Henry McVey: The Cycle Continues, But the “Divergence Conundrum” Is Intensifying

KKR, a leading global investment firm, today released “The Divergence Conundrum,” the 2026 Mid-Year Global Macro Outlook by Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA).

In the report, McVey and his team argue that the global economy is still expanding, but doing so unevenly as it enters a period of intensifying divergence. “The cycle is not over, but it is becoming more selective,” McVey writes, as the team sees economic gains becoming increasingly concentrated and creating wider dispersion across regions, industries, and asset classes. Drawing on historical parallels to the 1870s, 1920s, and late 1990s, McVey and his team argue that periods of elevated divergence are not unprecedented, though today’s version may be broader in scope.

They call this environment the “Divergence Conundrum”: a market and macro backdrop in which a broadening productivity boom is extending the cycle even as geopolitical fragmentation, energy security concerns, and strategic competition contribute to a higher resting heart rate for inflation. In their view, this combination will be increasingly difficult for central banks to navigate as economies move away from the efficiency-first model that defined much of the pre-COVID era and toward one that places a greater premium on resilience, redundancy, and control.

Against this backdrop, the report points investors toward staying up in quality, diversifying into assets linked to nominal GDP, and emphasizing operational improvement stories. This approach leads them to corporate carveouts, collateral-based cash flows, power and energy infrastructure, and investments tied to the “Security of Everything” theme. At the same time, the team remains more cautious on long-duration government bonds, over-levered 2021 vintage deals, lower-income consumer exposure, and assets dependent on a return to the old regime of low inflation, low rates, and abundant liquidity.

The report also reinforces the team’s conviction in select international markets, particularly Asia, where corporate reform, AI infrastructure, and consumption upgrades remain key long-term themes. In Europe, the team argues the region is bifurcating, not collapsing, with the periphery, including Spain and Italy, outperforming the industrial core on the back of domestic demand, tourism, and fiscal-driven investment.

The report highlights several areas where McVey and his team believe the market may be underappreciating the degree of change underway. Among the report’s key conclusions:

• The “Security of Everything” theme is broader than originally thought, extending beyond defense to food, water, energy, and critical inputs. Security, the team argues, is becoming a core operating assumption for CEOs and policymakers.
• AI’s productivity benefits are only beginning to emerge in 2026. Since COVID, productivity gains have been driven largely by services-sector automation and digitalization, suggesting that this cycle may be broader and more durable than any single technology wave.
• Inflation is likely to remain structurally above consensus everywhere except China, as goods inflation becomes less disinflationary and geopolitical shocks become more frequent.
• The global easing cycle is fading. By the end of May 2026, 10% of the world’s top 30 central banks were raising rates, up from 3% at year-end 2025, while only 40% were still cutting.
• Oil prices are likely to remain more constructive than the futures curve over the medium term, reflecting depleted buffers, the need to rebuild inventories, disciplined shale, OPEC+ fiscal incentives, and persistent geopolitical risk.
• In this cycle, governments, not corporations or consumers, have too much leverage. As a result, bonds are becoming more correlated to stocks, diminishing their role as portfolio shock absorbers.
• Portfolio construction is becoming a bigger source of return. As dispersion increases, the team believes manager selection, diversification, position sizing, sector exposure, documentation, and discipline around yield will matter more.
• Asia remains one of the team’s highest-conviction regional opportunities, where corporate reform, AI infrastructure, and consumption upgrades continue to support opportunities across Private Equity, Infrastructure, and Corporate Credit.
• The team continues to favor private markets opportunities tied to operational improvement rather than financial engineering, with value creation increasingly dependent on execution, governance, productivity enhancement, and margin improvement.

The report also details the GMAA team’s updated views on global economic forecasts, inflation, interest rates, currencies, capital markets, and relative value. It further addresses key investor questions on global bond market dynamics, expected returns, and credit market opportunities.

Links to access this report in full as well as an archive of Henry McVey’s previous publications follow:

• To read the full report, click here.
• For an archive of previous publications, please visit https://www.kkr.com/insights.

About Henry McVey

Henry H. McVey joined KKR in 2011 and is Head of the Global Macro, Balance Sheet and Risk team. Mr. McVey also serves as Chief Investment Officer for the Firm’s Balance Sheet, oversees Firmwide Market Risk at KKR, and co-heads KKR’s Strategic Partnership Initiative. As part of these roles, he sits on the Firm’s Global Operating Committee and the Risk & Operations Committee. Prior to joining KKR, Mr. McVey was a Managing Director, Lead Portfolio Manager and Head of Global Macro and Asset Allocation at Morgan Stanley Investment Management (MSIM). Learn more about Mr. McVey here.

About KKR

KKR is a leading global investment firm that offers alternative asset management as well as capital markets and insurance solutions. KKR aims to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in its portfolio companies and communities. KKR sponsors investment funds that invest in private equity, credit and real assets and has strategic partners that manage hedge funds. KKR’s insurance subsidiaries offer retirement, life and reinsurance products under the management of Global Atlantic Financial Group. References to KKR’s investments may include the activities of its sponsored funds and insurance subsidiaries. For additional information about KKR & Co. Inc. (NYSE: KKR), please visit KKR’s website at www.kkr.com. For additional information about Global Atlantic Financial Group, please visit Global Atlantic Financial Group’s website at www.globalatlantic.com.

The views expressed in the report and summarized herein are the personal views of Henry McVey of KKR and do not necessarily reflect the views of KKR or the strategies and products that KKR manages or offers. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment decision or any other decision. This release is prepared solely for information purposes and should not be viewed as a current, past or future recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. This release contains forward-looking statements, which are based on beliefs, assumptions and expectations that may change as a result of many possible events or factors. If a change occurs, actual results may vary materially from those expressed in the forward-looking statements. All forward-looking statements speak only as of the date such statements are made, and neither KKR nor Mr. McVey assumes any duty to update such statements except as required by law.

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