Category: CIO Commentary

There are a few large and somewhat unrelated forces shaping markets today. In this letter, we focus on two, particularly the conflict in the Middle East and the evolving impact of AI. While these topics are very different, both introduce significant uncertainty and cause market volatility.

Some Big Moving Pieces and Lessons to Remember

On the first large force shaping markets today: most of us are familiar with the situation unfolding in the Middle East (ME), where the U.S. and Israel are attacking Iran with the stated goals of preventing Iran from obtaining a nuclear weapon, degrading its missile capabilities, limiting its ability to fund terrorism/proxy groups, and securing the Strait of Hormuz, through which roughly 20% of the world’s oil flows. While the ultimate end-state remains somewhat unclear, most U.S. policymakers – who rarely agree – appear aligned in preferring a short conflict and with no U.S. “boots on the ground.” Our goal here is not to choose a side, but to assess what these developments might mean for our portfolios in the short- and long-term. Our goal also is not to ignore the human consequences of this war, which are large and painful. However, our role is to determine whether this development causes materially different investment outcomes than previously considered.

Energy as the Primary Transmission Channel

From an investment perspective, the primary channel through which this conflict affects the global economy is energy prices. Iran has demonstrated its ability to disrupt up to 20% of global oil supply through the Strait of Hormuz by threatening shipping. If flows remain constrained for an extended period, already elevated oil prices could rise further, pushing inflation higher and slowing growth. The chart below shows how a sustained oil shock could impact growth across countries.

2026 GDP Growth Percent Impact Due to Energy Price Shock1

If disruptions ease, prices should normalize more quickly, limiting the impact on inflation and allowing market volatility to subside. Ultimately, a short, successful conflict could lead to a more stable Middle East, reducing some of the geopolitical “risk premium” currently embedded in oil prices, which would support both equity and bond markets.

What Markets Are Pricing

As you can see below, higher price expectations have already been reflected in forward price curves for oil. What matters now is how quickly the Strait reopens. The longer it stays constrained, the larger the supply shortfall becomes — and the higher prices are likely to go.

U.S. Crude WTI Future Curve Before and After Attack on Iran

The range of possible outcomes is best illustrated by how oil markets are currently pricing different scenarios.

The Goldman Sachs chart above illustrates how oil price expectations vary depending on how long the Strait remains disrupted. Forward curves already reflect higher prices, with a prolonged closure likely pushing them higher still.

GS Estimated Impact on Brent 2027Q4 Prices Under Different Strait of Hormuz Disruption and Recovery Scenarios2

Recent Developments and Path Forward

On March 22, the U.S. administration warned that failure to reopen the Strait of Hormuz within 48 hours could result in strikes on Iran’s energy infrastructure. Iran responded with warnings of potential retaliation against regional energy assets, shipping routes, and U.S. facilities in the Middle East.

Approximately 36 hours after the initial warning, the U.S. administration paused further escalation, citing “constructive talks with Iran,” a characterization Iranian officials disputed. While both sides have continued limited exchanges, larger-scale offensives appear to have eased, at least temporarily. There are indications that talks may be underway, possibly intensifying with face-to-face meetings in Pakistan. With much of the Iranian leadership removed, it is unclear who ultimately has negotiating authority, which adds another layer of uncertainty. There also appear to be some differences within the remaining Iranian leadership, as most of the oldest hardliners are gone. If a more reformist-minded leader such as President Masoud Pezeshkian ascends, or if the new hardline Supreme Leader Mujtaba Khameini takes a less active role, some experts suggest Iran may become less combative. This would be a positive outcome. If not, the status quo since 1979 or worse may result.

Potential Outcomes

Our view today is cautiously hopeful. If Iran softens its traditional position and the U.S. remains open to an off-ramp, a deal that allows both sides to save face is possible.

The challenge, of course, is that each side’s stated objectives remain far apart. Iran has sought security guarantees, sanctions relief, reparations, removal of U.S. military bases and greater control over the Strait, while the U.S. objectives outlined earlier are largely unacceptable to Iran.

Any resolution would therefore require meaningful concessions from both sides. One possible framework could involve Iran foregoing its pursuit of a nuclear weapon and limiting its missile and drone capabilities, in exchange for security assurances, sanctions relief, and potentially some form of economic support.

While this may seem unlikely today, an outcome that allows both sides to claim some degree of success may be the clearest path to a more stable Middle East. Our hopeful scenario would mark the end of Iran’s 47-year history of destabilization both for themselves and hopefully also for the Middle East. If so, oil prices may embed a permanently lower risk premium. This could lead to lower inflation and stronger global growth in the future.

Lessons for Investors

Against this backdrop, it is worth stepping back and remembering a few lessons that have served investors well:

1. Warren Buffett’s oft quoted observation: “The stock market is a device for transferring money from the impatient to the patient.”
2. Over the last four decades, there have been 21 U.S. airstrike campaigns in the MENA region, and eight weeks later the SPX was higher 95% of the time.

