Economists say growth is holding up, diversification matters, and bonds look compelling now
Economic growth has proved tougher than expected, artificial intelligence is reshaping investment opportunity sets, and fixed income may be offering one of its most attractive entry points in years.
That’s the message from PIMCO’s latest macro and investment outlook, Compounding Opportunity, published today by Tiffany Wilding, Economist, and Andrew Balls, CIO Global Fixed Income.
The report examines conditions heading into 2025 and 2026 and argues that markets have adapted more successfully than many anticipated to sweeping global policy shifts — particularly in the United States — while new technology-driven productivity gains are reinforcing economic momentum.
“The Trump administration’s sweeping tax, trade, and immigration policy overhauls – including quadrupling the effective US tariff rate – were widely expected to stifle global growth, trade and investment. In response, various DM and EM governments announced pre-emptive yet targeted fiscal measures to buffer the economic transitions, while central banks focused on downside risks. It turns out that economic growth has been surprisingly resilient as these policy trends intersected with a new general-purpose technology: AI,” the authors state.
The paper outlines several key investment themes likely to shape portfolio construction in the coming year:
Growth resilience and AI investment tailwinds
Despite higher trade barriers and geopolitical friction, PIMCO believes near-term global growth prospects remain firmer than forecast earlier in the cycle. AI-related capital spending and productivity enhancements are providing an offset to tariff pressures, while lower Chinese export prices have helped global trade flows adjust away from U.S. dependence.
The implication for portfolios: growth-sensitive assets may continue to find support even as policy uncertainty remains elevated.
Diversification opportunities across global markets
The outlook highlights meaningful dispersion across developed and emerging economies. PIMCO points to emerging market local-currency debt as an increasingly compelling source of yield and diversification. Several large EM economies now offer substantial real yield advantages over developed market bonds, with risks viewed as more country-specific than systemic.
EM local-currency bonds delivered strong returns in 2025, according to the firm, while also helping diversify portfolios at a time when correlations across developed markets remain high — a point of particular relevance for advisors balancing client risk exposures.
Diverging monetary and fiscal policy paths
Central banks are no longer moving in lockstep. PIMCO expects the UK and several emerging markets with elevated real rates and limited fiscal room to cut policy rates more aggressively than the European Central Bank or the Bank of Canada, where monetary policy is closer to neutral.
Meanwhile, fiscal policy is likely to play a larger role in both China and the U.S., with Chinese stimulus aimed at offsetting trade pressure and U.S. tax reductions supporting households and business investment.
This divergence creates what the firm views as fertile ground for active global fixed-income positioning.
Fixed income regains strategic appeal
One of the most direct takeaways for advisors is PIMCO’s conviction that bonds are attractively priced relative to equities. Following the post-pandemic repricing of interest rates, starting yields on high-quality fixed income remain elevated.
The firm argues investors now have a rare chance to increase portfolio quality, liquidity, and diversification without sacrificing return potential — a message likely to resonate with advisors re-evaluating strategic allocations after years of low yields.
Credit markets: selective positioning required
PIMCO’s outlook remains constructive on credit but stresses careful security selection. The firm favors secured lending segments such as asset-based finance, real estate credit, and well-structured infrastructure debt. Lower-quality corporate credit, by contrast, faces tighter spreads, weaker underwriting standards, and signs of broader market complacency — conditions that could lead to disappointment.
