, particularly opportunity.
DN: Yeah, you mentioned overweight and underweight. It seems obvious where the overweight's are. It's going to be big tech and all the adjacent categories that are participating including industrials and utilities to a certain extent. And that's also obviously because expectations are so high. So, inside the US where are the underweights or the more attractive opportunities?
PS: Yeah, so a couple of areas I would highlight. So, one of them is healthcare. And so that's a part of the market that recently has started to do better, better than the market in the fourth quarter, but it's really been beaten down. So, sort of third consecutive year on the performance relative to the S&P 500, despite the fact that it actually has higher earnings growth in the market. And then other catalysts that we like about the opportunity isn't that's one of the reasons why it's sold off and was kind of depressed is concerns around regulation. Both coming from the vaccine side as well as coming from the tariff side. And we expect that there's going to be more clarity around these things in the future, which can be a positive catalyst for some of these stocks. And the second area I would point to is some higher quality consumer stocks, for example, in the consumer package goods area. And so, some of those stocks have been depressed for a number of reasons. One of them was to high inflation period that has impacted margins and profitability of these stocks. But we think that these companies have the ability to restore and potentially improve profit margins through better pricing actions, through cost savings. And we think that that is missed by some market participants.
DN: I know GLP1’s tends to be a big overhang for that group. As people are doing more GLP1’s, conceivably, they're consuming less food and drinking less soda. Is that a challenge that you see? I mean, is that already priced into the stocks?
PS: Yeah, it's something we've looked at and certainly is one of the reasons why another reason in addition to the inflation point that I made that they've been sort of depressed. But again, I also think it's one of those areas and one of those concerns where, the impact is extrapolated at a rate that is too high. They think it's probably not way to properly give them what we think the likely impact will be on some of those stocks. And the other thing I would say is just kind of that K-shaped economy narrative of late and the impact of finding that for us,
DN: K-shaped?
PS: So K-shaped economy is a term that sort of characterizes kind of the dichotomy between wealthier households and individuals versus folks with lower incomes. And just in terms of the macroeconomic data, the lower income households have been more impacted, obviously, by inflation. And so that's an additional concern that's wait on those stocks. So GLP1’s certainly something that needs to be incorporated. But again, it's one of those things that in our mind makes it somewhat of a contrarian opportunity, which ultimately in our mind will benefit these stocks. Once you actually see the cash flow impacts into quality of these businesses makes sense.
DN: All right. Let's talk bond market. The death of the 60/40 was a prominent discussion only a few years ago. Bonds had a black eye in the minds of investors with a few years of consistent negative returns. But sitting here today, bonds at stage pretty decent come back. It's going to be a couple years of positive returns, high-demand single digits. What's the outlook for bonds? Let's make that specific to investment grade to start.
PS: Yeah, overall, I would say, go back to, kind of where we are from, just all in yield standpoint, we're still looking at pretty attractive yields all in in the four to seven percent range going from kind of low to high to low quality bonds. And so I think that certainly makes it a much better environment for income investors. So we do think that there are, pockets of opportunity and kind of where we like to be positioned, which is in the higher quality area, kind of in the belly of the curve where we think they're still room for, potential continued steepening of the curve to be beneficial from a portfolio standpoint. But not doing it in a way where you take on too much duration risk. On the credit side, that's an area where we're more concerned. And so we actually don't see a lot of opportunity on the on the credit side at the moment, both in terms of the low grade bonds as well as investment grade.
DN: Any value elsewhere?
PS: The area that we still like is a merger market debt in local currency terms. And that, we can talk about some of the concerns around the dollar. And in some ways, looking at emerging markets, we see more favorable fundamentals declining domestic inflation, for example. We have lower debt outstanding. And also, if we continue to see Fed cuts, this year and maybe more cuts next year, that should benefit non-US currencies. And that can be another tailwind for that asset class.
DN: I think one of the things that's interesting, at least to me, is that cash levels still remain very high, despite yields having increased considerably since 2020. I think almost 8 trillion still sits in money market funds, which is a record high. Is that surprise you at all?
PS: It does not surprise me. Part of it is just if you look at where we were a couple of years ago, yields were about 5% and, just given where we came from in kind of the post-global financial crisis period. This was just a lot more yield that was available without, taking on any duration risk, any credit risk. And so, but I think it's important to recognize as well that things are changing, we are not, kind of the yield curve is not inverted the way it was, just a couple of years ago. And so, we think that it makes sense for investors to start thinking about increasing or maybe moving out of cash. And, you can get pretty attractive yields at, 4 to 5.5%. In assets that are, pretty short duration still in sort of one to five-year range, but you're not just sitting in cash. And so, we would encourage folks to start thinking about maybe pushing into, bonds again or, parts of the equity market that we think are looking attractive.
DN: Yeah, that's a good point. I mean, how should advisors educate clients on this topic? Because presumably, you have Fed cutting rates, which, they only control the short-term rates, but, money market funds, they probably have some correlation to that. I mean, is that going to be an impact on the yield that investors are receiving in their money markets? If the Fed continues to cut rates, moving in next year?
