Adjusting the Sails: Second Quarter 2026 Outlook

Nick Niziolek, CFA, Dennis Cogan, CFA, Paul Ryndak, CFA, and Kyle Ruge, CFA

Summary Points:

• Our conviction in the global opportunity set remains intact. Although geopolitical risks are high, earnings growth remains healthy, the AI infrastructure buildout continues to accelerate, and many other secular and cyclical themes provide tailwinds.
• We have adjusted our positioning to be more balanced across cyclical and defensive cohorts, while maintaining our emphasis on thematic growth exposure.
• Positioning shifts include moderating our exposure to financials and increasing exposure to businesses that are less vulnerable to near-term macroeconomic risks.
•  Optical networking, robotics, and space represent three secular growth themes where we see especially strong tailwinds and are actively investing across the value chain.

We entered 2026 with optimism, as the global rebalancing we anticipated was gaining traction, supported by stimulative fiscal policies, a weak dollar environment, and broadening secular growth themes. While we remain optimistic and our underlying conviction in the global opportunity set remains intact, we have updated our positioning to be more balanced across cyclical and defensive cohorts while continuing to emphasize thematic growth exposure.

The most significant new variable driving our positioning is the war in Iran and the disruption to commodity flows through the Strait of Hormuz. Recent signals suggesting a US-led push toward a negotiated outcome are encouraging, and a ceasefire scenario that allows commercial traffic to reopen early to mid-April remains plausible. 

That said—and while many severe geopolitical oil shocks have proven shorter than feared—it’s impossible to know how long the disruption will last or how deep the impact on commodity markets will be. A prolonged disruption through the second quarter would create significant headwinds for the global economy, particularly for Europe and parts of Asia where import reliance for energy commodities is greater than in the United States. Central banks are already responding to the potential inflationary implications of higher energy prices with more hawkish messaging, representing a shift from the monetary tailwind we saw in January.

While conditions in the Middle East represent the most significant unknown, we are also mindful of other potential risks to economic growth. Private credit markets, which expanded by roughly 14% annually through the post-pandemic period, are now showing elevated default rates. Major bank exposures to private credit funds do not appear large enough to represent a systemic concern, but tighter financial conditions and higher yields are incremental headwinds for leveraged borrowers.

Additionally, AI-driven changes in labor demand appear to be contributing to a more fragile US labor market. Over the long term, we are optimistic that AI acceleration and adoption will improve productivity and create new businesses and jobs, but the near-term impacts on the labor market warrant close monitoring.

Positioning for Uncertain Terrain

These developments have not yet altered our fundamental case for global equities. Earnings growth remains healthy, the AI infrastructure buildout continues to accelerate, and many other secular and cyclical themes provide tailwinds. We have, however, made selective adjustments to our positioning. Most notably, we have moderated our exposure to financials, where flattening yield curves, reduced near-term prospects for monetary easing, softer capital markets activity, and the private credit dynamics we described above have each reduced the near-term conviction we had entering the year. European banks face a more challenging environment if the energy shock persists and the ECB moves toward hiking. At the same time, we’ve increased exposure to businesses that should be more insulated from a deterioration in the macroeconomic environment, including those exposed to strong growth themes.

Harnessing Secular Growth Tailwinds

In our recent paper, “The AI Inflection: Investing Beyond Sectors in a Thematic World,” we discussed the value of a thematic framework for identifying opportunities and managing risk. Below, we share three themes where we see especially strong tailwinds. 

Optical Networking

With massive capital pouring into AI computational resources (AI compute), networking and interconnection are becoming increasingly critical. Within this broader opportunity, we see particularly attractive investment potential in optical (light-based) networking, which improves the speed and efficiency of data flow. Optical solutions are gaining importance across three levels of connectivity: between data centers, between servers within a data center, and between chips. As bandwidth demands ramp up with each new generation of AI accelerators, optics are increasingly displacing copper and electrical interconnects. Companies across the supply chain are seeing unprecedented demand and investing to expand capacity, creating attractive opportunities spanning substrate materials, fiber manufacturing, semiconductor fabrication, precision manufacturing, and photonic component design.

Robotics

Robotics is approaching a structural inflection point, driven by the convergence of advanced AI and physical hardware. (This transition has been described as a move from bits to atoms, or as the rise of Embodied AI.) As hardware and software capabilities continue to improve, robotics will drive meaningful productivity gains in logistics, healthcare, manufacturing, and agriculture. These advances will ripple through the entire supply chain, accelerating demand for precision components, such as harmonic drives, planetary gear screws, actuators, force-torque sensors, servo motors, and vision systems.

 Against this backdrop, we see a fundamental transformation for manufacturing on the horizon, with robotics emerging as a foundational layer of the next industrial revolution. We believe this transformation will create compelling opportunities for robot developers, precision component suppliers, and software and AI companies providing the "brains" that enable machines to perceive and interact with the physical world.

Space

Our “space” theme encompasses essentially all economic activity conducted in or enabled by space, including the broad commercialization, utilization, and defense of orbital and beyond-Earth environments. A structural decline in rocket launch costs makes it increasingly economical to place hardware and infrastructure in orbit, unlocking demand for satellite communications, Earth observation, national security, and futuristic use cases such as orbital data centers.

The space theme is transitioning from a narrative-driven phase to one defined by tangible order growth, contract wins, and earnings visibility, particularly as launch cadence accelerates and satellite service providers scale toward global coverage. The beneficiaries span four broad and sometimes overlapping categories: operators running space-based systems and selling downstream services related to connectivity, imagery, and data analytics; launch providers transporting payloads to orbit; builders assembling satellites and spacecraft; and suppliers manufacturing the specialized components that go into these platforms. We are investing across all four layers of this value chain, with a particular focus on companies where space is a direct and primary revenue driver rather than an incidental exposure within a larger conglomerate.

In Closing

With a geopolitical backdrop likely to stoke elevated volatility for the foreseeable future, we believe that selectivity, applied within a thematically driven framework, will provide the best compass for navigating the markets. Across our funds, we’ve adjusted our sails and are moving forward.

Our global and international funds share the same experienced team and time-tested process; their different risk/reward profiles and investment universes support diverse asset allocation goals.