2025 US Economy Resilience Fuels Constructive 2026 Asset Outlook

Bloomberg Surveillance · December 23, 2025 · Listen to Original Episode →

Original Title:

TL;DR

Yield curve steepening is primarily driven by falling short-term yields, not rising long-term yields, indicating the Federal Reserve has cut rates more than anticipated, impacting total return through coupon clipping rather than capital appreciation.
The US dollar's performance over the last five years remains strong despite recent dips, with no significant data supporting de-dollarization trends, making it a necessary holding for most portfolios.
Private credit is experiencing a resurgence, mirroring 2019 deal flow due to falling interest rates and controlled inflation, creating a constructive environment for credit investments with balanced risk-reward.
A "new 60/40" portfolio likely requires more equity and less bonds, as sideways interest rate movements diminish bonds' traditional stabilizing role and reduce their hedging effectiveness against equities.
The bond market is signaling smooth sailing for equities in 2026, provided inflation remains stable, as credit spreads are tight and default risks are low, preventing bonds from becoming a hurdle for stock market growth.
The shift towards longer car loan terms, extending to 72 months or more, is a consequence of rising new car prices and monthly payments, indicating affordability challenges for many families.
Dessert wines are increasingly featured on restaurant menus due to their lower cost compared to aged red wines and their extended bottle life, offering a profitable and labor-efficient upsell.

Deep Dive

The US economy in 2025, particularly in its final quarter, is demonstrating unexpected resilience despite prior concerns about tariffs and monetary policy shifts. This robust performance, characterized by strong GDP growth and stable inflation, sets a constructive backdrop for 2026, suggesting continued positive returns in both equities and fixed income, though a shift in investor strategy is necessary to capture these gains.

The economic data for 2025 indicates a stronger-than-anticipated performance, with GDP growth exceeding expectations and inflation remaining relatively contained. This environment is beneficial for risk assets, as credit spreads are tight and default risks appear low, suggesting that the bond market will not be a hurdle for equity performance in the coming year, provided inflation does not shock higher. Consequently, a "grab the coupon" approach to fixed income, focusing on collecting yields rather than expecting significant price appreciation, is advised for 2026, with total returns likely in the 5-6% range. For equities, the broader market, excluding the largest tech firms, is expected to outperform as cyclical sectors benefit from the lagged effects of fiscal stimulus and lower interest rates.

The prevailing economic conditions necessitate an evolution in traditional portfolio construction. The historical effectiveness of a 60/40 stock-bond portfolio is diminishing as interest rates are expected to move sideways rather than exclusively downward. This implies a need for a slightly larger allocation to equities and a reduced exposure to bonds to maintain optimal returns. Furthermore, the continued strength of the economy and favorable credit conditions are fueling activity in private credit and M&A markets, with deal flow mirroring pre-2020 levels. This environment supports a focus on asset selection, particularly in private credit, where holding risk alongside investors and actively managing loans is key to navigating opportunities.

The outlook for 2026 suggests a sustained period of economic growth supported by robust productivity and a potentially dovish monetary policy, assuming inflation remains in check. While the economy appears "hot" with strong nominal GDP growth, the absence of runaway inflation suggests a high productivity environment, which is generally positive for asset markets. However, the primary risk to this outlook is a significant uptick in inflation. Greed, rather than a fundamentally flawed economic setup, is identified as the main pitfall for investors, as expectations for market-beating returns may lead to excessive risk-taking.

Action Items

Audit yield curve steepening narratives: Analyze 5-10 instances where steepening was misleading to investors (ref: Steven Major).
Measure fixed income opportunity: Calculate potential returns from cash holdings in money markets versus fixed income ETFs to inform allocation decisions.
Track US dollar performance: Compare current year-to-date performance against the last five years to assess de-dollarization trends.
Evaluate curve steepening explanations: Analyze the drivers of US curve steepening (front-end yield reduction vs. long-end yield increase) for 3-5 recent periods.
Assess bond market value: Calculate the difference between Treasury yields and swaps for 5-10 recent periods to gauge potential over/underselling.

Key Quotes

"The elaboration on that tom is that the returns on offer from fixed income are really quite healthy and if you think about the amount of cash that people are holding so is it some 7 trillion in in money markets now i think before i started my my garden leave six months ago it might have been never six but 7 trillion in cash that's not going to be earning what it was at the start of this year so there's plenty of cash to go into fixed income here now."

