Navigating an Uncertain Macro Backdrop: Inflation, Rates, and the Growing Weight of Debt
We are once again operating in an environment defined by uncertainty. Geopolitical tensions have escalated meaningfully, with conflict in the Middle East driving volatility across energy and financial markets. Markets are attempting to balance these risks against underlying economic data that appears resilient but is increasingly sending mixed signals.
The March jobs report showed the economy added 178,000 nonfarm payrolls, nearly three times what economists had expected[1]. This marked a strong rebound from February’s weather- and strike-related job loss and continued a recent pattern of volatility in monthly job creation[2]. However, looking over a longer period, the trend is less encouraging. Over the past 12 months, the U.S. has added less than a third of the jobs than is typically in a healthy expansion, pointing to a gradual softening in the labor market[3].
Inflation, which had shown signs of moderating, is now reaccelerating. In March, headline inflation rose 0.9% for the month, pushing the annual rate to 3.3% – the highest reading since April 2024 – driven almost entirely by a 10.9% surge in energy costs[4]. The resurgence in energy prices, largely tied to geopolitical developments, introduces a renewed inflationary impulse just as we were hoping that price pressures were becoming contained.
The Risk of Stagflation
The U.S. economy has demonstrated remarkable resilience over the past several years. Consumer spending has remained strong, supported by rising asset prices, a healthy labor market, and the expansion of the upper middle class.
However, this momentum seems to be slowing. S&P Global expects U.S. real GDP growth of 2.2% in 2026, followed by sub-2% annual growth for the remainder of the decade[5]. The recent energy shock, especially if it persists, risks feeding into broader inflation measures and dampening consumer spending.
As a result, economists are increasingly anticipating a period of mild stagflation, an affordability crunch driven by rising inflation and slower real wage growth. Some have even referred to this dynamic as a “war dividend,” reflecting the inflationary consequences of geopolitical conflict[6].
Stagflation presents a particularly challenging environment for policymakers and investors alike. Unlike a traditional recession, where central banks can stimulate growth by lowering rates, or a typical inflationary environment, where tightening policy can cool demand, stagflation limits both options. Policymakers are forced to choose between supporting growth and fighting inflation, often at the expense of the other.
This trade-off is problematic. Persistent inflation erodes purchasing power and consumer confidence, while slower growth constrains earnings and employment. The result may be a more fragile economic situation with fewer effective policy tools available.
Higher Rates for Longer
Against this backdrop, the path for monetary policy has become increasingly constrained.
Despite earlier expectations for rate cuts in 2026, recent inflation data and geopolitical uncertainty have pushed out that timeline. In response to the latest inflation print and reduced odds of near-term easing, Treasury yields have moved higher. Despite a succession of rate cuts last year, the 10-year Treasury yield remains in the mid-4% range, reflecting persistent inflation concerns, increased government borrowing, and shifting expectations for Fed easing[7].
While current interest rates remain modest by historical standards, they feel elevated in the context of the post-Global Financial Crisis era. More importantly, they may suppress economic activity in ways that compound the risk of a slowdown.
When borrowing costs are high, businesses may defer expansion, entrepreneurs may delay new ventures, and consumers may think twice about large purchases, including homes. These types of investments would typically support jobs, innovation, and productivity, ultimately driving long-term economic growth.
The Overlooked Risk: National Debt
Higher rates exacerbate an often-overlooked issue: the trajectory of U.S. federal debt. The national debt has surpassed $38 trillion and continues to grow at an accelerating pace, with no plan to improve the situation[8]. While this has been a long-term trend, the implications are harder to ignore.
First, rising debt levels contribute to higher interest rates. As the government issues more debt, investors may demand higher yields to compensate for increased supply and perceived fiscal risk. This dynamic is evident in the upward pressure on longer-term Treasury yields.
Second, the cost of servicing the debt is consuming a growing share of federal spending. As interest payments rise, fewer resources are available for productive investments such as infrastructure, education, innovation – areas that can support long-term economic growth.
Third, elevated debt levels reduce the government’s flexibility in responding to future crises. Whether facing a recession, financial shock, or public health emergency, a heavily indebted government has fewer tools available to provide support.
