2026 may already be more than a month in, but advisors and investors are still quite keen to navigate the complex geopolitical market in order to find the most opportune investment opportunities.
Recently, Eric Hundahl, Head of Macro & Investment Strategy at BNY Investments, sat down with the VettaFi team to discuss how BNY is approaching investment strategies in the new year. During the conversation, Hundahl broke down potential risk signals, the private credit market, opportunities amid small-caps and AI stocks, and more.
Nick Wodeshick: Eric Hundahl, thanks for taking the time to answer my questions! To get things started: it’s probably an understatement to say that, as a whole, 2025’s markets did not perform in the way that many advisors and investors were expecting them to. For you, which sectors and strategies stood out as the most interesting, and what lessons should advisors remember as they head into 2026?
Eric Hundahl: First, let me thank you for your interest in BNY and our 2026 outlook. While you’re correct, 2025 presented a complex landscape to navigate and it did challenge many initial expectations, the ultimate outcomes were not entirely unexpected. In our 2025 outlook [see above]we did expect the S&P to have a good year driven by a re-acceleration of growth and easing monetary policy. The size of the shocks were larger than expected, but the shocks themselves were not.
Regarding sectors and strategies, one must certainly respect the melt-up in precious metals that we saw last year. The performance of gold and other precious metals was remarkable as we saw the flow into gold from central banks transition into more flow from ETFs. Investors are looking for hedging strategies against the threat of large amounts of global fiscal spending and shifting trade dynamics and gold has provided an attractive return here.
The performance and resilience of non-U.S. equity markets was also strong. Despite the tariff shock that largely defined 2025, non-U.S. markets performance was also interesting. We believe the drivers of outperformance, such as other central banks leading the Fed in easing cycles, a general weakness of the U.S. dollar and a significant valuation gap between the U.S. and the rest of the world, are trends that can continue. Diversification was a key theme going into 2025, but nearly all geographies being solidly in the green was still a surprise.
If 2025 was about anticipating and managing shocks, we think 2026 will be about living with the reality of those shocks. I think we learned that growth could coexist amongst a soft labor market, supply shocks and elevated prices. As we continue to see tension between inflation, growth and labor markets, I don’t think we should wait for an all-clear signal and need to focus on portfolios that can remain resilient despite those tensions.
Despite 2026 getting off to a kinetic start, 2025 proved that the global economy was more resilient than the headlines might have suggested. For 2026, we expect economic momentum to continue and potentially rebound as the shocks realized in 2025 begin to fade.
Wodeshick: Speaking of 2026: the year has only just begun, but we’re already seeing plenty of mixed signals about where the markets will go. Should advisors be more optimistic this year, or should they be prepared for more disruption?
Hundahl: I think that advisors should remain constructive on markets, but remain grounded on the realities. The rearview mirror is filled with the shocks of 2025, like tariffs and government shutdowns, but those are fading. But there’s a reason why the windshield is larger than the rearview mirror in your car. Investors should focus on the road ahead and the windshield is showing the lagged benefits of fiscal stimulus and Fed easing beginning to flow through the real economy. Add in robust corporate profits, the ingredients for growth are there.
However, I don’t think that investors should mistake constructive markets for easy markets. Return expectations should be tempered for U.S. equities compared to the previous, very robust, years. The noise in the markets is loud and there are quite a few low-probability events that are difficult to price, but these can become meaningful in aggregate. The challenge for advisors will be separating the noise from the signals.
To that last point, while the base case for 2026 is strong, one specific risk we are watching quite closely is the labor market. Layoffs remain stable, but hiring remains unusually low. The market is acutely sensitive to any further softening from here, and if the labor market continues to crack, the narrative can change quickly.
Overall, we should be optimistic about the recovery, but don’t get complacent about the disruptions. The shocks are fading, but in many ways the rules are changing.
Wodeshick: One topic we have been hearing a lot about is potential systematic risks in the private credit market, including the “cockroach problem.” Do you believe these private market concerns are founded, especially as institutional investors sell out of private equity positions?