Historical Asset Class Performance Eight Weeks After Initial U.S. Airstrike Operations in the Middle East and North Africa3

Positioning Implications

With global equity markets down nearly 7% since the conflict began, and analysts’ earnings estimates showing continued upward revisions in the U.S., we sense some modest upside potential in stocks. While we are not taking large positions in the portfolio in either direction based upon what we know and what we’ve heard, we do own a few small bullish call option positions that would benefit the portfolio some if this were to occur. Additionally, we are keeping a close eye on 10-year Treasury yields. A break above 4.5% would interest us, as any energy inspired inflation would likely revert quickly if a deal can be struck, allowing rates to fall back to lower levels. If we are wrong and conditions in the ME deteriorate further, we will be positioned very close to our benchmarks and will have all the flexibility to make more impactful changes after better opportunities have presented themselves.

The range of possible outcomes in the Middle East is very wide, and the ramifications if energy or desalination infrastructure is struck and / or more countries join the fray should not be underestimated. However, while geopolitics may be driving incredible near-term market uncertainty (even hour by hour), a separate and potentially more impactful force is shaping longer-term market expectations: the impact of AI.

AI’s Impact on Jobs and the Economy

A central question in markets today is AI’s potential impact on the economy and employment. Past technological advances have helped humans live safer and easier lives (fire/electricity), move goods and people more efficiently (the wheel/trains/cars), communicate faster (telephones/the internet), and make better decisions (computers/software). AI may be different. For the first time, we may be developing a technology capable of thinking and making decisions in place of humans, raising important questions about employment and long-term economic growth.

Bear Case: Those who believe AI can disintermediate jobs quickly see a technology that works non-stop without supervision and improves itself at an ever-increasing pace. You don’t pay it a wage or health care benefits, it never sleeps or complains, and if it cannot do what you want today, it likely will in a few weeks (or less). (And this is putting aside the ultimate Bear case, which envisions a dystopian humankind versus machine battle.)

Bull Case: Those who believe AI won’t take all of our jobs point to its lack of 1) human creativity or 2) access to all data (as critical databases are inaccessible because uninvited sharing of sensitive data could be an existential threat). They believe that, like previous technological advances, AI will free humans to focus on higher-value work, increasing productivity and creating jobs we cannot yet imagine, much like a software engineer could not have been imagined before a computer was invented.

The Potential SaaSpocalypse

Ground zero of this debate is the SaaS (software as a service) stocks. There are others, but AI believers expect that, over time, companies will be able to task their own internal AI to build software stacks that replace some of the SaaS services they currently use for internal processes. They believe companies understand their own “hotspots” and where they cannot afford software mistakes and will continue to test in-house AI-developed solutions until they are reliable. While these solutions may not be ready to take over from current vendors today, they could be more viable in the future.

Those who doubt AI will rapidly cannibalize jobs see AI as a productivity accelerator. They believe in the human processes that require time to investigate, understand, gain trust, run trials, debug, and then slowly begin to implement a solution that may represent an existential decision. If you implement a big change to your enterprise resource planning (ERP) process (software) you are betting your company on it working.

Before tackling an example, it is worth briefly defining what ERP software does: it “pulls data and workflows from finance, supply chain, HR, sales, and other functions into a single platform, allowing a company to operate on one consistent set of real-time information.”

One of the best examples of this dynamic is SAP, a company several of our managers own. SAP is one of the leading global providers of enterprise resource planning (ERP) software and is also working to incorporate AI into its own offerings.

Importantly, the company’s fundamentals remain strong. Revenues and earnings are expected to grow at an accelerating pace over the next several years, with consensus estimates pointing to continued double-digit earnings growth.

That is a very attractive earnings profile! With the stock today at $176, that is a PE of 21x 2026 and only 11.3x 2030 earnings estimates. The average PE over the last 10 years is 31x.

Nevertheless, the stock price has declined by 28% YTD and is down 44% from its July 2025 high. This is not due to weakening near-term earnings, but rather a reassessment of the durability of the business. The market is increasingly pricing in potential AI-driven erosion of SAP’s franchise and terminal value.

As a result, earnings are rising while the stock is falling — a reminder that markets are forward-looking discounting mechanisms. At times, investors simply do not believe the future will look as strong as the past, regardless of current earnings estimates.

Currently, it is hard for the SAP bulls to combat the AI believer’s assertions. Only time will tell if AI will become another tool, assimilated in the same way the internet was, creating some of the greatest businesses ever – think Google and Amazon, or if in time AI will take over all aspects of what SAP (and many companies) currently does for its customers and slowly (but quickly when it comes) put them out of business. As we sit here today, the AI bulls appear to be winning, but several of our managers believe this is creating attractive opportunities for new investments.

Productivity and the Power Constraint

We are more aligned with the bulls. Our current belief is that AI will become more pervasive across corporate America. It will make businesses large and small more productive. Rising productivity enhances living standards and tends to reduce inflation. AI can help with both. We have been using AI in our investment process and firm operations and have indeed been astounded by its capabilities when prompted well. (As an interesting example, please see the Appendix which combines AI insights with the Middle East War.)

