Macro Insights Flash Macro: Market Update May 2026

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May 2026 4 minute read Henry H. McVey David McNellis Brian Leung Sign up to subscribe to the latest insights from KKR How are we thinking about the capital markets? In recent days, I have spent time with a few different senior relationships from around the world. The common thread in our conversations was that we are moving further away from a world defined by benign globalization and towards one where economic nationalism around certain resources, intensifying geopolitical rivalry, and the weaponization of strategically important resources are becoming more central to policy and market outcomes. This reality is creating uncertainty and a broader rethinking around the traditional tools of monetary policy, how to gauge inflation correctly, and what actually drives GDP and EPS growth. From an economic standpoint, I think the capex cycle is becoming more important, helping growth stay more resilient than many expect, even as inflation headwinds remain higher this cycle. Against that backdrop, more countries will likely want to build domestic inventories of key imports (e.g., oil, fertilizers, copper, etc.), encouraging resource hoarding, reconfigured supply chains, and reduced reliance on foreign supplies. I expect further increases in domestic capex aimed at resilience and self-sufficiency across the globe. For example, Canada just announced its C$25 billion sovereign wealth fund (Canada Strong Fund) to invest in infrastructure, advanced manufacturing, and energy/mining. Governments are also likely to promote capital repatriation. Consider that incremental spending on domestic grids, defense, and strategic industries could put upward pressure on local interest rates unless it is offset by more capital returning home. Korea, for example, revised its tax policy late last year to exempt the capital gains tax if citizens sold overseas equities and reinvested proceeds into domestic equities. Similar policies could emerge elsewhere. In the end, I think our Regime Change framework still holds. Bigger deficits, heightened geopolitical uncertainty, and a messy energy transition are keeping inflation more volatile and, outside of China, running at a higher resting level than in the pre-pandemic era. If I am right, investors will continue to migrate towards more control positions with operational levers, more upfront yield, and strategies that are less dependent on broad market beta. Also, as I discuss below, I think that the ongoing transformation of the Public Equity markets is likely to accelerate further as systematic strategies push deeper into mainstream markets. Below are some additional summary thoughts that I hope you find helpful.

Not surprisingly, many of our conversations focused on AI. Three themes kept resurfacing. First, there is increasing concern about governance, guardrails, and the rules of engagement as AI becomes more embedded in economic and national security agendas. The consistent feedback I heard is that a clearer oversight framework and stronger accountability will be needed as adoption accelerates, especially if different governments and business leaders adhere to different rules of engagement. Second, China has clearly made AI a major priority of its 15th 5-Year Plan, and it is quite advantaged in that it has roughly three times the population of the United States, giving it a meaningful advantage in scaling certain AI applications. Relatedly, China’s decision to block Meta’s acquisition of AI firm Manus marks an important data point to consider as we think about cross-border technology investments. Third, markets still do not fully appreciate the surge in demand coming as AI scales. As prices come down, demand is likely to rise, increasing the overall market size. Employment will be impacted at the sector level more than at the aggregate level. Already, the Tech sector has seen negative job growth for 15 consecutive months and financial services for six consecutive months; these are two sectors where we expect continued headcount pressure. By comparison, goods employment, healthcare, and many service categories should still grow modestly.

We have been seeing this in our data for several months, and recent conversations reinforced the same point. Tight supply chains, restrictive commodity policies, and tariffs have created a step-change in pricing pressure to start the year. Some policymakers may be underestimating the persistence of these forces. For the Fed, it likely means rates cannot be cut as much as many would like, but it does not mean the Fed necessarily shifts into an outright tightening cycle. That distinction matters for the perception of financial conditions. EXHIBIT 1: We Think There Should Be a $5-10 per Barrel Premium for Oil Over the Medium Term Relative to Current Futures Pricing

In the past, the U.S. consumer would lever up and buy goods and some services from Europe, Asia, and Latin America. The cycle would end when either the corporate or the consumer sectors were forced to de-lever, a deflationary event that generally required central bank intervention to engender some form of inflation. Today, the cycle is different. Residential construction has been in recession for several years (we are tracking it at just 3.2% of GDP, one of the lowest levels in decades), but national security, supply chain resilience, and AI investment represent priorities that are largely price insensitive. In the world I think unfolds, incremental growth is driven more by capex (some of which is fiscally driven) than by the traditional consumption-led playbook. As a result, sectors such as defense, energy, energy infrastructure, materials, and utilities may grow as a share of overall market activity, while staples and parts of consumer discretionary become less central. Beyond AI, the ‘Security of Everything’ becomes pervasive. EXHIBIT 2: AI Capex Has Surged, But Traditional Cyclical Capex Has Plummeted EXHIBIT 3: Tech Capex (Tech Hardware, Software IP, Data Centers) Contributed Fully 1.9% of the 2.0% U.S. GDP Growth in 1Q26

The Fed is operating during a very odd moment in time. Monetary policy remains a blunt instrument that cannot ‘fix’ the current K-shaped economy. At the same time, inflation is moving higher on a more structural basis than many want to admit, and AI complicates the picture further. In the near term, AI-driven buildout can be inflationary because the pull demand for commodities, power, and infrastructure is real. Longer term, AI can be disinflationary as productivity improves. This tension is why I think the debate inside the Fed is going to shift. In particular, I expect dovish Fed officials to increasingly emphasize the ‘Greenspan playbook’ from the Internet era, arguing that the economy’s speed limit may be higher than many assume because productivity can support faster growth without leading to near term overheating. Look for that kind of framing in the coming months. The practical implication, however, is that the Fed may have less flexibility to ease quickly if the inflation risk premium remains elevated and supply chain tightness keeps near-term price pressures sticky. Separately, balance sheet policy is likely to matter more than markets currently appreciate. Warsh is a balance sheet hawk, and that matters because when he last served at the Fed, the balance sheet was roughly eight percent of U.S. GDP; today it is closer to 23%. When the balance sheet debate returns to the foreground, it will influence liquidity conditions and term premia in a way that policy rates alone may not fully capture.

