The outlook for global capital markets has undergone a significant shift in recent months, as persistent inflation and rising geopolitical tensions force investors, lenders, and issuers to recalibrate expectations for the year ahead.
At the start of 2026, market participants broadly anticipated a more accommodative environment, with the Federal Reserve (Fed) expected to begin cutting interest rates as inflation cooled. That expectation has significantly shifted as elevated energy prices due to geopolitical unrest in the Middle East and ongoing increases in food, education, and other consumer costs have kept inflation high, and changed the outlook for potential Fed rate cuts.
Debt capital markets show resilience
Despite ongoing uncertainty, financing activity has remained robust. Banks are performing well and have strong balance sheets, allowing them to continue lending. Investment grade and leveraged markets have been resilient in the face of volatility as investor demand remains constructive.
M&A activity has picked up substantially in 2026, showing that companies are still confident and willing to invest in growth; however, strategic megadeals continue to dominate with a continued decline in financial sponsor activity. At the same time, more businesses are seeking customized financing solutions, reflecting a growing need for flexibility in how they raise capital.
“The markets are showing no signs of slowing despite some of the headwinds,” said Brian McNelis, head of Debt Capital Markets at PNC. “Companies are becoming more nimble and tapping into more diversified funding sources as the markets evolve. We’re very optimistic about how the rest of the year will play out.”
Leveraged finance faces mixed signals
In leveraged finance, conditions are more nuanced. The below-investment-grade segment has experienced some volatility, though less than anticipated earlier in the year.
There’s still plenty of money available in the market right now. Investor demand is strong, and capital availability is high to an extent that some investors are struggling to find attractive opportunities to deploy it. This has kept borrowing costs relatively low, but it also raises concerns that risks may not be fully reflected in the market.
At the same time, volatility in the economy could impact corporate earnings. If higher energy costs and ongoing global tensions hurt profits, especially for companies with a lot of debt, lending markets could come under pressure again.
Uncertainty around AI’s impact
Another emerging dynamic is the impact of artificial intelligence (AI) on how investors allocate capital, particularly within the technology sector. Some software companies that previously accessed financing markets at favorable terms are now seeing valuations drop as investors grow concerned with how AI could impact their business models.
This “AI disintermediation” trend is contributing to a broader imbalance: even though there’s a lot of money available to invest, it’s getting harder to find opportunities that investors feel confident about.
A market defined by contrasts
As we move into the second half of the year, financial markets are in an unusual situation. There is plenty of cash available and the markets are strong, but there’s uncertainty around the economy as inflation remains persistent, interest rates stay elevated and international conflict affects energy prices.
“Success in this market isn’t going to come from trying to guess what the economy will do next,” McNelis said. “It’s going to be defined by addressing financing needs while the capital is available and derisking your funding plans during attractive windows versus waiting for perfection.”
