Navigating 2026: International Opportunities Amidst US Economic Shifts

The year 2026 is shaping up to be a complex landscape, where conventional wisdom about economic growth and investment strategies will be tested by hidden consequences and systemic shifts. This conversation reveals that while resilience has characterized recent economic performance, the future demands a more nuanced approach, particularly in fixed income and M&A, where opportunities lie in navigating overlooked markets and understanding the delayed payoffs of difficult decisions. Those who can look beyond immediate gains and map the downstream effects of current trends will gain a significant advantage. This analysis is crucial for investors, economists, and business leaders seeking to build durable strategies in an increasingly unpredictable global economy.

The Illusion of "Safe" Markets: Unearthing Value in the Bankruptcy Process

The prevailing sentiment for 2026, as articulated by David Sherman, CIO of CrossingBridge Advisors, is one of high valuations, tight spreads, and elevated geopolitical risk. Yet, within this seemingly frothy environment, Sherman highlights a counterintuitive opportunity: debtor-in-possession (DIP) financing. This is debt provided to companies already in bankruptcy, a space often perceived as high-risk. However, Sherman argues it's "very low risk to you" because DIP lenders are typically secured and are among the first to be paid, often with significant yield premiums. The perceived risk, he suggests, is often a function of market perception rather than inherent financial danger, especially when compared to the complexities of the U.S. bankruptcy system.

Sherman points to the Japanese market as an example where rising interest rates and government encouragement for companies to improve shareholder outcomes are creating more opportunities for DIP financing. Japanese institutions, viewing bankruptcy as a failure, have historically shied away, creating a void that foreign investors can fill. This is a classic example of a system where cultural norms create market inefficiencies, offering higher returns for those willing to engage with the perceived stigma. The implication is that by understanding the systemic biases and structural issues within different financial systems--like the U.S. bankruptcy process being mired in "creditor on creditor warfare" due to complex securitized products--investors can identify durable advantages.

"The reason I think it's less risk is yes a company's in bankruptcy but you're the first person to get paid other than the tax authorities and you're usually secured so unless a company is administratively insolvent or is illiquid and just vaporizes like first brands you're perfectly fine."

-- David Sherman

This approach challenges the conventional wisdom of seeking safety only in established, seemingly stable markets. Instead, it suggests that true safety, or at least superior risk-adjusted returns, can be found by understanding and navigating the complexities and perceived risks of less conventional, but structurally sound, opportunities. The delayed payoff here is not just financial; it's the strategic advantage gained by developing expertise in markets or financial instruments that others avoid due to a lack of understanding or a preference for the path of least resistance.

The Broadening Economy: Beyond the Headline Numbers

Bill Adams, Chief Economist at Comerica Bank, offers a perspective on economic growth that moves beyond the headline GDP figures. While acknowledging a likely softer Q4 2025 due to factors like the government shutdown, he anticipates 2026 to be a year of "solid economic growth and broadening economic growth." This broadening is expected to be supported by lower interest rates, which should stimulate the housing market and related industries. However, Adams also injects a note of caution by highlighting a significant disconnect: strong GDP growth has coincided with a "softening labor market," particularly for Black or African American workers, whose unemployment rate has risen substantially.

This divergence is a critical systemic insight. It suggests that aggregate economic health, as measured by GDP, does not necessarily translate to equitable well-being across all demographics. The "k-shaped economy" is not just a metaphor; it's a reality where different segments of the population experience vastly different economic outcomes. While retirees may be insulated by asset price increases and pensions, those more dependent on wage growth and job security face increasing pressure. This has downstream consequences for consumer spending patterns and overall economic stability.

Adams also raises concerns about the politicization of monetary policy, particularly with the upcoming transition at the Federal Reserve. The market's anticipation of a new Fed chair who might prioritize lower interest rates, regardless of economic conditions, could introduce volatility. This highlights how political incentives can create feedback loops that influence economic policy, potentially leading to outcomes that are not purely data-driven. The conventional approach might focus on the Fed's dual mandate of stable prices and maximum employment, but Adams suggests the administration's desire for lower rates could override these considerations, creating a hidden risk.

"There is a big disconnect in the past year between pretty good real gdp growth on the one hand and a softening labor market on the other."

-- Bill Adams

The advantage for those who grasp this lies in anticipating economic shifts based on a more granular understanding of labor market dynamics and the interplay between political will and monetary policy. It means looking beyond the surface-level positive GDP numbers to understand the underlying vulnerabilities and the potential for these vulnerabilities to compound over time, affecting different sectors and consumer groups unevenly.