Positioning Portfolios in a Challenging Environment
The current environment is defined by tension: between growth and inflation, resilience and fragility, and short-term stability and long-term risk.
For investors, this calls for a disciplined and balanced approach. We believe diversification remains an important consideration for long-term investors, especially as stocks and bonds have become more correlated in times of heightened volatility[9]. In an environment where both equities and fixed income face potential headwinds, exposure to a broader set of return drivers, including real assets and private investment strategies, may help improve portfolio resilience for investors with appropriate risk tolerance and investment horizons.
While the economic backdrop may appear challenging, it is not a cause for immediate alarm. Rather, it is a reminder that patience is an essential component of successful investing. Many economists expect inflation to moderate later this year as geopolitical tensions ease and energy prices stabilize, potentially reopening the door for future rate cuts[10].
The timing of these improvements is unknown. Until then, we believe the appropriate response is not to chase short-term moves, but to maintain a well-constructed, diversified portfolio designed for environments like this one. Markets typically reward discipline, particularly when conditions make discipline hardest to maintain.
Fixed Income Update by Olivia O’Toole
How Wars Affect the Bond Market
Geopolitical conflict tends to move bond markets quickly. Early on, investors typically seek safety and liquidity from government bonds. As demand rises, prices move up and yields fall. We’ve seen this pattern play out repeatedly, from the Gulf War to the more recent Russia Ukraine conflict.
As conflict drags on, the focus usually shifts to second-order effects, especially inflation. War can disrupt energy supply, complicate supply chains and increase government spending significantly, all of which can put upward pressure on prices. When inflation expectations pick up, yields often follow and bond prices can decrease.
There’s also the policy side to consider. Central banks, including the Federal Reserve, don’t operate in a vacuum. If inflation starts to look more persistent, policy expectations can shift and bond markets tend to adjust quickly.
Recent tensions in Iran are a good example of this dynamic between shorter- and longer-term effects. In the near term, uncertainty around oil supply has supported demand for Treasuries. But if energy prices stay elevated or government spending increases meaningfully, the longer-term picture could look different, putting upward pressure on yields and potentially influencing how the Fed responds.
BSW’s Perspective
Geopolitical events are unpredictable by nature, so our approach is not to forecast specific outcomes, but to build portfolios with the goal of navigating a range of scenarios. In fixed income, we believe this means maintaining diversified exposure with a focus on high-quality bonds that tend to provide stability during periods of stress.
Liquidity is another key piece. Keeping a portion of the portfolio in highly liquid instruments gives us the flexibility to rebalance when markets move, rather than being forced to react.
Overall, our approach remains consistent: focus on thoughtful portfolio construction to support stability and maintain flexibility as conditions evolve, rather than reacting to short term headlines.
Equities Update by Dmitry Popov
The first quarter of 2026 was a reminder that markets don’t necessarily require “new” information to reprice – only a new distribution of outcomes. A late‑February escalation in the Middle East created an oil‑driven shock that quickly migrated from commodities into inflation expectations, policy expectations, and ultimately equity multiples. The disruption to energy flows and shipping through the Strait of Hormuz became the macro hinge: higher energy prices pushed nearer‑term inflation up and growth down, exactly the combination that narrows central banks’ room to ease.
Global equities fell modestly in aggregate, but what mattered for investors was dispersion: energy surged while rate‑sensitive, long‑duration parts of the market de‑rated. By quarter‑end, the MSCI ACWI IMI was down 2.65% year‑to‑date, while the S&P 500 was down 4.33%. Sector leadership was unusually extreme: MSCI World Energy was up 36.86% year‑to‑date, while MSCI World Information Technology was down 9.03%, and Consumer Discretionary was down 10.77%.
For equity investors, Q1 was less about “being right” on the macro forecast and more about not being brittle. Concentration in a small set of long‑duration growth exposures (particularly U.S. technology‑heavy benchmarks) was punished; inflation‑sensitive exposures (energy, materials, some defensives) served as shock absorbers. And because major central banks largely held policy rates steady through the quarter, discount rates stayed higher for longer – keeping valuation risk alive, even when headline equity declines looked manageable.
