Capital Market Line 3q2026 v3

MULTI-ASSET | OCTOBER 2026 Contributors

Capital Market Line: Michael J. Kelly, CFA Global Head of Multi-Asset Hani Redha, CAIA

Secular Stagnation Portfolio Manager Steven Lin, CFA Portfolio Manager

Segues Towards Peter Hu, CFA, FRM Portfolio Manager

Secular Growth? Sunny Ng, CFA Portfolio Manager Mikhail Johaadien Research Analyst Teresa Wang For the past 15 years, many investors have viewed the global economy through Research Analyst the lens of secular stagnation. Aging populations, excess savings, modest productivity growth and the lingering effects of the Global Financial Crisis (GFC) were supposed to constrain economic activity, suppress inflation and keep interest rates structurally low. Even after the pandemic temporarily disrupted this framework, the prevailing assumption remained that once the effect of the Covid shock passed, along with its massive subsequent demand stimulus and Modern Monetary Theory-like central bank response, that the world would revert back to the “new norm” of subdued growth and low inflation. By contrast, our framework viewed this suppressed period as a regime, which like all other regimes creates material imbalances that can take well beyond an economic cycle to clear. Yet, one day they do clear, and the markets and global economic backdrop transition into the next “new norm.” There is nothing new about “new norms.”

We continue to believe that the next five years will likely be defined by a very different set of forces, creating what we would call a “running-hot” regime. Rather than a world constrained by insufficient demand and thus insufficient

investment, evolving forces such as deglobalization, reshoring, climate change, geopolitical bifurcation and accelerated technological change in the form of AI have created a new mix of imbalances. Among other things, these imbalances are characterized by less savings, a rising investment intensity of GDP and growing competition for capital. If it were not for China’s rising savings rate, a precautionary measure in a sticky balance sheet recession, the world would be rapidly depleting the savings glut it amassed after the GFC. The significance of this shift in regimes challenges some of the core assumptions that have shaped investment thinking for much of the past 15 years.

The most powerful driver of this new mix of imbalances is AI. Much of the discussion to date has focused on the technology’s infrastructure buildout. Investors have been understandably captivated by the insatiable demand for capital to finance extraordinary spending on data centers, semiconductors and computing power. History nonetheless suggests that the most important economic consequences of transformational technologies are rarely found in the initial buildout phase. Railroads ultimately transformed commerce, not steel demand. Electricity reshaped productivity, not copper consumption. The internet revolutionized business models, not fiber-optic networks. Every major technological revolution eventually becomes a productivity story. We believe AI will as well. Time to think of what that means, and how to invest into it.

What makes AI particularly significant is where its productivity gains are likely to emerge. Previous disinflationary waves were concentrated in goods production through automation, globalization and increasingly efficient supply chains. AI has the potential to revolutionize services, an area that accounts for the majority of economic activity and has structurally higher inflation than goods in developed economies, but that has also historically been more resistant to productivity improvement. As adoption broadens beyond the relatively small group of technology leaders currently building out the capability, AI is likely to influence everything from software development and logistics to healthcare, financial services and professional advisory work. There are many potential tracks for the diffusion of AI, yet these areas are where the rises in productivity and disinflation of prices will be most beneficial.

If productivity growth accelerates meaningfully, the impact on the macroeconomic landscape could be profound. Stronger productivity is supply-led growth, which…