Navigating 2026: Top Questions on ISG’s 2026 Outlook Answered

Q: How does the appointment of a new Fed Chair and the recent Supreme Court ruling on tariffs impact ISG's Outlook?

A: If confirmed by the Senate, Kevin Warsh will become Chair of the Federal Reserve. Warsh generally held hawkish views when he was a Fed Governor from 2006 to 2011, but more recently he has supported lower interest rates. ISG does not expect major changes to monetary policy if Warsh is confirmed as the new chair. Changes to the policy rate or the Fed’s balance sheet require a majority of the 12-person Federal Open Market Committee (FOMC) voting committee. If views diverge on the FOMC, more voting dissents are likely. Warsh has also indicated support for Fed reform, which could lead to changes in Fed communications and staffing. Periods of short-term volatility are possible as a result.

More broadly, an overly accommodative policy stance would likely prove self-defeating. Heightened inflation concerns would push long-term yields higher—an outcome outside the Federal Reserve’s direct control—and would thereby tighten financial conditions rather than easing them. In this way, the market itself can serve as the ultimate restraint on inappropriate policy.

On tariffs, ISG anticipates only a modest decline in the effective tariff rate from the Supreme Court's ruling against levies imposed under the International Emergency Economic Powers Act (IEEPA). The White House likely has the ability to reimpose tariffs under other authorities. The potential for refunds is uncertain, and even if required, the implications for the federal deficit and GDP growth would be modest.

Q: Are recent developments in the private credit market regarding Blue Owl's asset sale reflective of a systemic risk to the asset class or the banking system?

A: Headlines related to the Blue Owl asset sale and subsequent halt of fund redemptions in a private Business Development Company (BDC) have caused concerns around private credit, with alternative asset manager stocks selling off in recent weeks. Although this highlights a liquidity mismatch between investors looking for redemptions from their investments and an inherently illiquid asset class in private credit, it has added fuel to fears that private credit could be the next subprime. While these concerns are understandable, ISG believes that linkage between private credit stress and the broader banking system remains limited. Banks’ lending to private credit accounts for just ~4.2% of their total exposure to non-bank financial institutions (NBFIs).¹

Individual investors make up just ~$200 billion of the private credit industry’s net asset values. Assuming a 20% annual redemption rate (5% max per quarter), the industry would face ~$40 billion of redemption requests—compared to ~$400 billion of available institutional capital sitting on the sideline across Direct Lending and Opportunistic Credit funds. As happened with Owl's recent loan sales, institutional investors could step in to raise needed liquidity.

On the whole, ISG does not believe that today’s leverage backdrop resembles the conditions that preceded past systemic credit events. In short, it seems more likely that private credit losses are idiosyncratic and investment-manager specific, rather than a signal of the next systemic credit event. ISG will continue to closely monitor the private credit market and keep clients informed if developments change this assessment.

Q: How much of a risk is the K-shaped economy?

A: The current K-shaped economy—where high-income households are experiencing stronger income growth than low-income households—bears watching but is not a material risk in ISG’s forecast. Consumption, which represents about 70% of GDP, continues to grow at a solid 2.5% annualized pace. While real income growth is weakest in the lowest quintile, it remains positive for all income cohorts. Importantly, middle- and top-income households, who account for a disproportionate share of total consumption, continue to see solid growth. Healthy household balance sheets have also allowed consumers to draw down savings to smooth their consumption. Net worth as a share of GDP is close to its decade-long trend and household debt relative to GDP is continuing a multi-year deleveraging cycle. 

ISG’s base-case expectation is that inflation eases and the labor market modestly improves this year, which should support rising real incomes, and ultimately consumption, in 2026.

Q: What are ISG’s views on gold?

A: In assessing the case for a strategic allocation to gold, it is important to consider the reasons for adding an asset to a well-diversified portfolio: income generation, upside exposure to growth, hedging against inflation or deflation, or protection against downside risks. Historically, gold has not consistently satisfied these criteria. While gold is often considered an effective inflation hedge, the chart below highlights that the S&P 500 has more consistently fulfilled that role than gold, historically.