The Practical Consumer and the AI Mirage: Retail's New Reality

Julia Wilson, Principal at KPMG US, provides a ground-level view of consumer behavior, emphasizing practicality over exuberance. The holiday shopping season, while stronger than some predicted, was characterized by "very practical" spending, with items like sweaters and socks being popular--the "year of the sweater." This suggests a consumer who, despite economic resilience, remains cost-conscious and risk-averse, prioritizing needs over wants. Gift cards also played a significant role, a trend Wilson attributes partly to the compressed shopping window between Black Friday and Christmas, catching some consumers by surprise.

The challenge for retailers, as Wilson outlines, is navigating an omnichannel landscape where AI is becoming a significant, yet sometimes elusive, tool. While AI can streamline tactical processes like returns and enhance personalization, its immediate impact on last-minute shopping is limited--"AI does not bring the package to your door." This highlights a common pattern: the hype around new technologies often outpaces their practical, immediate application, creating a gap between expectation and reality. Retailers must leverage AI for productivity and personalization, but they still rely on traditional channels and physical presence.

"The smart consumer kind of played out ours was ours was socks this year socks yeah I was just gonna say and how bad is that or you know what there was s and l had a great skit they always do it it was an old skit but they did it where the mom gets a robe every year but everybody else in the family gets like really cool gifts and she's like okay I have another robe so I feel you on the sweater robe sock thing."

-- Julia Wilson

Moreover, the rise of "Dry January" as a way for consumers to save money, alongside health and wellness concerns, further underscores the theme of practicality and fiscal prudence. For retailers, the advantage lies in understanding this shift. It's not about chasing fleeting influencer trends but about meeting the consumer where they are, with practical offerings and efficient, integrated shopping experiences. The delayed payoff for retailers who invest in true omnichannel integration and data-driven personalization, rather than just adopting AI buzzwords, will be a more loyal customer base and sustainable growth, even in a market where consumers are increasingly discerning about value.

M&A's Resurgence: Navigating Valuations and Regulatory Shifts

Scott Sperling, CEO of THL Partners, discusses the M&A environment, noting an anticipated pickup in activity for 2026, driven by a return to a more "normal" antitrust regime. This shift, he explains, allows for strategic consolidations that can streamline costs and improve consumer value--opportunities that were previously curtailed. The slowdown in recent years, Sperling clarifies, wasn't primarily due to the cost of capital, but rather because many companies acquired in 2021-2022 were bought at inflated multiples. It has taken time for these companies to "grow into their valuations."

This is a critical point about delayed payoffs. The expectation in private equity is typically a 3-5 year hold, but the market conditions of the past few years have extended this to 5-8 years or more. The current environment, with companies performing well and valuations becoming more rational, is creating opportunities for monetization and new acquisitions. The large deals currently occurring are significant because they represent a return to strategic consolidation, enabled by a regulatory environment that Sperling believes is more aligned with traditional antitrust principles.

"The opportunity now to actually do things that make sense for consumers in particular -- or customers if it's a business to business -- type situation I think that's -- allowing these -- very large acquisitions to occur that's making up the bulk of that -- of that -- number that you spoke of."

-- Scott Sperling

Sperling also identifies key growth areas, including pharma services, where generative AI is enabling drug development and clinical trials, and automation across various business functions. These are areas where the payoff is not immediate but requires sustained investment and innovation. The advantage for investors and companies in these sectors comes from understanding the long-term convergence of technology and industry needs, and being willing to commit resources even when immediate returns are not apparent. The difficulty here lies in the extensive operational value-add required, which demands a specific thesis and patience--qualities that are often in short supply, creating a durable competitive moat for those who possess them.

Key Action Items:

• Explore DIP Financing: Investigate debtor-in-possession financing opportunities, particularly in markets like Japan, where cultural norms create inefficiencies. (Immediate to 12 months)
• Analyze Labor Market Divergence: Move beyond headline GDP and focus on granular labor market data, especially for vulnerable demographics, to anticipate consumer spending shifts. (Ongoing)
• Anticipate Fed Transition Volatility: Prepare for potential market fluctuations related to the Federal Reserve leadership change and the administration's influence on monetary policy. (Next 3-6 months)
• Focus on Practical Consumer Value: Retailers should prioritize practical, value-driven offerings and efficient omnichannel experiences over chasing ephemeral trends. (Immediate)
• Leverage AI for Productivity, Not Hype: Implement AI strategically for operational efficiency and personalization, understanding its current limitations in direct consumer engagement. (Ongoing)
• Invest in Long-Term Growth Sectors: Allocate capital to areas like pharma services and automation where technological convergence and sustained investment will drive future value. (12-18 months+)
• Develop Expertise in Overlooked Markets: Build specialized knowledge in less conventional investment areas (e.g., Nordic high-yield, specific bankruptcy financing) to capture delayed payoffs. (Ongoing)