Each January, Carlyle resists the temptation1 to publish a point forecast. Instead, it asks questions—because, as Jason Thomas frames it, “questions are often more useful than predictions.” They force assumptions into the open, expose fragilities beneath comfortable narratives, and keep investors adaptive as policy and markets evolve. Heading into 2026, the consensus looks benign—“accelerating growth, easing inflation, lower interest rates, and another leg higher for equities.” Carlyle does not reject this path. It stress-tests it.
What follows is not a call for alarm, but a systematic probe into where risk has quietly accumulated, where policy incentives are misaligned, and where today’s capital flows may be narrowing tomorrow’s options.
1. The Affordability Trap: When Politics Collide with the Fed’s Models
Carlyle opens with a subtle but destabilizing observation: the Fed’s reaction function has become increasingly asymmetric. Over the past two years, “above-target inflation got explained away, while weakness in labor markets was met with a forceful response.” This approach makes sense to market professionals steeped in neutral-rate models—but it collides with voter experience.
By late 2025, “an ‘affordability crisis’ emerged as the topic du jour in Washington, DC.” Prices remain “21% higher, on average, than levels that prevailed prior to the onset of the pandemic,” even as the Fed presses ahead with cuts. Thomas notes the growing absurdity of the public discourse: “CNBC and C-SPAN should offer viewers a confusing split-screen this year,” with markets debating how many cuts are coming while lawmakers debate how to rein in prices.
This divergence is not sustainable. As midterm elections approach, Thomas warns that “don’t be surprised if Fed policy gets ‘politicized’ by elected officials wondering why the federal agency tasked with price stability hasn’t delivered on that mandate.” Monetary policy, in other words, may be forced to respond not just to models—but to legitimacy.
2. The Wrong Villain: Why Private Credit Isn’t the Systemic Risk
The second question dismantles a popular strawman. While many expect private credit to be the epicenter of the next financial shock, Carlyle argues this misses the point. “Crises don’t emerge from asset quality issues; liability structures are paramount.” The danger lies not in who owns the assets—but in how they are funded.
Private credit, Thomas notes, looks structurally resilient: “equity levels 3x to 5x those of banks and maturities on outstanding borrowing that typically match or exceed those of the loans.” The real excesses sit elsewhere. Since late 2022, margin debt has surged to “a record $1.2 trillion,” hedge fund repo borrowing has ballooned, and the U.S. Treasury itself has dramatically increased short-term issuance.
Carlyle’s diagnosis is blunt: “analysts focused on financial stability risks have far bigger things to worry about than private credit.” The system’s most fragile points are those reliant on overnight funding, volatility-sensitive leverage, and continuous liquidity—conditions increasingly normalized by Fed reserve management purchases.
3. AI’s Capital Gravity: When Data Centers Crowd Out the Economy
Perhaps the most consequential question Carlyle asks is whether AI investment has crossed from engine to absorber of capital. The scale is staggering. “By 2025, data center development in the US surpassed spending on all other commercial buildings combined.” Since ChatGPT’s debut, data center assets have grown 3.2x, while all other real estate development is up less than 10%.
This is no longer a tech story—it’s a macro allocation story. Data centers now account for “roughly two-thirds of the entire [infrastructure] market,” with average greenfield projects jumping from $800 million to over $3 billion in a single year. The energy demands alone imply “an additional $1.4 trillion in energy infrastructure spending by 2030.”
The constraint is no longer feasibility—it’s concentration. “We may soon reach a point where data centers consume virtually all the economy’s net private capital formation.” For allocators, Thomas cautions, it’s one thing to back the right technology; it’s another to allow “incremental stock, real estate, infrastructure, and credit exposures to become so highly correlated with a single risk factor.” Fear of over-concentration—not skepticism about AI returns—may become the binding constraint.
4. Japan: Don’t Misread the Signals
Rising yields and a weak yen have led some observers to claim Japan is trapped. Carlyle rejects this narrative. Since Abe’s reforms, Japan has seen “a 4-percentage point acceleration in nominal per capita income growth,” a “40% drop in unemployment,” and shrinking fiscal deficits.
Despite rate hikes to a “30-year high of 0.75%,” the yen has barely moved. Critics see this as a warning sign. Thomas sees prudence. Japan’s net debt, after adjusting for public assets, is “closer to 80% of GDP… 20% lower than that of the US.” Its net financing needs absorb just “6% of Japanese private savings.”
Moreover, Japan is structurally “short the yen.” As the currency weakens, national net worth rises—reflected in a “record high of $3.7 trillion” in net foreign assets. The BOJ, Thomas argues, isn’t boxed in—it’s cautious. “Don’t misread market signals,” he concludes. “There’s nothing alarming about the normalization of interest rates in an economy that’s finally exited convalescence from its deflationary slump.”
5. Europe’s Institutional Ceiling: Why a New Treaty Matters
Carlyle’s final question reaches beyond markets into institutional design. More than a year after Mario Draghi’s competitiveness agenda, “barely 10%” has been implemented. The issue, Thomas argues, is not will—but structure.
EU treaties were written to restrain state intervention, not coordinate it. Member-state vetoes and fragmented authority now impose what Carlyle describes as “intra-EU tariffs of 45% on manufactured goods and 110% on services.” Crisis-driven improvisation has filled the gap—but at the cost of legitimacy. “A healthy capacity to respond to crises seems to have morphed into a dependence on them to achieve policy outcomes.”
History suggests a reset. Just as Rome followed Suez and Maastricht followed the Cold War, today’s geopolitical fractures may force Europe to formalize what it has already improvised—joint borrowing, defense integration, and capital-market reform. Without it, Europe’s vast potential risks remaining permanently under-realized.
Key Takeaways for Advisors and Investors
- Consensus Isn’t Wrong—but It’s Fragile: Growth and easing inflation may continue, but political legitimacy, leverage structures, and capital concentration are tightening constraints.
- Watch Funding, Not Headlines: Systemic risk is accumulating in short-term leverage and sovereign financing choices—not in private credit.
- AI Is a Portfolio Correlation Risk: The question is no longer returns, but how much of the economy—and your portfolio—can hinge on one capex theme.
- Japan Is Normalizing, Not Breaking: Rising yields and a weak yen reflect prudence and structural strength, not impending crisis.
- Europe’s Opportunity Is Institutional: Without treaty reform, Europe’s scale and savings will remain a promise deferred.
Carlyle’s message for 2026 is disciplined and unsensational: the world is not on the brink—but it is outgrowing old frameworks. The investors who adapt earliest will not be those chasing the next forecast, but those interrogating the assumptions beneath it.
Footnote:
1 Thomas, Jason. Five Questions for 2026. The Carlyle Group, Jan. 2026.