The limiting constraint to AI growth may be electricity generation. We continue to push the grid, because we need ever more power in order to grow AI at the breakneck speeds we have to this point. Substituting AI for people will require more electricity. Some investors argue that the productivity improvement AI brings may be meaningfully offset by the increased cost of powering the AI. It seems unlikely that AI electricity will cost more than a human, but the scale and cost of the required electricity build out could surprise us all.

This is a complex situation. AI has the potential to make the global economy more efficient — provided it augments, rather than replaces, human work.

Capital Expenditure of U.S. Investor-Owned Electric Utilities vs. U.S. Electricity Demand4

Today’s Positioning

Bringing these topics together, we turn to how we are positioning portfolios.

We have not made major changes to our strategic asset allocation or overall portfolio construction. Within equities, we remain close to benchmark on “Level 1” factor exposures such as sector and geography, while maintaining our longstanding modest underweight to megacap stocks in favor of medium (mostly) and small cap companies. Despite limited factor risk, the portfolio continues to reflect our highest-conviction ideas, with most deviation from the benchmark driven by idiosyncratic security selection.

Within diversifiers, we maintain exposure to a mix of strategies designed to have low correlations to one another, and we have recently added merger arbitrage and equity capital markets strategies in anticipation of increased corporate activity.

Within fixed income, we remain short duration, reflecting concerns about the U.S.’ deteriorating fiscal position and the potential for higher inflation if the situation in the Middle East worsens.

While we are always looking for tactical opportunities, we recognize these are among the most difficult decisions to get right. Historically, the most attractive opportunities have come when sentiment is extremely negative. Today, markets are highly focused on developments in the Middle East, and unless disruption escalates meaningfully, a compelling entry point may not emerge. While that is not a desirable outcome, we would be prepared to respond if conditions were to deteriorate. Should tensions escalate further—through broader regional conflict or a prolonged disruption to the Strait of Hormuz—opportunities may develop later in the year. For now, we remain balanced and flexible, relying on security selection to drive value, as we have over most of TIFF’s history.

Despite a difficult start to the year, the investment backdrop could still improve as we move forward. If earnings estimates remain firm and inflation pressures from energy prove temporary, 2026 could still be a positive year for markets. While uncertainty is elevated, markets have handled it relatively well. A short conflict with no U.S. boots on the ground would likely represent the most favorable outcome for markets.

As always, we greatly appreciate the opportunity to manage your capital and help you achieve your organization’s goals. We are here to assist in any way possible, so please feel free to reach out to us with any questions or needs.

Your TIFF Investment Team

Appendix: Applying AI Capabilities to Middle East War Potential Outcomes

Additional Context on the War in Iran

Because the range of potential outcomes in the Middle East is unusually wide, we used AI as a tool to help frame possible scenarios and stress-test our thinking. It is important to emphasize that AI is not used to make investment decisions, but rather to extend the team’s research capabilities and explore a broader set of inputs and perspectives.

For this exercise, we asked a well-known Large Language Model (LLM) AI engine (on March 24, 2026) to outline what it viewed as the most likely scenarios based on its synthesis of a large body of available information (the underlying analysis drew from hundreds of sources). What follows is a condensed version of that output. These scenarios do not represent the views of the TIFF team, nor should they be interpreted as forecasts. As with any model, the results are sensitive to changing inputs, and different conditions or prompts would likely produce different outcomes. We hope you find this content useful.

Strait of Hormuz Crisis: Scenario Analysis
The March 28 Deadline and What Comes Next

Current State of Play

Twenty-five days into the U.S.-Israeli military campaign against Iran, the air war is largely won — over 9,000 targets struck, 140+ naval vessels destroyed, missile launch rates down roughly 90%. But Iran’s most consequential weapon remains deployed: the effective closure of the Strait of Hormuz. Tanker transits have collapsed 94% from pre-war levels. The IEA has called this the largest supply disruption in the history of the global oil market. On March 21, Trump issued an ultimatum demanding Iran fully reopen the Strait within 48 hours or face strikes on power infrastructure. That deadline was postponed five days on March 23 after the administration claimed productive conversations with Iran through mediators. Tehran has denied direct talks. As of March 24, fighting continues: Israel launched fresh strikes on Tehran; Iran fired ballistic missiles at Tel Aviv and hit a Kuwaiti oil refinery. Pakistan has offered to host in-person negotiations. The new deadline expires Saturday, March 28.

Three Scenarios from the March 28 Deadline

Scenario A — Negotiated De-escalation (~30%)

Backchannel talks produce a framework agreement by early April. Iran agrees to phased Strait reopening in exchange for a halt to energy infrastructure strikes and a pathway toward broader negotiations. Brent retreats to $75–85 by end of Q2, settling near $70–75 by Q4 as flows normalize. GDP drag is contained to roughly -0.3 to -0.5 percentage points for full-year 2026. Headline CPI spikes to 3.0–3.5% in Q2 before moderating. The Fed holds through June and delivers one or two 25bp cuts in H2. Recession is avoided. Key trigger: Any confirmed in-person meeting between US and Iranian representatives, or a visible increase in Hormuz tanker transits from the current 4–5 per day toward 20+.