What this quarter suggests going forward is not especially comfortable, but we believe it is manageable. When markets start paying more attention to risks on the edge – a longer conflict, supply disruptions, or inflation that proves harder to contain – it becomes less useful to anchor on one “most likely” outcome. The better approach is to build portfolios with the goal of holding up across a wider range of possibilities. The key question is not simply whether this shock passes, but whether it lasts long enough to squeeze corporate margins, push rate cuts further out, and keep investors uneasy. In that kind of environment, flexibility has real value. Diversification matters. Valuation discipline matters. And companies with pricing power and strong balance sheets tend to matter even more. The lesson is not that investors need to guess the next geopolitical headline correctly. It is that portfolios should not be built on the assumption that the world will cooperate.
Real Asset Update by Katherine St. Onge
Real assets have historically provided diversification and inflation protection. The current macro backdrop defined by higher interest rates, persistent inflation, and elevated geopolitical uncertainty has created greater dispersion across sectors.
Residential real estate remains pressured by high interest rates and limited supply. For a moment in February, the 30-year mortgage rate fell below 6% – a psychological threshold that raised hopes for increased transaction activity[11]. However, renewed inflationary pressures and geopolitical uncertainty have since pushed mortgage rates back above 6%. Affordability challenges continue to weigh on homebuyers, benefiting the multifamily rental market, which is seeing increased demand from renters by necessity and those seeking greater housing flexibility. The valuation reset over the past several years, combined with moderating supply and improving absorption rates, should position the sector for more favorable returns going forward[12].
Infrastructure, particularly renewable energy, experienced a more nuanced quarter. Higher interest rates have increased project financing costs and generally delayed development timelines. While wind and solar currently account for less than 20% of U.S. electricity generation today, they are projected to be the fastest growing sources in the years ahead[13]. At the same time, rising electricity demand driven by data centers and broader electrification trends, particularly in transportation, should support continued growth across the infrastructure sector[14].
The timber market has been supported by the under supply of single-family homes, ongoing remodeling activity, and increased demand for sustainable construction materials[15]. However, higher construction costs and elevated interest rates continue to weigh on housing activity and, by extension, timber demand. We expect these pressures may begin to ease later this year. While demand is projected to remain relatively flat in the U.S., pricing may face upward pressure due to tariffs.
Across real assets, a clear theme has emerged: the cost of capital matters again. Higher rates are pressuring valuations and slowing transaction activity, but we find they are also creating more attractive entry points for long-term investors. We believe assets with durable cash flows, pricing power, and structural demand drivers are generally better positioned to navigate near-term uncertainty while pursuing long-term value.
Private Equity Update by Aaron Deitz
While we tend to focus on private equity, recent developments in private credit have become increasingly relevant in today’s broader private markets discussion. Over the past 15 years, private credit has been one of the fastest growing segments of the alternative investment universe, evolving into a parallel lending system as banks stepped back from middle market financing following the Global Financial Crisis. This shift, combined with strong demand for yield, has driven the asset class to over $2 trillion and made it a key financing source for private equity-backed companies.
We believe several dynamics recently have driven increased scrutiny. Private credit’s floating rate structure benefited investors during the rising rate environment; however, those same higher rates have pressured borrowers as they’ve remained elevated. Now with the Fed’s current easing cycle, forward yields have decreased for investors. In addition, concerns around AI driven disruption of software sector fundamentals, particularly among Software-as-a-Service (SaaS) companies, have raised questions about the durability of cash flows and the ability of some borrowers to refinance. Given the meaningful exposure many private credit portfolios have to software, these concerns have become more central.
Further, strong inflows into the asset class have increased competition among lenders, contributing to tighter spreads and looser underwriting standards. We have also seen increased use of payment in kind structures, which may signal borrower strain as higher interest costs pressure cash flows. Combined with negative headlines, this has led to elevated redemption requests in semi liquid private credit funds.