Steven Major argues that fixed income investments are attractive due to the significant amount of cash held in money markets. Major explains that this substantial cash balance, earning less than it did previously, is likely to flow into fixed income, making it a healthy option for investors.

"And when people tell me that there's a de dollarization going on i don't see it in the data and i always ask well what else are you going to hold actually what is what is and so it's not a satisfactory answer because because it's the same answer to the same question but i'm afraid it's still the case that the dollar is is something that you have to hold it takes a big chunk of everyone's portfolio."

Steven Major expresses skepticism about the concept of de-dollarization, stating that he does not see evidence of it in the data. Major contends that the U.S. dollar remains a necessary asset for portfolios, as there is no clear alternative for investors to hold.

"Well the steepening has come from the front hasn't it in fact if you pick your points on the curve the middle point let's say seven's to tens has done very little which means your positive total return this year of what best part of 5 is coming from the coupon you just clip the coupon that's fine but if you go to the front of the curve those yields have come down a lot which means the fed has cut by more than most people expected at the start of the year by definition for the yield to fall it had to beat the forwards for you to make money and that's what's happened."

Steven Major explains that the observed steepening of the yield curve is primarily due to a decrease in short-term yields, not a significant movement in the middle to longer end. Major indicates that this phenomenon suggests the Federal Reserve has cut rates more than anticipated, leading to positive total returns mainly from coupon payments.

"I think the biggest mistake anyone could make would be taking profits too early in this rally and whether that's gold or s p 500 and there are better people than me that are giving you explanations as to why this will continue into 2026 it does seem that the economy is resilient the growth numbers are robust the fed's going to be dovish whoever's going to be in charge will be cutting rates by more than the current chair for sure so that's quite a nice setup going into 2026 it's very difficult to see um how how this could be derailed but that's exactly when you should start to worry because when it's so obvious and everyone's doing the same thing then you need to be diversified."

Steven Major advises against taking profits too early in the current market rally, citing a resilient economy, robust growth, and a dovish Federal Reserve as positive indicators for 2026. Major cautions that when a situation appears obvious and widely followed, it is precisely the time to consider diversification.

"So i would say it's it's a little more equities a little less bonds jim i i got the first look at gdp here and i know you haven't seen excuse me the second look i know you haven't seen this but these are jaw dropping ellen zentner statistics i mean this is unbelievable i got a gdp annualized not 3 3 but a stick up 4 3 i got personal consumption thank you paul sweeney 2 7 up to 3 5 i'm eyeballing 7 nominal."

Jim Caron suggests a portfolio allocation favoring equities over bonds, referencing strong GDP and personal consumption data as indicators of a robust economy. Caron believes that while bonds may not offer substantial returns, equities are positioned for continued strength, especially if inflation remains stable.

"So i think that the interest rate cycle that that we have from 1981 to 2021 was pretty much just downward rates which meant that bonds were stable 60 40 as a passive way to look at the markets was a very very good allocation but now that interest rates are likely to move sideways over time that means that 60 40 is no longer optimal so what it means is that you probably need to have a bit more a bit more equity a bit less bonds because bonds aren't going to be the stable returns plus bond return correlations are very high relative to equity return correlations so therefore one is not hedged necessarily against the other."

Jim Caron explains that the traditional 60/40 portfolio, which was effective during a period of declining interest rates, may no longer be optimal. Caron posits that with interest rates likely to move sideways, a portfolio with a higher allocation to equities and a lower allocation to bonds would be more suitable.

Resources

External Resources

Books

"The Intelligent Investor" by Benjamin Graham - Mentioned as a foundational text for value investing principles.

Articles & Papers

"The Wall Street Journal" - Mentioned for reporting on car payment averages and restaurant dessert wine pricing.
"Bloomberg News" - Mentioned for reporting on restaurant dessert wine pricing.
"Wall Street Journal" - Mentioned for reporting on the strength of Boston Beer's Utopia's brand.

