Quality Assets Poised to Outperform as 'Everything Rally' Ends | KKR Macro Outlook

What's New

KKR's High Grading: Outlook for 2026 report reveals that the global economy is entering a mature phase where productivity gains are increasingly priced into capital market assumptions, prompting a strategic pivot to "High Grading." According to Henry H. McVey, Head of Global Macro & Asset Allocation at KKR, this approach advocates upgrading portfolios, capital structures, and counterparties to emphasize resilience, quality, and capital efficiency as the cycle matures—critically, at a time when the cost to do so is extremely low.

Why It Matters

This shift signals that the post-pandemic "everything rally" is over. With credit risks normalizing, the return differential between best and worst performing assets compressing to historic lows (7.4% vs. 9.1% a few years ago), and market-implied S&P 500 EPS growth at 16% versus an 11% long-term median, investors can no longer rely on broad market beta to generate returns. Success in 2026 will depend on active management, operational improvements, and owning assets with high barriers to entry in a structurally higher inflation and interest rate environment.

Big Picture Drivers

• Regime Change: The world has shifted to a structurally higher inflation environment, with U.S. CPI forecast at 3.0% for 2026, requiring portfolios to have greater linkages to nominal GDP through collateral-based cash flows like Infrastructure, Real Estate, and Asset-Based Finance.

• Capital Light Transformation: Corporates are aggressively shedding assets to improve returns, creating a surge in corporate carve-outs (nearing €60 billion in Europe) and Asset-Based Finance opportunities as companies shift from capital-heavy to capital-light models.

• Security of Everything: Global military expenditure reached $2.72 trillion in 2024 (up 9.4% in real terms), with NATO allies boosting defense spending 22% since 2022, as geopolitical friction drives massive secular investment in defense, energy security, and data protection.

• Intra-Asia Trade: Asian trade conducted within the region has grown from 46% in 1990 to 60% today and is expected to reach 68% by 2030, creating scalable investment opportunities spanning logistics, manufacturing, and digital enablement.

• Productivity & AI: S&P 500 inflation-adjusted revenue per worker is up 5.5% since ChatGPT's 2022 launch after 20 years of zero growth, but the focus must shift to "workforce capex" and retraining as labor scarcity becomes a structural constraint.

By The Numbers

• 7,600: KKR's S&P 500 price target for 2026, implying approximately 9% returns, with EPS forecast at $303 per share (11% growth).

• 2.3%: Forecast for U.S. Real GDP growth in 2026, notably above the consensus estimate of 1.8%, driven by productivity gains and fiscal stimulus.

• $60: Expected average WTI oil price per barrel in 2026, reflecting an oversupplied market with peak surplus of 2-3 million barrels per day expected in 1H26.

• 3.125%: Forecast Fed Funds rate for 2026, implying negative real rates as the Fed prioritizes labor market support over inflation targeting.

• 60 bps: The spread between AAA and BBB corporate bonds, roughly half its 25-year average, making it historically cheap to upgrade credit quality.

Key Trends to Watch

• Credit Normalization: High Yield default rates are expected to rise toward post-2011 averages of 2.5% from current 1.2% levels, with particular stress on 2021 vintages and debt-funded roll-ups in software and healthcare that were underwritten for a zero-rate environment.

• Services Over Goods: A "K-shaped" divergence continues widening, with services growth trumping goods production; China's services sector remains underdeveloped at 56.7% of GDP versus a 66.3% global average, creating both challenges and opportunities.

• Asian Corporate Reform: Japan remains "ground zero" for corporate governance improvements (40% of market trades below book value, 17% of assets in cash), while Korea is emerging as the next frontier with 70% of its market still trading below book value despite activism-driven gains.

• Private Market Alpha: As the return differential between asset classes compresses to historic lows, Private Markets—especially Private Equity, Infrastructure, and Asset-Based Finance—are expected to outperform by leveraging illiquidity premia, operational control, and proprietary origination.

The Wrap

Investors should not retreat to the sidelines but must refine their approach by swapping beta bets for alpha strategies. The opportunity set in operational improvement stories, collateral-based cash flows, and international markets appears as robust as KKR has seen in some time. As Seneca wrote, "Luck is what happens when preparation meets opportunity"—and High Grading portfolios now, while the cost is low, positions investors to capitalize on dislocations ahead.