Key Takeaways:
KKR's Henry McVey argues the global economy is entering a period of divergence unseen since the 1870s, with AI-driven productivity gains concentrated in a narrowing set of winners.
The global economy is expanding unevenly as it enters a period of intensifying divergence, with AI productivity gains concentrated in a narrowing set of winners, KKR's Henry McVey said in the firm's 2026 midyear outlook.
"The cycle is not over, but it is becoming more selective," McVey, CIO of KKR's Balance Sheet and Head of Global Macro and Asset Allocation, said in the report titled "The Divergence Conundrum."
The iShares Semiconductor ETF has surged about 80% year to date, while the S&P 500 has gained roughly 6%, a gap that reflects the concentration McVey describes. By the end of May, 10% of the world's top 30 central banks were raising rates, up from 3% at the end of 2025, while only 40% were still cutting. The last time divergence reached this extreme was at the start of the second industrial revolution in the 1870s, McVey wrote, drawing parallels to the 1920s and late 1990s as well.
The divergence creates what McVey calls an investing landscape where certain segments of the economy are starved for capital while others are flush with financing options. This combination of a broadening productivity boom and intensifying geopolitical fragmentation 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, he said.
McVey argues that the "Security of Everything" theme extends well beyond traditional defense spending to include food, water, energy, and critical inputs. Security is becoming a core operating assumption for CEOs and policymakers, he said, as nations shift from benign globalization to great-power competition. The war in Iran is the latest symptom of this shift, he noted.
"How can you feel like you are winning in national security if you're not winning in AI?" McVey said, arguing that technology is now inseparable from the rule of law, trade, and economics. Cybersecurity will matter as much as physical security, he added, because digitization has enmeshed the private sector with the public sector.
AI's productivity benefits are only beginning to emerge in 2026, McVey wrote. Since COVID, productivity gains have been driven largely by services-sector automation and digitalization, suggesting this cycle may be broader and more durable than any single technology wave. He pointed to the 1870s, 1920s, and 1990s as evidence that concentration in leading sectors can persist longer than many investors expect.
KKR's team maintains high 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 rather than collapsing, with the periphery — including Spain and Italy — outperforming the industrial core on the back of domestic demand, tourism, and fiscal-driven investment.
Against this backdrop, McVey directs investors toward staying up in quality, diversifying into assets linked to nominal GDP, and emphasizing operational improvement stories. The firm favors 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 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.
Inflation is likely to remain structurally above consensus everywhere except China, as goods inflation becomes less disinflationary and geopolitical shocks become more frequent, McVey wrote. 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 production, OPEC+ fiscal incentives, and persistent geopolitical risk.
Portfolio construction is becoming a bigger source of return as dispersion increases, McVey said. Manager selection, diversification, position sizing, sector exposure, documentation, and discipline around yield will matter more in this environment. 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.
This article is for informational purposes only and does not constitute investment advice.