People

Steven Major - Global Macro Advisor at Tradition, discussed for his views on yield curve steepening, fixed income returns, and the US dollar.
Jim Caron - CIO of Cross Asset Solutions at Morgan Stanley Investment Management, discussed for his outlook on a U-shaped economic recovery in 2026 and fixed income strategy.
Randy Schwimmer - Vice Chair and Chief Investment Strategist at Churchill Asset Management, discussed for his insights on private credit activity and the impact of a lower rate environment.
Lisa Mateo - Mentioned for providing newspaper headlines.
Tom Keene - Host of Bloomberg Surveillance.
Paul Sweeney - Host of Bloomberg Surveillance.
Benjamin Graham - Author of "The Intelligent Investor."
Corbin Wittington - Mentioned as an example of someone diagnosed with CIDP and dilated cardiomyopathy who found strength through community.
Ellen Zentner - Mentioned in relation to GDP statistics.
Todd Frank - Mentioned in relation to regulation in the mortgage-backed securities market.
Stuart Paul - Mentioned as being in the car.
Lee Cooperman - Mentioned in relation to team dynamics.
Michael Arruitt - Thanked for participating in a discussion.
Jimmy O'Connor - Mentioned in relation to Windom Mountain.

Organizations & Institutions

Tradition - Employer of Steven Major.
Morgan Stanley Investment Management - Employer of Jim Caron.
Churchill Asset Management - Employer of Randy Schwimmer.
J.P. Morgan Asset Management - Mentioned for active fixed income ETFs.
J.P. Morgan Chase & Co. - Parent company of J.P. Morgan Asset Management.
J.P. Morgan Distribution Services, Inc. - Issued a communication for J.P. Morgan Asset Management.
FINRA - Member organization for J.P. Morgan Distribution Services, Inc.
HSBC - Former employer of Steven Major.
Bloomberg - Mentioned for news stories and the Bloomberg terminal.
Morgan Stanley - Employer of equity analysts referred to as "beasts."
Churchill - Mentioned in relation to asset management.
TIAA - Parent company of Churchill Asset Management.
Kroger - Mentioned as being available on DoorDash.
CVS - Mentioned as a community partner and for prescriptions and snacks.
Boston Beer - Maker of Utopia's brand beer.
Samuel Adams - Brand of beer from Boston Beer.
Compassion International - Organization providing holistic support to children.
Novo Nordisk - Mentioned in relation to an interview with Sir Mike.

Websites & Online Resources

jpmorgan.com/getactive - Website to learn more about J.P. Morgan Asset Management's active fixed income ETFs.
discovercart.com - Website to learn more about CAR T-cell therapy.
optum.com - Website to learn more about Optum's healthcare services.
omnystudio.com/listener - Website for privacy information.
odu.com - Website to try Odoo for free.
duo.com - Website to learn more about Cisco Duo.
iheart.com - Platform to listen to "Untold Stories: Life with a Severe Autoimmune Condition."
apple podcasts - Platform to listen to "Untold Stories: Life with a Severe Autoimmune Condition."
doordash.com - Platform to order groceries from Kroger.
cvs.com - Website for CVS.
compassion.com - Website to sponsor a child.

Podcasts & Audio

Bloomberg Surveillance - The podcast being transcribed.
Untold Stories: Life with a Severe Autoimmune Condition - A podcast production from Ruby Studio in partnership with Argentix.