Whether these concerns are overblown remains an open question. Default rates remain near historical norms, but if conditions weaken or software fundamentals deteriorate, pressures could build quickly. Regardless of the outcome, we expect dispersion between managers to increase.
At BSW, our exposure to private credit remains limited and intentional. While it can play a role in diversification and income generation, we believe its use should be carefully considered within a broader portfolio. As a result, within our clients’ portfolios we continue to emphasize private equity over private credit for its long-term value creation and more asymmetric return profile.
Footnotes & References: [1] https://www.bls.gov/news.release/empsit.nr0.htm [2] https://www.bls.gov/news.release/pdf/empsit.pdf [3] https://www.morningstar.com/news/marketwatch/20260403208/the-march-jobs-report-isnt-as-good-as-it-looks-here-are-the-bad-parts [4] https://www.cnbc.com/2026/04/10/cpi-inflation-report-march-2026.html [5] https://www.spglobal.com/ratings/en/regulatory/article/economic-outlook-us-q2-2026-curb-your-enthusiasm-s101676533 [6] https://finance.yahoo.com/news/mild-stagflation-bank-of-america-rips-up-economic-forecasts-braces-for-100-oil-all-year-on-iran-war-disruptions-163951466.html [7] https://www.spglobal.com/ratings/en/regulatory/article/economic-outlook-us-q2-2026-curb-your-enthusiasm-s101676533 [8] https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/ [9] https://www.nl.vanguard/professional/vanguard-365/understanding-stock-bond-correlations [10] https://finance.yahoo.com/economy/policy/articles/fed-expected-cut-rates-2026-110000248.html [11] https://constructioncoverage.com/research/hottest-real-estate-markets-us [12] https://www.aprio.com/insights-events/6-real-estate-insights-from-q1-2026-and-what-they-mean-for-you-ins-article-re/ [13] https://www.eia.gov/outlooks/steo/ [14] https://www.aprio.com/insights-events/6-real-estate-insights-from-q1-2026-and-what-they-mean-for-you-ins-article-re/ [15] https://blog.harrisonstpw.com/real-assets/timberlands-value-is-driven-by-biological-growth-not-market-forces
Disclosures:
This blog is created and authored by BSW Wealth Partners, Inc., a Public Benefit Corporation (“BSW”) and is published and provided for informational purposes only. The opinions expressed in the blog are our opinions and should not be regarded as a description of services provided by BSW or considered investment, legal or accounting advice. Certain information sited is from third-party sources and while we believe the information to be accurate and true to the best of our knowledge, we cannot guarantee its accuracy as there may be certain unknown omissions, errors, or mistakes. Use of third-party information, including links, is in no way an endorsement by BSW. References to third-party forecasts, projections, or opinions are for informational purposes only. BSW has not independently verified such information and makes no representation as to its accuracy or completeness. This commentary contains forward-looking statements that reflect current views and are subject to risks and uncertainties. Actual results may differ materially. The views reflected in the blog are subject to change at any time without notice. Nothing on this blog constitutes investment advice, performance data, or any recommendation that any security, portfolio of securities, investment product or investment strategy is suitable for any specific person. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BSW), or any non-investment related content, made reference to directly or indirectly in this blog post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Not all BSW clients will have the same experience within their portfolio(s) and certain topics discussed in this blog may not apply to all clients or investors. Index returns shown are for illustrative purposes only, are unmanaged, do not reflect fees or expenses, and are not available for direct investment. BSW client results will differ. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BSW. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BSW is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of BSW’s current written disclosure statement discussing our advisory services and fees is available upon request.
Investors should be aware that real estate investments carry significant risks including: illiquidity, concentration risk, leverage risk, interest rate sensitivity, economic cyclicality, and the potential for loss of principal. Investors should also understand that private equity investments carry substantial risks including: illiquidity, leverage risk, concentration risk, valuation uncertainty, lack of transparency, limited regulatory oversight, and the potential for total loss of invested capital. Private equity is suitable only for investors who can bear such risks and tolerate long investment horizons without access to capital. Bond investments carry risks including interest rate risk, credit risk, and the potential for loss of principal.