PS: Yeah, so, obviously, lower yields at the front end of the curve that will, all those equal, make that cash rate less attractive to you. And because you're not really taking on any duration risk, you're not really benefiting from, potential steepening of the curve as well. And so, given the, different shape of the yield curve and also just kind of the return that's available elsewhere within the yield curve, in our mind, it makes sense for investors to, at least if they want to maintain some defensiveness, going to short-term bonds and not just sitting cash.
DN: Yeah, and then obviously, inflation's the ultimate swing factor for both bonds and cash. Tariffs flowing through in the form of higher cost is, a constant debate. It hasn't really shown up yet, but I mean, there is data to support that, we are likely to potentially see more inflation through higher cost and store shelves starting later this year and early next year. It was that a major risk that investors need to be further considering when it's bonds and cash.
PS: Yeah, we don't see kind of a 2022 type inflation returning. Anytime soon, there's some unique things that happened with the pandemic and the fiscal, spending and the, Ukraine, Russia, war that kind of impacted supply chains. And so, we don't expect kind of a return at that type of inflation, however, we do marginally think that inflation will increase going into 2026 as a result of the tariff pass through that ultimately, likely is temporary, but can put some upward pressure on the inflation rate. And then the other, thing to think about is more kind of the policy framework and kind of the new fat share and sort of what that means in terms of how dovish the Fed might be. And so, it's one of the risks we're thinking about. It's not kind of a base case concerned that we have at this stage, but as we think about robust portfolio construction, if you will, and think it and preparing for different potential outcomes, actually having some inflation protection in the portfolio makes sense to us. So investing in some tips, treasure inflation, protect the bonds does make sense to us in a diversified fixed income portfolio.
DN: Okay, we've covered most of the big topics from the outlook, let's shift gears, I'd like to have a little fun and do a quick lightning round with you. Gold, having one of strongest years in a long time. What's your take on the rally?
PS: It's a tough one. Look, I think it's partly driven by some, behavior that's explainable. And so it kind of started with central bank buying. It kind of came out of the Ukraine, Russia, conflict as well where some central bank started buying gold. But and also then been, kind of helped by the, dollar weakness as well. But of late, it just seems like more of a speculative trade and it's actually not been defensive in during market sell-offs because it's been somewhat speculative.
DN: CME CEO, Terry Duffy recently joked gold strength is tied to central banks hedging their ineptitude, pointing to them being the largest buyers. Is he right?
PS: I think there is an answer truth actually to that because of course, hedging and, they're trying to just make sure that they're not, some of those emerging market central banks, for example, want to make sure they’re not really impacted by potential asset freezes like, some, the Russian central banks, for example, was and so I do think it's something to look out for. So, if you don't have a, if you have a forced buyer of an asset, that's always a bit of a concern.
DN: Private markets. Many advisors are being flooded with emails about private credit. I guess taking a step back first, what is private credit?
PS: Yeah, private credit is a form of non-bank lending, oftentimes by institutional investors and what they do is, it's basically privately negotiated debt and so it's not public debt and so there's kind of different flavors there, one of the big ones, one of the key ones is direct lending where companies lend directly to, smaller businesses, mid-sized businesses and so it's part of, it kind of opens up a segment of the debt market that is not available through public debt and so I think there's some interesting things to look out for as far as changes in how banks, for example, lend in the, in capital markets and so private credit gives you access to debt instruments that are not available elsewhere. So that's certainly one of the, one of the things that make it attractive.
DN: In your view, as an asset class, should advisors be allocating clients towards it?
PS: I think it's worth thinking about the role that private credit can play. I think two things are important to keep in mind. One of them is liquidity. So these funds, these vehicles available in the wealth channel to financial advisors have limited liquidity. Oftentimes, your cap to maybe 5% with the Rawls in that asset on a quarterly basis and so you have to be comfortable, parking the assets there and not being able to use those funds if you need them in the short term. And the second piece is really the fees. It's an area that we focused on broadly at Morningstar through our manager research team to really start, shedding a light on, the differences in fees that happen in that are available in this private market space. And so fees are high. And so that's something to be aware of and certainly something that we'd like to see come down over time.
DN: Yeah, I think that's the right point. I think communication is going to be essential for a lot of these private vehicles that advisors if they're communicating with and clients that need to make sure that they understand what the gated redemption schedule is that, if you want to access your money on a daily basis, that's not going to be the case.
PS: You have to understand that most of these vehicles will be quarterly or even longer. So, the transparency and making sure they understand what they're investing in, I think will be paramount. And I think Morningstar will lead in that category.
DN: Beyond debt, anything else interesting to you in private markets?