Scenario B — Protracted Standoff (~45%)

The most likely outcome. March 28 passes without resolution. Trump may extend deadlines, impose limited additional strikes on non-energy targets, or begin selective strikes while claiming a phased approach. Iran maintains the Strait’s contested status using mines, drone threats, and the $2 million per-transit toll it has already imposed. The conflict shifts from intense kinetic operations to a grinding attritional phase. Houthi entry becomes probable, extending maritime disruption to the Bab el-Mandeb. Brent oscillates in a $95–120 band through Q2, with spikes above $120 on escalation headlines. A sustained $30–40 increase from pre-war WTI levels implies -0.30 to -0.40pp of GDP drag and +0.84 to +1.12pp on headline CPI. Core PCE reaches 2.8–3.2%. Recession probability rises to 35–45%. The Fed remains frozen — unable to cut into rising inflation, unwilling to hike into weakening growth. Key trigger: Houthi military action in the Red Sea or Bab el-Mandeb, or further Iranian drone strikes on Saudi Arabia’s Yanbu bypass port.

Scenario C — Escalation Spiral (~25%)

March 28 passes and Trump orders strikes on Iranian power plants and energy infrastructure. Iran retaliates by mining the entire Persian Gulf, striking Gulf state desalination plants (90%+ of freshwater supply), and ordering Houthi attacks on Red Sea shipping simultaneously. Brent breaches $130–150, potentially exceeding the 2008 record. Goldman’s extreme scenario envisions daily prices above $147. Gas prices nationally exceed $5.50–6.00/gallon. Recession becomes the base case: Dallas Fed modeling shows oil at $132 by year-end with growth remaining negative. The Fed faces a Volcker-era dilemma. Credit markets, currently showing modest stress (HY spreads at the 38th percentile), widen violently. Key trigger: Any strike on Iranian power generation infrastructure — Iran’s explicit threat to mine the entire Gulf in response makes this a bright-line escalation event.

Note: These three scenarios sum to roughly 100% of estimated probability. A 5–10% residual tail of outcomes outside this framework exists — most notably regime collapse in Tehran, a Chinese-brokered grand bargain, or a direct Iranian nuclear test — each carrying non-linear market implications that resist probabilistic framing.

Decision-Relevant Signposts

The single highest-leverage variable is the physical status of the Strait of Hormuz. Windward and Lloyd’s List Intelligence provide near-real-time tanker tracking — any sustained increase above 20 transits per day would confirm de-escalation before official announcements. Beyond that: the March 28 deadline outcome, any Houthi belligerency declaration, the April 5 OPEC+ meeting (spare capacity sits on the wrong side of the Strait), and the April 28–29 FOMC (the Fed’s next decision point on whether oil-driven inflation merits a hawkish pivot).

What This Means for Long-Term Allocators

The range of plausible outcomes over the next 60 days is unusually wide — spanning from a swift normalization that unwinds the oil risk premium to a sustained supply crisis that tips the US economy into recession. For institutional investors with multi-decade horizons, the analytical frame matters more than any single scenario: the most decision-relevant variable is not oil prices themselves but the duration of the Strait’s disruption, which determines whether the shock is a transient repricing or a structural regime change in energy, inflation, and growth. History favors the transient outcome, but history has never seen 20% of global petroleum transit shut simultaneously for this long.

End Notes

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Executive Summary

• 2026 is “game time.” The year ahead should help answer whether the One Big Beautiful Bill (OBBB) supports growth and disinflation, whether deficits can be reined in, and whether the AI boom is durable—or a bubble.
• OBBB could be a net positive for growth and possibly inflation. We expect tax cuts and investment incentives to support jobs and productivity, potentially keeping inflation contained and giving the Fed room to ease.
• The budget deficit remains the biggest long-rate risk. With U.S. debt cited at approximately $38.4T by year-end 2025 and still rising, we remain cautious on long duration and mindful of dollar risk.
• Tariffs may change form, but the peak shock has likely passed. Even if current tariffs are overturned and later re-implemented under different authorities, we expect the worst of the tariff impulse is behind us.
• AI remains in the middle innings, but scrutiny is rising. Hyperscalers’ 2026 capex is cited at approximately $550–$600B and potentially much more in aggregate, meaning markets will increasingly demand proof of broad adoption and real returns.
• Outlook and positioning remain constructive, with more volatility. We expect a more two-sided equity market with bigger swings and mid-single-digit gains as a base case, while staying fully invested and close to policy targets. We are modestly overweight healthcare, roughly market weight “Mag 7,” short fixed-income duration, with a slight underweight to the U.S. dollar.

