CIO Perspective: The Edge Comes from Asking Better Questions

Starting yields and uneven economic conditions make fixed income more capable of carrying portfolio returns, allowing investors to select equity risk more narrowly.

• U.S. growth is running at a pace consistent with 7% nominal GDP growth, but computers and peripheral equipment, about 1% of GDP, generated roughly 27% of recent growth while housing remains under severe affordability pressure.
• The Fed’s policy rate is now 3.75%-4.00%, the 2026 median projection implies two further hikes to 4.125%, and core PCE inflation is projected at 3.4%; however, much of current inflation comes from relatively rate-insensitive energy, insurance, healthcare, education and chip-related costs.
• Labor-market momentum is weakening despite 4.1% unemployment: the hires rate is at its lowest since 2010, private-sector wage growth is 3.1%, and payroll growth excluding healthcare averaged only 6,000 jobs per month over the past year.
• A diversified fixed-income portfolio can yield more than 7% with less than three years of duration and an average A- rating; the estimated volatility for a hypothetical A-rated portfolio is 2.6% annualized, versus 11.1% in 2021.
• Equity outcomes are wider, with a possible one-year return range of -5% to +20%; over the latest two months, the S&P 500 gained 1%, compared with 16% for high-free-cash-flow stocks, 9% for stable-sales-growth stocks and 8% for low-capex-to-sales stocks.

Takeaway: Investors should use the high carry available in fixed income to reduce dependence on broad equity beta, add duration selectively, and favor durable cash flows while fiscal risks and the composition of inflation remain unresolved.