In Brief: Mid Year Outlook for 2026

June 2026 6 minute read Henry H. McVey Lauren Goodwin Sign up to subscribe to the latest insights from KKR At KKR, our 2026 Mid-Year Outlook reaches a clear conclusion: the cycle continues, but the rules of the game are changing. The global economy is moving from a low-cost, efficiency-first model towards one where redundancy, reliability, resilience, and control carry a higher premium. We are calling this environment the ‘Divergence Conundrum,’ an investing landscape where certain segments of the economy and markets are starved for capital, while others are flush with attractive financing options. For investors, the implication is not to avoid risk, but to be more disciplined in how that risk is owned. Sign up to subscribe to the latest insights from KKR

We believe the ‘Divergence Conundrum’ is the defining feature of this cycle. For investors, we think this is a time to stay up in quality, focus on durable cash flows, and lean into managers and assets that can create value through operational improvement, productivity gains, and disciplined capital allocation. The ‘Divergence Conundrum’ thesis encapsulates our view that the economy is no longer moving in one clean direction. Some areas, like AI, productivity, high-end services, and national security, are still attracting capital and driving growth. Other areas, like housing, lower-income consumers, old economy capex, and rate-sensitive sectors, remain under pressure. For investors, the question is whether the economic resilience they are seeing is increasingly concentrated in a few pockets of strength rather than broad-based. For policymakers, the challenge is setting monetary policy for an economy that is hot in some areas and cold in others. Exhibit 1: The ‘Divergence Conundrum’ Is Poised to Become More Extreme as the Cycle Continues. Against This Backdrop, the Complexity of Economic, Societal, and Monetary Considerations Becomes More Challenging

Exhibit 2: Driver One: Economic Momentum Becomes More Concentrated in Tech/AI and National Security Issues

Exhibit 3: Driver Two: Critical Minerals and Oil Supplies Increasingly Become Chokepoints for Economic Leverage and Exacerbate K-Shaped Dynamics

Exhibit 4: Driver Three: Leverage Concentrates In Governments, Not Consumers

Exhibit 5: Driver Four: The Productivity Boom Likely Favors Capital Over Labor and Consumption

Productivity is the secret sauce extending the business cycle, but the benefits are uneven. For investors, the message is to focus on companies and strategies that can convert productivity into margin durability, revenue-per-worker gains, and operational improvement. The global productivity boom shows no signs of abating. Importantly, services, not goods, appear to be driving productivity gains this cycle, while AI is still in the early stages of becoming an equally powerful tailwind. Exhibit 6: Services Are Experiencing a Boom Not Just in Consumption, But Also in Productivity

The ‘Security of Everything’ Is becoming a capital allocation decision. For allocators of capital, this argues for more exposure to assets that provide resilience, reliability, and redundancy. Security is becoming a core operating assumption for CEOs and policymakers. This mega theme began with defense and physical security, but now extends across cyber, data, shipping lanes, food and water, energy, critical materials, components, and processing capacity. From an investment standpoint, we think this argues for exposure to infrastructure and other Real Assets tied to this transition, business models that help companies navigate the adjustment, and management teams that are already ahead of the curve in managing supply chain complexity, resiliency, and security risk. Exhibit 7: National Security Is Now Bundled With Rule of Law and Economics/Trade, and Wrapped in the Complexity of Digitalization

As part of our Regime Change thesis, we expect a higher resting heart rate for inflation this cycle. As such, we think portfolios need more nominal GDP linkage. We have more conviction in our Regime Change asset allocation framework, including a higher resting heart rate for inflation. Goods inflation is no longer the persistent disinflationary force it was in the last cycle, while geopolitics, energy, tariffs, transport costs, and supply-chain disruption are keeping a firmer floor under prices. Exhibit 8: We Have Moved Away From Structural Goods Deflation. We Expect Goods Inflation to Settle About 100 Basis Points Above Pre-Pandemic Levels

We believe the relationship between stocks and bonds is changing. In a world of higher deficits, stickier inflation, and more frequent geopolitical shocks, investors should be careful about relying too heavily on long-duration Treasuries as safe havens. For portfolios, this argues for adding differentiated return streams beyond traditional public equities and fixed income. The goal is not to replace public markets, but to complement them with exposures that can improve diversification, income, and resilience across a more volatile cycle. Exhibit 9: Stocks and Bonds Continue to Offer Diminished Diversification Benefits

Expected returns are not unattractive, but they are becoming harder to capture across most asset classes. As a result, we believe investors should be more deliberate about the return streams they underwrite, the structures they use, and the managers they select. Broad beta, multiple expansion, and falling rates are likely to do less work than in the last cycle. In our view, the advantage will go to investors who can identify not just where return exists, but also whether those returns are durable, diversified, and repeatable. Exhibit 10: The Expected Return Differential Between the Best and Worst Performing Assets in a Portfolio Remains Tight

Exhibit 11: We Continue to Think Expected Returns Over the Next Five Years Will Look Quite Different Relative to the Past Five Years