Game Time

Happy New Year! At least that is our hope as we turn the calendar to 2026. While we are optimistic, we are not certain that capital markets will maintain the same excellent streak they’ve enjoyed since 2022. The year ahead may be when we find out if the administrations’ One Big Beautiful Bill (OBBB) actually helps the economy and brings down inflation (we still believe it can), whether U.S. budget deficits can be reined in relative to GDP growth (we doubt it), and finally whether markets are in an AI bubble or if AI can justify all the “pre-game” hype (we are cautiously optimistic).

Because the OBBB cuts taxes for both households and businesses and provides more generous investment incentives, we remain optimistic about prospects for the U.S. economy. Arthur Laffer once asked, “If I tax you 100%, would you work more? If I eliminated your taxes and let you keep everything you make, would you work more?” Everyone in the room agreed that this was not a realistic choice, but that if it was, they would work more if they got to keep more.

We are hopeful that people still feel this way and that the economy will have more people working and more investment supporting these additional jobs. In particular, it would be nice if by exempting taxes on tips and certain overtime, combined with certain child- and work-related credits, the OBBB could help reduce pay inequality. Naysayers don’t bother us; in today’s world, it seems no program can please all of the people. We remain optimistic about the OBBB.

If the economy does remain solid—or accelerate some as the previous paragraph optimistically intimates—it is possible that inflation stays tame. As Milton Friedman famously said, “inflation is always and everywhere a monetary phenomenon.” Translated: it is too much money chasing too few goods. By stimulating investment and jobs, productivity can rise, and the supply of goods hopefully grow at least as quickly as demand. This is a balancing act that could result in stable or even slightly lower inflation levels, which would allow the Fed to reduce short-term rates some. Additionally, and importantly, just as the internet build-out led to higher productivity in the late 1990s and early 2000s period, AI has similar potential to similarly increase productivity.

Prospects for a New Productivity Upswing: Evidence from Historical Periods1

As we write, markets are anticipating the Fed to cut short-term rates by 25 basis points two more times by September 2026. Normally, when the Fed reduces short-term rates, mortgage rates and other borrowing costs fall as well, stimulating further economic growth. Our fingers are crossed that this benign environment can eventuate as it would likely not just be good for short-term interest rates and the economy, but also for the bond and equity markets.

The Setup: Deficits, Tariffs, and Inflation

Much of what we hear on tariffs is that they are likely to be over-turned ruled by the U.S. Supreme Court. It isn’t clear whether the government would be required to provide refunds, but tariffs are unlikely to be allowed as structured today. We fully expect the administration to implement a revised version of tariffs under a new executive order, using different emergency powers or trade acts. Regardless, we expect that we’ve seen the worst of the tariff and that is a good thing. With that policy backdrop, the key market question is what all of this means for inflation and interest rates.

In general, bonds are pretty simple. If a three-month Treasury bill yields 4% and rates are not expected to decline, then a six-month T-bill will typically yield a little more than 4% due to the slightly longer duration. The same principle applies to a 12-month T-bill relative to a 6-month and extends all the way to the 30-year Treasury bond. When investors expect rates to rise or fall based on expected changes in future inflation, the shape of the yield curve can change. Lower rate expectations typically bring the entire interest rate curve lower and vice versa.

So, the yield curve is mostly math plus expectations, which brings us to our biggest concern about long-term rates today: how much debt the U.S. will issue, and what investors will demand to finance it.

The massive pile of U.S. debt continues to grow, reaching $38.4 trillion by year-end 2025. According to the Congressional Budget Office (CBO), debt growth of $1.9 trillion in 2025 will accelerate to $2.6 trillion by 2035, with total debt expected to reach $138 trillion by 2055. At the current pace, we are expected to add $100 trillion in debt in the next 30 years. This level is expected to equal an estimated 156% of GDP in 2055, up from approximately 100% today! In our minds, this is not sustainable.

This also explains why markets are nervous about U.S. dollar risk. Historically, rather than make the hard decisions about how to balance a country’s budget, politicians have taken the “easy” path—inflating their way out. Devaluing the currency hurts everyone, but bondholders get hurt the worst as they are repaid in less valuable currency than expected. This simple fact keeps us nervous about letting our duration get too long. We remain cautiously positioned today at 4.25 years versus roughly 6.10 years for the Bloomberg Aggregate Index.

All this said, any progress on lowering inflation would be good for bond prices, and if the OBBB were to help bring some balance to government financing, it could lead to lower interest rates than we currently expect. The reasonably low starting interest rate of 4.1% on the 10-year Treasury, however, causes us to believe that even in that environment, extending duration is unlikely to prove helpful for future returns. As we’ve said before, if/as rates move higher, we would be inclined to extend our duration marginally.

The Deficit is Rising Higher and More Quickly than Ever Before2

Another factor shaping the longer-term outlook for inflation and interest rates is the scale of investment our trading partners have proposed in the U.S. Many of these commitments may take years to materialize—if they materialize at all—but those that do could influence growth, inflation, and capital demand well beyond this administration.

