Executive summary

1. Current headlines ping pong between concerns about the war in Iran, the vulnerability of private credit, and where artificial intelligence (AI) disruption will hit next.
    
2. Can we handicap the range of outcomes? Probably not; we’ve got a “three-body problem” on our hands.
    
3. So what to do? First, a reminder: I’d argue we entered this period in good shape.
    
4. And there are offsets: For example, this isn’t our parents’ oil price shock.
    
5. Still, with uncertainties like the ones we face today, I believe it’s good to put valuation and diversification on your side.
    

Risks are on the rise. That’s at least the way it feels as headlines ping pong across the Iran war, private credit concerns, and AI disruption.

Here’s the uneasiness for many investors: How threatening are these risks to the U.S. economy?

If only we could say with certainty.

The reality is that each of these risks comes with unknowns on magnitude, duration, and significance.

As I write this commentary, a tenuous U.S.-Israel-Iran ceasefire has taken hold. But none of us know whether that ceasefire will continue and, if it does, what the negotiation terms will actually be. Thus, while the Iranian people may have welcome relief at the moment, the economic effects for the U.S. and the rest of the world may linger.

The scale of the true problems within private credit also is difficult to handicap. We know private credit has seen rapid growth over the past 10 years, particularly from weaker borrowers that turned to non-bank lending in the wake of the Global Financial Crisis. We also know private credit has exposure to the beleaguered software industry — and some of the end investors may not have the temperament or wherewithal for the long-time horizon required for private investing. What we don’t know for this opaque, data-light asset class: Are those concerns on the margin or in the main?

Finally, on AI disruption: Model companies have entered the early stages of monetization, dropping enterprise plug-ins aimed at streamlining workflows in legal work, wealth management, and logistics. With each new announcement, another legacy industry shudders. Not only do investors wonder whether incumbents will collapse, survive, or thrive in an AI world; they also worry about which industry will come into the crosshairs next.

With prevailing conditions clouded by uncertainty, my impulse is to turn to scenario analysis, often rooted in historical corollaries, to zoom in on the range of outcomes. But if we’re truly spanning all of these risks, from the Iran war to private credit to AI disruption, what historical corollary exists? Do we experiment with a mix of the 1970s plus a “lite” version of the Global Financial Crisis, with a touch of the late 1990s mixed in? No, thanks. That’s a three-body problem (which my colleague Tom Nun tells me also is a good book for the sci-fi fans out there).
 

Here’s what I do know: Entering this period, the U.S. economy appeared remarkably resilient. 

Our recent affordability study suggested that, despite the roller coaster of the post-pandemic years, the U.S. consumer — across all income levels — is modestly better off now than back in 2015, with income growth exceeding spending growth. Relatedly, we’ve seen the wealth effect in full effect, bolstering spending with strong market gains — and, more importantly in our estimation, housing gains. With our research suggesting high home prices are likely to remain rangebound over the course of 2026, we don’t expect that pillar to crumble despite the other pressures on the U.S. economy.

Meanwhile, though the fog of war clouds the long-term impact on commodities, we can take some reassurance that this isn’t our parent’s oil shock. Unlike in the 1970s, the U.S. is now the world’s largest oil and gas producer, which provides price protection for the U.S. gas market and shortage protection for U.S. businesses and consumers across the board. Moreover, energy dependency has declined over the years, and fuel prices were below the three- and five-year averages before the war (though they have since shot higher).  

Gasoline prices: April 7, pre-war, and historical averages²

Pre war: $3.52 

April 7: $4.88 

3Y average: $3.77 

5Y average: $3.88 

10Y average: $3.31 
 

Can I offer any similar reassurances on private credit? The opacity here is real, with time lags surrounding any aggregated read of default rates. Recent data from Cliffwater shows non-accrual rates (the percentage of loans relative to fair value or cost that have stopped paying interest or principal) remain below the 10-year average.1 And I’m not throwing in the towel on software names, some of which I think will adapt and thrive in the AI world order.

In regard to AI disruption, I can’t deny that I think there is more to come, particularly for complacent high-margin businesses. But is this something that could take down the U.S. economy? In fact, I think it’s far more likely to create a boom than a bust at the aggregate level, though particular industries, or, better said, particular businesses, could face more existential questions.  

The base case

It appears I have a base case after all: Resilience. That’s not to say I’m not uneasy. Threats abound, and those with more pessimistic views can paint compelling pictures that bear a striking resemblance to recession. This is why earnings season will loom as large as ever over the next few weeks, with guidance again playing an outsized role amid uncertainty.

But even as I nervously say resilience, as an investor I think a valuable approach in this environment comes back to margins of safety (cheap valuations) and diversification across risk factors.

It’s for that reason that I celebrate the better valuations among technology — in fact, the Mag 7 is in the second lowest decile of its own history, dating back to 2015 — and emerging markets, which have dropped to the sixth decile. (Of course, in this environment not all emerging markets are created equal; consider the split between importers and exporters.)

As for diversification: Investors have bemoaned the Treasury market weakness of late, but I’d argue nothing is broken there. Given inflation concerns, Treasuries have edged lower but could easily surprise to the upside if inflation concerns subside and growth concerns take hold. Meanwhile, we’ve seen strength from the U.S. dollar, but U.S. equities have proven less vulnerable than their global counterparts.

In other words, spreading portfolios across an assortment of global asset classes has done its job amid uncertainty. As uncertainty persists, such diversification remains a favorite risk-management tool of mine.

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