Iran’s economic footprint is modest, but its ability to disrupt chokepoints is not. Iran’s economy is roughly 60% the size of Belgium’s, yet it is impacting up to 20% of global oil flows and an even larger share of certain supply-chain inputs. More broadly, countries around the world are increasingly looking for ways to leverage their economic footprint to match tariffs, create negotiating leverage, and advance political agendas. From an investment standpoint, recent events reinforce our ‘Security of Everything’ thesis. Middle East countries will continue to look to reduce dependence on the Strait, while global supply chains will demand greater regional resilience to remain relevant during periods of conflict. Ultimately, we see more regionalization of the global economy on the horizon, which reinforces our bullish view on infrastructure investment.

For the last few years, we have argued that the technical backdrop across capital markets has been unusually favorable. In Equities, the S&P 500 has been shrinking by roughly $1 trillion per year from buybacks before layering in M&A volume. However, a backlog of signature IPOs could make that imbalance less supportive. By comparison, it remains clear to me that many market participants still underestimate the demand for credit and the need for yield coming from insurers and other liability-driven allocators. EXHIBIT 4: Our Capital Markets Liquidity Indicator Is Still Recovering From Near-Trough Levels. However, Upcoming IPO Issuance Could Impact What Has Been a Bullish Tailwind

One of the most interesting insights in our discussions was the changing nature of markets. Similar to how CLOs and ETFs changed credit markets, I increasingly believe Public Equities will be even more influenced by systematic strategies. Quants are no longer confined to the edges of the market where they historically generated very high Sharpe ratios (10-20) on smaller pools of capital. They are moving into more fundamental parts of the market, where the Sharpe is lower (2-4), but still often competitive versus traditional discretionary approaches. Hedge funds are also losing analysts and PMs to teams that can embed that expertise into more systematic ‘quantamental’ frameworks. If I am right, this has important implications for market share, liquidity, and price discovery in Public Equity markets.

Stepping back, our conclusion is straightforward. The range of potential macro-outcomes has widened, and the market is being asked to price geopolitical risk, supply-chain resilience, and AI-driven capex at the same time. In that environment, traditional diversification tools may be less reliable, and investors may be forced to do more work on what they own, why they own it, and how it should behave in stress. For us, this reinforces our ‘high grading’ mindset: stay invested, but lean into quality, liquidity where appropriate, and return streams that are less dependent on valuation expansion. Said differently, we continue to prefer strategies that can ‘make our own luck’ through control and operational levers, harvest more upfront yield, and emphasizing collateral-backed, contractual cash flows where downside outcomes are more definable. EXHIBIT 5: Non-Tech Capex Including Non-Data Center Construction, Non-Tech Equipment, Non-Software IP) Actually Subtracted a Substantial -0.5% From GDP Market Commentary Macro Insights Global Wealth Investment Playbook LEARN MORE Macro Insights Thoughts from the Road: China LEARN MORE Macro Insights Flash Macro: U.S. Markets Update LEARN MORE Macro Insights Thoughts from the Road: Japan LEARN MORE Important Information Thank you for visiting the website (the “Site” or “Website”) of Kohlberg Kravis Roberts & Co. L.P. and its affiliates (collectively, “KKR”, “we” or “us”). By accessing this website you are indicating that you have read, acknowledged and agree to be bound by the following information. The following important information, together with the information available at the Terms of Use and Privacy Policy governs your use of this Website. Your use of this Website and the materials herein constitutes your acceptance of these terms of use. If you do not agree with the Terms of Use, you should immediately cease use of the Website and review of the materials. Professional Investors only: This Website is only intended for and directed at institutional, professional or accredited investors (as defined in your jurisdiction) and is not suitable for retail or individual investors. If you are a retail or individual investor then please leave this Website immediately. Access Subject to Local Restrictions: This Website is not directed at any specific jurisdiction and you are entering a global website. Products or services mentioned on this Site are subject to legal and regulatory requirements and may not be available in all jurisdictions. This Website and the materials herein are intended for certain types of investors only and to persons in certain jurisdictions where the strategy is authorised for distribution. Products or services mentioned on this Website are intended only for distribution in those jurisdictions where the offering of such products and services is legally permissible. No Offer of Securities or Investment Advice: This Site and the materials herein are presented for informational purposes only. Neither the Site nor the materials herein constitutes a solicitation or offer by KKR to buy or sell any securities of any kind or provide any investment advice or service. This Site does not provide specific investment advice to any individual viewing the content of the Site and does not represent that the securities or services described herein are suitable for any specific investor. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Risks Warning: Investing in financial instruments involves risk, including the possible loss of capital. The value of investments may fluctuate and past performance is not a reliable indicator of future results. Investors should conduct their own research and, where appropriate, seek independent professional advice before making any investment decision. Also, investors should always consider investment objectives, risks, charges and expenses of strategies that may be