Endurance Under Pressure

Developed Markets Feel the Weight

Developed markets face fiscal strain as higher borrowing costs meet persistent deficits and rising issuance.

Fiscal policy tends to be countercyclical (loosened during economic downturns when the unemployment rate tends to rise) as governments step in to boost aggregate demand. However, we observe that U.S. fiscal policy has become more procyclical (higher government spending during higher GDP growth and lower unemployment), circa the passing of the Tax Cuts and Jobs Act (TCJA). The UK, Germany, and Japan are also seeing elevated debt burdens and fiscal pressures.

Prepare for steeper yield curves and bond market volatility. Stay active in duration and across global sovereign markets.

Fiscal Policy & Unemployment

Sources: BNY Investments, BLS and CBO. Data as of September 22, 2025.

From Privilege to Pressure

Shifting trade policies, rising FX hedging activity, and narrowing global growth differentials are eroding support for the U.S. dollar.

With policy shifts reducing the degree of U.S. outperformance relative to the rest of the world, and capital flows becoming more diversified, dynamics reinforce a weaker dollar over the long term.

Over time, we expect the U.S. dollar’s real effective exchange rate (REER) to revert toward its 10-year moving average, driven by the ongoing convergence of global growth rates and rebalancing of trade, the structural rise in FX hedging by international investors, and the dollar’s continued overvaluation relative to long-term benchmarks.

Reassess global currency exposure, hedge ratios and the diversification role of non-U.S. assets as capital flows broaden.

USD Real Effective Exchange Rate

Sources: BNY Investments and Bloomberg. Data as of October 31, 2025.

The Macro Shock of the Decade

The impact of AI on productivity and competitive dynamics will become more visible.

The biggest beneficiaries of AI adoption won’t simply be the fastest adopters. Winning firms will likely leverage two advantages: strong productivity gains even after widespread adoption and the ability to capture unmet demand where lower prices translate into higher volumes. Sectors that pair these two dynamics together can become important plays in the AI theme. While information technology remains a favored sector under this framework, it also faces disruption with wide dispersion between winners and laggards.

Look toward firms and sectors that can both retain productivity gains and convert lower costs into sustained demand and earnings growth.

Productivity and Demand

Source: BNY Investments

Engine of Value Creation

Private markets are at the center of an AI-driven capital expenditure boom, facilitating AI adoption and creating significant opportunities for investors.

Private equity and venture capital remain key funders of startups and are well-suited for long-term, active investments in AI infrastructure. They are increasingly complemented by private infrastructure and real estate funds, which offer inflation-linked returns and exposure to secular trends in energy and data. Aligning with the surge in AI adoption, more companies are choosing to remain private for longer, allowing more growth to occur before reaching public markets.

Look beyond traditional public markets to access the full growth opportunity set and be mindful of increasing market concentration in public equities.

Private for Longer

Source: World Bank. Data as of December 31, 2024. Note: Publicly listed data from before 2024 is from World Bank and Statista; 2024 data is from Morningstar.