A meaningful share of this spending is likely to support the physical build-out required to stay competitive in AI. Leadership in AI will require far greater power generation and grid capacity. Current estimates suggest that roughly $1.1 trillion will need to be invested by 2029 to meet projected AI-driven electricity demand of 123 gigawatts by 2035, up from 4 gigawatts in 2024. Progress on permitting and regulatory reform—also promised in the OBBB—will be critical to enabling this build-out.

AI: Middle Innings or Bubble?

Our optimistic equity outlook has served us well over the past three years. As we enter 2026, we remain constructive, but with greater caution. We expect a more two-sided stock market, with larger swings both up and down, ultimately pointing to mid-single-digit gains. That said, outcomes could deviate meaningfully: a strong or weak finish could shift returns by 20% in either direction, or we could simply be wrong in our assessment. Let us explain.

The late-2022 announcement of ChatGPT may have been the catalyst for the 2023 advance and has continued to power markets since. Elon Musk recently claimed that in 10-20 years, work will be optional, like growing your own vegetables is today. Not mandatory, but a choice. He believes AI and robotics will create an “age of abundance” in which goods and services become nearly free. While this may or may not prove true, it has investors thinking that the rewards of backing the right companies could produce huge profits in the stock market. The largest and most profitable companies in the world are now spending more on building out datacenters and AI capabilities than would have been imaginable just three years ago. Each company views winning in the AI race as existential.

Something similar happened 30 years ago when the internet captured investors’ imaginations. A group of tech companies spent heavily to build out the internet. It ended up producing enormous benefits for society, but also a bubble in stock market values that later collapsed. The leading stock at the time, Cisco Systems, rose to $82 per share in March 2000 from $0.14 in January 1991. While Cisco has been a successful company over the last 25 years, it has yet to reclaim its 2000 high.

This concern exists today for some of the leading AI companies. After three years of strong gains, we expect to glean some clarity in 2026 on whether or not this technology and these companies are real and can change the world, or whether this is another bubble similar to the internet boom. We expect more back and forth in 2026 than we’ve seen to this point.

Mag 7 valuations are elevated and have pulled overall market valuations higher. Strong earnings growth has thus far justified the premium, with expectations for continued growth into 2026. As long as these companies deliver, both they and the broader market can keep moving higher. The risk, of course, is that growth slows. High valuations, paired with moderating earnings and significant capital spending, would represent a headwind for both the group and the broader market.

At some point, that scenario is likely, but we believe we are still in the middle innings of the AI cycle, not the later ones. Ultimately, AI has the potential to become ubiquitous in cars, robots, and beyond. If GDP is a function of the size of the workforce multiplied by productivity, and robots can increasingly perform human tasks, then GDP growth could rise well beyond current limits. Such an outcome could usher in an age of abundance marked by stronger growth and lower inflation.

That doesn’t mean stocks will go straight up. We expect this year will be more two-sided, with the bull argument and the bear argument each dominating at different times. All the talk about what AI can and will do will be more carefully scrutinized by investors. The massive sums of capital being invested will need to produce returns to justify further investment. Without justification, investors may move to the sidelines, and the stocks could decline. Capex projections for hyperscalers in 2026 are approximately $550-600 billion. Including other participants, capex could reach as much as $2 trillion by some estimates. Without signs of broader adoption across corporate America and beyond, this level of spending will likely trigger a retrenchment in stock prices.

Balancing Elevated Valuations with Record Capital Spending3

It’s hard to be certain how the year may unfold, but we do believe one side of this debate may be in vogue for a time, only to be replaced by the other later in the year. This dynamic could repeat more than once. When we get to the end of the year, we don’t think it will be “decided”, but we do think we will be closer to understanding whether AI is a bubble or possibly the most important development of our lives.

Regardless, we start 2026 with very high valuations and expect that downside moves could be larger than we’ve seen in a few years. We are also aware that the last three years have been particularly strong, producing three-year compound SPX returns north of 20%. The last periods with comparable returns were 2021 and 1999, which were both followed by bad equity markets in 2022 and 2000. This doesn’t mean stocks will fall but does remind us that if fundamentals do change, markets have come a long way and could retrace some of those gains. In the end, modest inflation, an easing Fed, a resilient consumer, and expected low-double-digit earnings growth cause us to believe that when we ring in 2027, we will be capping another positive year—though possibly one that requires some hand wringing along the way.

Finally, on this subject, we regularly remind ourselves that markets are rational, even if investors sometimes are not. The market looks forward and discounts earnings back to a current value of expected future earnings discounted back at an appropriate risk-adjusted rate. High current valuations are not a reason to sell stocks, but they are a good indication that if expectations are not met, the potential downside may be larger than average. As long as the future continues to get brighter, stocks can continue to rise.

The more investors doubt that stocks can rise, the more cash on the sidelines waiting for a pullback. If stocks don’t pull back, then one by one those sidelined investors re-enter the market and push prices higher. Once everyone (proverbially) is fully invested and conditions change, that is when the market peaks and begins its decline. This is what makes calling tops so difficult.

As we move through 2026, we won’t be trying to call a top per se, but we do hope to rebalance out of winners and into underperformers, and vice versa, at appropriate times. Rebalancing and dollar cost averaging are your friends. We try not to forget that.