Other Resources

CAR T-cell therapy - A personalized treatment for multiple myeloma.
Prime Video - Mentioned for holiday entertainment.
Optum - Company using technology to make healthcare easier and more affordable.
Fixed Income ETFs - Passive investment vehicles.
Active Fixed Income ETFs - Investment vehicles offered by J.P. Morgan Asset Management.
Multiple Myeloma - A type of cancer.
Yield Curve Steepening - A phenomenon discussed in relation to investor strategies.
US Dollar - Currency discussed in the context of de-dollarization.
US Treasury Market - Market for US government debt.
Asset Swap Spread - A metric used to assess the health of the bond market.
Term Premium - A component of bond yields.
World Equity Indices - Measures of stock market performance globally.
S&P 500 - A major US stock market index.
Global Fixed Income - Investments in bonds from around the world.
Credit Spreads - The difference in yield between corporate bonds and government bonds.
Commodity Markets - Markets for raw materials like gold, silver, and palladium.
Gold - Precious metal discussed for its investment value.
Silver - Precious metal discussed for its investment value.
Palladium - Precious metal discussed for its investment value.
West Ham - A football (soccer) club discussed in relation to potential relegation.
New England Patriots - Professional football team.
Pro Football Focus (PFF) - Data source for player grading.
Private Credit - Loans provided by non-bank lenders.
Leverage Loan Growth - Increase in the volume of leveraged loans.
Corporate Lending - Loans provided by banks to corporations.
C&I Loans - Commercial and Industrial loans.
Investment Grade Bonds - Bonds with a high credit rating.
Sub-Investment Grade Bonds - Bonds with a lower credit rating.
Leverage Loans - Loans provided to companies with high levels of debt.
Syndicated Loans - Loans provided by a group of lenders.
Private Credit - Loans provided by non-bank lenders.
Capital Formation - The process of raising capital for investment.
401k - A retirement savings plan.
TIAA - An organization that provides retirement and financial services.
Dividend Recaps - A financial transaction where a company issues new debt to pay a dividend to its shareholders.
M&A - Mergers and Acquisitions.
AI - Artificial Intelligence, discussed as a driver of economic lift.
Linen Management - A sector discussed for investment opportunities in healthcare.
Booth School of Business - Business school mentioned in relation to salary expectations.
Gen Z - A demographic group discussed in relation to financial success.
Millennials - A demographic group discussed in relation to financial success.
Gen X - A demographic group discussed in relation to financial success.
Boomers - A demographic group discussed in relation to financial success.
Golden Goose Sneakers - A brand of sneakers discussed for their value.
Versace - A luxury fashion brand.
New Car Affordability - Issue related to the cost of new vehicles.
Car Loan Terms - Duration of loans for purchasing vehicles.
Electric Vehicles (EVs) - Vehicles powered by electricity.
Auto Insurance - Insurance for vehicles.
Utility Bills - Costs associated with electricity and other utilities.
Dessert Wines - Sweet wines often served after a meal.
Utopia's Brand Beer - A highly alcoholic beer from Boston Beer.
Cognac - A type of brandy.
60/40 Portfolio - An investment portfolio allocation of 60% stocks and 40% bonds.
Nvidia - A technology company.
Mag 7 - Refers to the seven largest technology companies.
GDP - Gross Domestic Product, a measure of economic output.
Personal Consumption - Spending by individuals on goods and services.
Mortgage Backed Securities (MBS) - Securities backed by pools of mortgages.
Agency MBS - MBS guaranteed by government-sponsored enterprises.
Non-Agency MBS - MBS not guaranteed by government-sponsored enterprises.
Housing Market - The market for buying and selling houses.
Financial Crisis - Economic downturns, such as the one in 2008.
Productivity - The efficiency with which goods and services are produced.
Inflation - A general increase in prices and decrease in the purchasing value of money.
Credit Quality - The likelihood that a borrower will repay their debt.
Asset Allocation - The process of dividing an investment portfolio among different asset categories.
Bond Correlations - The statistical relationship between the price movements of different bonds.
Equity Correlations - The statistical relationship between the price movements of different stocks.
Private Equity - Investment in companies not listed on public stock exchanges.
Service Sectors - Industries that provide services rather than tangible goods.
LCL Loans - Loans provided to companies with high levels of debt.
Bank Loans - Loans provided by commercial banks.
Investment Grade Bonds - Bonds with a high credit rating.
Sub-Investment Grade Bonds - Bonds with a lower credit rating.
Capital Formation - The process of raising capital for investment.
Risk and Compliance - Departments within financial institutions that manage risk and ensure adherence to regulations.
General Partner (GP) - A partner in a business who manages the company and has unlimited liability.
Limited Partners (LPs) - Partners in a business whose liability is limited to the amount of their investment.
Income Stream - The revenue generated from an investment.
Leverage - The use of borrowed money to increase the potential return on an investment.
Asset Selection - The process of choosing specific investments for a portfolio.
Loan Maturity - The date on which a loan is due to be repaid.
Private Equity Sponsor - A firm that invests in private companies.
Interest Rates - The cost of borrowing money.
Financing Costs - The expenses associated with obtaining funds for a business.
Healthcare Companies - Businesses operating in the healthcare industry.
Disposable Medical Supplies - Medical products intended for single use.
Financial Success - The achievement of financial goals.
Starter Homes - First homes purchased by individuals or families.
Autoimmune Condition - A condition where the body's