PS: Yeah, I think, first of all, Morningstar, we like this convergence between public and private assets. I think it actually gives people more access to a part of the market. It was only available to certain institutional investors in the past. And so that's positive. And so as we look at as I look at private markets, the private credit is sort of the asset class a lot of people are talking about. There's more vehicles that are being launched in that space and probably makes more sense given the liquidity needs. But looking at private markets broadly one thing that I've looked at recently is just looking at the relative valuations between private equity and public equity. And you see kind of divergence in the valuations between private equity and public equity in recent years. And so private equity valuations peaked in 2021. That was kind of pandemic period. A lot of people were kind of chasing valuations and things like that. But since then, you've seen private equity valuations actually come off a bit. And that has to do with just how certain institutional investors in particular also have looked to exit the asset class. And so I do actually see, an opportunity ultimately to invest in private equity if you have the ability to do that because that asset class is going through a bit of a rebalancing at the moment, which has had a favorable impact on valuations, for example.
DN: All right. Before we wrap up, your contribution to the outlook took a behavioral angle. And I think that's a good place to close out. You focus around the idea that uncertainty isn't going away next year or any year after that. When we think about uncertainty, a lot of times the right framing that advisors use is signal versus noise trying to differentiate between the two. How can advisors help clients separate those?
PS: Yeah. I think one of the things that a lot of people, a lot of companies do in an outlook and say, look, these are the five things that were going to happen in 2026. And that's these are the five things that you need to focus on. And while I mentioned, we talked about a lot of different themes and what's impacting the Fed and policy, et cetera. And we kind of know, what there's kind of known unknowns, if you will. But investing fundamentally has to do with, dealing with kind of structural uncertainty, uncertainty things that are not knowable ahead of time. And so in that article, we focused on just, kind of how do you work with an investor as an advisor in kind of turning information into knowledge? And it kind of comes back to having principles and tools and frameworks in place to react to anything that might happen in the future. We talked about the tariff shock and how one could have navigated that and not to overreact and making sure that we have good principles in place to make sure we can respond in a way that benefits long term outcomes. And so, one thing that we highlight there is that, for example, during the tariff uncertainty, our behavioral research team, did some surveys worked with advisors and clients. And in those surveys and those conversations, it was very clear that clients wanted to be educated, wanted to get context, and understand how, this uncertainty compared to, historical period of uncertainty. And that education made clients more comfortable in doing the volatility and allowed them to stick the course and not deviate from the long term investment plans.
DN: I'll spare our listeners the Mike Tyson quote, but having a plan ahead of time can often help some of reduce some of those emotional reactions. What approach do you and the team take?
PS: Yeah, I'd say there's three things that we kind of have a three-step process, if you will, that we go through the periods of volatility or uncertainty. The first one is just not to overreact. Just to say, look, let's not use this as a peer to overreact to, the information that, we learn at the time and the tariff shock of things is a great example. If you sold in an early April, that would have really had a negative impact. And if you look at history, for example, if you over the past 25 years, if you have missed the best 10 days in the market, you would have basically have your holding period, turn over that time frame. So, overreacting, it's less than number one, number two rebalancing is one thing we do oftentimes during these periods. It's inherently a counter-cyclical activity where you're selling the winners and buying the losers while keeping your investment strategy in line with what you set out to do at the beginning. And then thirdly, periods of uncertainty can create an overreaction by the market. So, markets respond more than what's justified by fundamentals. And so, that's when our teams oftentimes spend time just analyzing, digging through, trying to understand what the true potential impacts of a potential crisis of shock could be. And oftentimes, we find great opportunities during these periods. Yeah, I think overreacting the headlines,
DN: Avoiding overreacting the headlines is a critical point because that's obviously something we see investors do, even with the prominent amount of behavioral research that we do. I think one of the fun stats we saw in April was, if you look at the 10 worst days in the market, individual trading days, going back to 2000, I think eight of the best trading days are followed within two weeks of those worst days. So, volatility tends to cluster. A lot of people overemphasize the down days, but it’s historically been shown that the best days tend to track pretty closely to the worst days. And if you miss those worst days, it can have a serious drag on your future returns.
DN: All right, we did about 50 minutes on the outlook. So, we appreciate your time. Great to have you. Maybe transitioning to the personal, wrapping up the year here, anything you're looking forward to between now and year end.
PS: Yeah, look, the holidays this year were, we're kind of staying local. I'm actually looking forward to that. We're not visiting, family and I've got some family overseas as well. So, we're staying put for both for the holidays and so just looking forward to spending time with the family. My son has a birthday around the holiday period as well. So, we usually combine those festivities with some birthday activities as
DN: Sounds great. Anything on your reading list?
PS: There's a lot, a lot of things in my reading list, too much to kind of summarize, but it's a pretty, a pretty big stack.
DN: Awesome. Philip, thank you for joining the show.
PS: Thanks for having me.
DN: And there you have it, another episode of Simple, but Not Easy. We thank Philip for his time and encourage everyone to check out Morningstar’s 2026 investment outlook—which will be available in the show notes or by going to Morningstar.com directly. Before we depart, if you enjoy the podcast, please consider leaving a five-star review on Apple or Spotify. Until next time, thanks for listening!
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