Today’s Positioning

Today we remain fully invested and broadly aligned with our strategic asset allocation targets for our client portfolios. We are not taking any meaningful geographic over- or underweights versus well-known indices. Within equities, we hold a modest overweight to healthcare—a sector that has lagged in recent years but one we believe could benefit from AI adoption. We also think RFK-related concerns have largely peaked, creating room for valuations to improve. Our position in the Mag 7 is roughly market weight; these companies continue to generate substantial cash flow to fund future investment, and in our view, at least one or two are likely to be long-term winners if AI unfolds as expected.

In fixed income, we continue to run short duration and maintain a slight underweight to the U.S. dollar, given our fiscal concerns.  Our hedge fund portfolios are again expected to provide better returns with similar or better ballast than fixed income.

2025 was another good year for markets—the third in a row. Here’s to a solid 2026 as well, even if we expect a bumpier path and a few more lead changes along the way.

As always, we greatly appreciate the opportunity to manage your capital and help you achieve your organization’s goals. We are here to assist so please feel free to reach out with any questions or needs.

Your TIFF Investment Team

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Executive Summary

• U.S. exceptionalism remains intact: We continue to see the U.S. as the world’s economic leader and believe equities remain the most resilient long-term store of value. We are mildly underweight bonds (both notional and duration-adjusted) given fiscal concerns.
• What other markets teach us: Argentina and Turkey’s stellar local-currency returns are not signs of economic health; currency depreciation tells the fuller story. When translated to USD, their markets no longer outpace the U.S./ACWI, yet equities there still delivered positive real-asset exposure through turmoil.
• Deficits and dollar risk warrant attention: The U.S. must sell roughly $2T of new debt each year. If foreign demand wanes, rates could rise and the dollar could weaken. That would slightly reduce the appeal of U.S. stocks for foreign buyers and could pressure bonds.
• Practical safeguards: Sensible steps include reviewing dollar exposure, maintaining global diversification, and holding proven real-asset hedges like gold; bitcoin may also play a limited role for some. Even so, owning equity remains the most universal hedge against inflation and currency decay.
• Current positioning: After ~30% gains from April lows, we are at target equity exposure and carry modest equity puts as inexpensive insurance into typical September–October chop.

U.S. Exceptionalism, Risks, and the Case for Equities

Despite unsettling headlines, we believe United States exceptionalism endures. As we wrote last quarter, we believe the U.S. will remain the economic leader of the world for the foreseeable future and that leadership will continue to translate into strong long-term returns. While U.S. fiscal deficits and potential pressure on the dollar deserve attention, and those concerns cause us to be mildly underweight bonds (on both a notional and duration-adjusted basis), we still see equities as an effective and resilient long-term store of value.

Lessons from Abroad

Below is a table of the best-performing stock market indices over the past 20 years, with returns denominated in local currency. For comparison, we have also included the S&P 500 and the MSCI All Country World index (both denominated in U.S. dollars). As shown in the table below, ACWI and the SPX have produced compound returns over that stretch of 8.4% and 10.0%, respectively, which is better than most investors expect going forward.

Net Total Return Local Index (Net of Dividends) Ended July 31, 2025

The two top-performing markets on this chart, Argentina and Turkey, have significantly outperformed the global and U.S. benchmarks, but their story is not one of economic strength.

Argentina’s experience is instructive. Chronic fiscal deficits, runaway inflation, and repeated currency crises drove the peso from roughly 3 per U.S. dollar to roughly 1,400 to 1! Over the past 20 years, living standards have fallen sharply, savings have been destroyed, and confidence in the currency has evaporated. In recent years, the peso lost nearly all credibility as a store of value, with many Argentines preferring to transact in U.S. dollars or other hard currencies whenever possible. This cycle of crisis and inflation repeated multiple times over two decades, preventing lasting stability and demonstrating the importance of strong fiscal and monetary institutions for currency stability.

The U.S. Dollar and Deficit Risk

However, the U.S. is not Argentina. Our institutions are stronger, our economy far more dynamic, our currency is still the world’s reserve, and most major commodities are transacted predominantly in U.S. dollars. That said, persistent deficits create risks. The U.S. government must sell roughly $2 trillion in new debt each year. If foreign demand weakens, higher interest rates and downward pressure on the dollar could follow—reducing the appeal of U.S. debt and eroding purchasing power for bondholders.

The chart below shows the long-term trend of the U.S. dollar (with DXY measuring its general international value by averaging its exchange rates against major world currencies). Today the dollar sits near its long-term average value versus major peers, suggesting to us that the U.S. dollar is somewhere near fairly valued. Confidence remains solid, but fiscal discipline will matter.

We are concerned that if the fiscal situation is not addressed, three impacts may follow. First, the U.S. dollar could depreciate, which would imply that we, as global investors, should increase our international holdings—a step we have not taken to date. Second, the U.S. stock market could become marginally less attractive as foreign investors worry about stock market gains being offset by currency losses. Finally, bonds could sell off, in some cases materially.