Hundahl: To understand the private market story, I think you have to look at the bigger picture. You simply cannot separate the AI revolution from the capital allocation story. Private markets have been the primary engine building the infrastructure that supports AI’s growth. In 2024 alone, global VC funding for AI startups was over $130 billion, which was a substantial jump from 2023. We expect an even larger jump in 2025 and into 2026.
We see a structural shift where tech firms are tapping into the private markets for R&D, infrastructure capital and acquisitions, while private-public partnerships continue to support later-stage growth.
There are quite a few reasons why capital is moving to private markets, but one of the primary drivers is efficiency. Private credit offers speed, certainty and custom terms that traditional markets often can’t match. In today’s landscape, it is much easier for a borrower to work with a single private lender to underwrite large, complex deals than to go through syndicates.
The cockroach concerns are valid, but this is not a risk-free asset class. The circular financing and other headline risks need to be considered, and idiosyncratic risk can grow. However, we view these as pockets of stress rather than systemic issues.
Wodeshick: International equity strategies were obviously a standout performer for many portfolios in 2025. Are you anticipating international stocks to continue to do well this year relative to U.S. stocks?
Hundahl: While we remain constructive on the U.S. growth story, we aren’t putting all our eggs in one basket. By maintaining an overweight to equities going into 2026, with a significant international tilt, we are positioning portfolios to capture growth wherever it accelerates. Whether that is driven by the continued AI capex spending in the U.S., fiscal spending in Europe, or more attractive valuations outside the U.S., we want to be positioned for that.
The share of firms with upward earnings revisions isn’t just a U.S. phenomenon anymore. We’re seeing non-U.S. developed and emerging market indices also reach elevated expectations of earnings growth.
The drivers for international outperformance were a combination of many central banks leading the Fed in their easing cycles, the U.S. dollar weakening, and the valuation gap between the U.S. and the rest of the world. In periods where the U.S. narrative gets complicated, global markets offer an important diversifier.
Wodeshick: On the topic of the U.S. market, every year seems to begin with advisors being more optimistic about how small-caps may perform as the year progresses. Do you think conditions are favorable for small-caps in 2026, and how are you looking at these stocks in terms of portfolio allocations?
Hundahl: I think you can categorize our view on small-cap stocks as structural headwinds with cyclical tailwinds. To understand expected performance for 2026, you need to separate the structural story from the cyclical one. Private markets are allowing companies to stay private for much longer. We’ve seen the number of listed companies decline by nearly 50% over the past 30 years, which means that a significant portion of early-stage value creation is happening away from the public markets. This creates headwind for the asset class and many retail investors.
However, if you look at the cyclical picture for small-cap stocks, it’s becoming much more constructive. We believe the U.S. is entering a reacceleration phase, and combined with lower rates, this should provide a supportive backdrop. With the Fed easing and the labor market remaining soft enough to keep policy accommodative, small-caps are starting to get some breathing room. We’re seeing that in the earnings growth and that is something we think can continue.
Wodeshick: Last but not least, the theme of Artificial Intelligence (AI) was clearly a key driver for the bull market last year. Are you expecting this AI momentum to continue, and what strategies do you recommend for locating the potential long-term winners in the AI race?
Hundahl: We do expect the AI momentum to continue, but the narrative is likely to shift from AI infrastructure to AI efficiency. In 2024 and 2025, the story was focused on the models, the infrastructure and data centers. We think investors need to begin to think about who can actually generate profits from AI. Now, we continue to view AI as a powerful structural tailwind for growth, however the narrative is beginning to shift from who has the most capacity towards who can generate results.
We are increasingly looking outside the traditional large tech giants to find companies and sectors that are successfully integrating AI into their daily operations. Capacity being built will get used, but it will be difficult to determine which models or tech firms will remain dominant in the future. However, productivity gains will be realized by those firms who have employees using the technology to transform productivity. Investors need to look through the noise and begin to look for sectors and industries that can translate AI capital spend into measurable earnings growth.
If a firm can show a clear path from their investments in AI to operational efficiency, they will likely be rewarded by the markets. The long-term winners won’t necessarily be the ones with the most tokens or the largest models, but the ones who use the technology to solve real-world business problems.
AI can still be a central driver of the market, but the easy gains from the infrastructure phase are likely behind us. We should pivot towards the companies that have incorporated AI into operations and start showing productivity.
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