How Will Credit Markets Fare in 2026?

Andrew Sheets and Lisa Shalett discuss the economic outlook for 2026, focusing on resilient global growth, moderating inflation, and gradual central bank policy easing. Sheets attributes the constructive inflation outlook to lower oil prices and softer shelter inflation, despite supportive fiscal policy and increased corporate spending. They explore the implications of a gradual Fed approach for credit markets, suggesting it's preferable to aggressive cuts if growth holds up. Sheets anticipates increased corporate risk-taking, leading to higher credit issuance and wider spreads, potentially causing investment-grade credit to underperform equities. He advises favoring stocks over credit, smaller-cap stocks, high yield over investment grade, and European credit. Key risks include weaker-than-expected growth and potentially less price-sensitive AI-related spending driving spreads wider.