Mid-Year Outlook: Markets survived the war; can they survive Warsh?

With the US and Iran signing a memorandum of understanding, markets are shifting their focus from geopolitical tensions back to macroeconomic drivers. As part of Natixis CIB’s mid-year outlook, Thibaut Cuilliere, Head of Sector Research, shares his view on credit markets, Florent Pochon, Senior Quantitative Cross-Asset Research, explains why the equity rally still has room to run, and John Briggs, Head of US Rates Strategy, assesses what Kevin Warsh’s first Fed meeting means for US Treasuries.

As geopolitical concerns fade, investor attention has returned to one of the year’s lingering anxieties: the resilience of private credit markets. Business Development Companies have reported a sharp rise in redemption requests, which reached US$15bn in the first quarter of 2026, more than four times the historical quarterly average. While the increase has revived concerns about liquidity, structural safeguards remain in place, with withdrawals typically set at 5% per quarter to limit liquidity mismatches.

Zooming out, there is a reassuring view on private credit fundamentals. Even after accounting for higher redemption requests, net outflows represent only around 1.5% of net asset values. Net asset values have declined by roughly 3% quarter-on-quarter, but this largely reflects market repricing rather than a deterioration in credit quality. The increase in non-accrual rates remain contained at around 40bp per quarter, while the share of PIK in total income – a key leading indicator for future private credit stress – has edged up to 8% over the past year, still comfortably below the 10% level associated with more severe credit downturns.

Despite stable fundamentals, credit spreads overall remain historically tight. Against swaps, most credit segments are below the 10th percentile, requiring a shift in portfolio allocations to balance risk. In this context, non-financial senior investment grade debt offers a safe harbour, with spreads of around 70bp providing comfortable margins and attractive risk/reward. Bank Tier 2 and AT1 securities continue to offer higher-beta opportunities, supported by favourable credit momentum and a manageable supply outlook. Investors can also improve risk-adjusted returns by moving away from corporate hybrids and towards high yield, notably in dollar, where valuations remain more compelling than $ investment grade, which continues to face supply pressure from tech-sector issuance.

Equity markets have remained resilient since rebounding in early April, with strong performance continuing to be supported by robust earnings expectations. Over the next 12 months, earnings are forecast to grow by around 30% for the Nasdaq, 20% for S&P500, 35% across emerging markets, and a more modest 13% in Europe. Supported by these fundamentals, Natixis CIB expects the S&P500 to reach 8,000 by year-end, while STOXX Europe 50 is forecast to reach 6,600.

Cracks may be appearing in the AI hype however in the medium run, as mega IPOs will increase equity supply and as concentration and leverage in the AI trades have increased. In this respect, investors may benefit from diversifying exposure across the AI value chain, including infrastructure, connectivity and power electronics, all of which continue to benefit from the record capital expenditure announced over the past year.

The upward trajectory in equity markets remains vulnerable to several factors. A slowdown in the US economy could restrict investments and bring an end to the market rally, while unexpected AI disruption could knock earning expectations, although neither currently appears likely. Instead, the most significant near-term risk may come from monetary policy. Whether Kevin Warsh proves more hawkish than markets currently expect could become the defining question for investors during the second half of 2026.

Kevin Warsh’s first FOMC meeting in June 2026 signalled a notable shift in tone. The Fed maintained rates at 3.75% while introducing a slimmer policy statement that removed the explicit forward guidance associated with the Bernanke era. By resisting calls for an immediate rate cut, Warsh has signalled a greater emphasis on restoring the Fed’s inflation-fighting credibility than markets had anticipated during his nomination.

Although lower energy prices are easing headline inflation, underlying price pressures remain consistent. Markets are now pricing roughly 40bp of further tightening, reflecting concerns that, as in 2022, supply-driven inflation could once again prove more persistent than initially expected. Any shift towards rate cuts is therefore likely to require several months of convincing disinflationary evidence.

A higher-for-longer rate environment is likely to keep pressure on Treasury yields in the near-term: two-year notes will struggle to fall below 4% from their current level of 4.2%, while ten-year notes are unlikely to decline much below 4.3% in the near-term, even if they approach 4.25% by the end of the year. More substantial declines would likely require inflation moving back to its 2% target.

Elevated levels of government debt – which has doubled since 2007 to reach 6% of GDP – will continue to be a headwind for the long-end of the yield curve. Additionally, the wave of AI issuance and private funding is sponging up capital that would be otherwise invested into the bond market. At the same time, some traditional overseas buyers, including Gulf states, are increasingly deploying capital domestically to fund infrastructure investment and defence spending, reducing a key source of demand for US government debt.

These trends reinforce longer-term diversification away from US Treasuries as central banks gradually reduce their reliance on dollar reserves. However, this should not be mistaken for a broader retreat from US assets. Strong investment into the technology sector continues to support demand for dollar-denominated assets, limiting the pace of any wider de-dollarisation trend. Instead, persistent weakness at the long end of the Treasury market is more likely to act as a structural constraint on further dollar appreciation. Against this backdrop, Natixis CIB expects the euro to strengthen towards 1.18 against the dollar as the ECB maintains its own cautious approach to inflation.

As energy markets re-balance following a peace agreement from the US and Iran, investors are once again focused on the underlying drivers of markets. Private credit faces growing pressure from rising redemption requests, but robust fundamental continue to suggest the sector remains resilient. Equity markets also retain strong support from earnings growth and AI investment, although increasingly stretched valuations make diversification more important than ever.  

The greatest uncertainty now lies with US monetary policy. Kevin Warsh’s early signals suggest inflation control will take precedence over supporting growth, raising the prospect of a higher-for-longer rate environment. Elevated government borrowing and softer foreign demand are likely to keep upward pressure on long-term Treasury yields, while continued investment into US technology should prevent a rapid acceleration in de-dollarisation.

Markets have already demonstrated their ability to withstand geopolitical shocks. Whether they can sustain the current rally may depend less on events in the Middle East than on how aggressively the new Fed Chair chooses to fight inflation.