Ways to Try and Safeguard Your Capital

Investors do have potential shelters to turn to. Throughout history, investors have looked to real assets when currencies waver. Gold, for example, has risen nearly ninefold over the past 20 years, roughly matching the performance of U.S. stocks. Bitcoin, though newer and more volatile, has also gained some acceptance as a store of value outside government control.

While we believe modest portfolio adjustments, such as examining dollar exposure, maintaining a global portfolio, and owning “safe havens” like gold and bitcoin as a hedge against possible dollar depreciation may be beneficial, we still view equities as the most practical and universal hedge. Investing in stocks may be the simplest way to hedge against inflation, however, because stocks offer exposure to real economic growth, pricing power, and global demand. They allow holders to participate in the hard work and innovation of employees and to benefit from the pricing power that companies can exercise.

The same chart from above, with returns adjusted into U.S. dollars (see below), shows Argentine and Turkish stocks no longer exceeding the U.S. or ACWI. Yet even these countries’ economically challenged markets have delivered positive returns in the face of massive uncertainty. Unlike bonds, which can be eroded by inflation and currency depreciation, equities have shown resilience—even in countries facing deep crises. And global investors tend to reprice companies toward fair value, creating a natural hedge against local currency weakness.

Net Total Return Index (Net of Dividends) Ended July 31, 2025

This is not to suggest that buying stocks in markets with depreciating currencies is the first choice of global investors. Other risks—such as political stability, capital controls and other governmental intervention—can cause large swings in realized returns over certain periods. It does suggest, however, that if it is possible to make money in equities in Argentina and Turkey in both local and U.S. dollar terms, then it certainly is possible to remain confident even when some pundits claim America has lost it exceptionalism or that foreigners may no longer want to own U.S. assets the way they once did. Stocks are still the asset we consider the most resilient and reliable generators of superior long-term real returns. And we fully expect the United States to maintain the conditions for companies to flourish here.

Our Positioning Today

Markets have been very kind for the past four months, gaining 30% from April’s lows. While we remain constructive and fully at target equity exposure generally, we are mindful of seasonal volatility and policy uncertainty. Historically, if something is going to go wrong, it tends to happen in September or October. As a result, we hold modest equity puts as inexpensive insurance.

Looking beyond the near term, we see supportive conditions for equities. November and December have historically been the strongest back-to-back months of the year. A combination of “revolutionary” new technology (AI), a decent economy, and an easing Fed could be a terrific recipe for higher stock prices.

Closing Thoughts

We remain confident in the United States’ global leadership position, cautious on government debt (including that of the United States), and constructive on equities as the most reliable source of long-term real returns. Deficits and dollar risks should not be ignored, but history and evidence suggest that owning businesses—through equities—remains the best way to preserve and grow wealth over time.

As always, we greatly appreciate the opportunity to manage your capital and help you achieve your organization’s goals. We are here to assist in any way possible, so please feel free to reach out to us with any questions or needs.

Your TIFF Investment Team

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Executive Summary

• Q2 saw significant market volatility, including an 18.9% S&P 500 drop over 49 days—comparable only to COVID-19, the Lehman collapse, and the 1929 Crash—though markets have since rebounded as investors price in more optimism than media and expert commentary suggests.
• The U.S. fiscal outlook is deteriorating, with the “One Big Beautiful Bill” projected to increase the federal deficit by $2.7 trillion over the next decade, and a sustainable path will require multi-pronged, gradual deficit reduction over many years.
• Foreign investors are beginning to question U.S. exceptionalism due to expensive markets and a strong (but weakening) dollar.
• Despite negative headlines, economic fundamentals remain solid: Q2 GDP is forecast at 3.4%, job creation continues at 120k/month, inflation has eased to 2.4%, and wage growth exceeds inflation—suggesting resilience and room for cautious optimism.
• Tariffs remain a risk with Trump’s planned July 9 actions, but TIFF anticipates they will be diluted and resolved by year-end.
• Proposed endowment tax changes (raising the rate to 8%) could force institutions to seek greater liquidity and rebalance portfolios, creating short-term buying opportunities and increased access to top-tier private equity and hedge fund managers.
• TIFF’s portfolio remains close to its strategic allocation (65% equities / 20% hedge funds / 15% fixed income), with neutral regional and sector exposures and a strong focus on manager alpha to drive returns.

It’s Not Over Yet

We have been expecting above-average volatility, and we got it this quarter. DOGE appears to have ended with very little actual budget impact and Trump’s proposal for next year’s budget has done nothing to help the deficit trajectory. The Congressional Budget Office (CBO) estimates that if enacted, this would add $2.7 trillion to the federal deficit over the next 10 years. Most other reputable forecasts are somewhat higher than this estimate, but when the baseline is $21.1 trillion, the increments seem less significant. The US remains on an unsustainable path unless meaningful steps are taken to address rising debt and persistent deficits. We have been numbed from the exorbitant levels since the Great Financial Crisis. The largest ever annual deficit before 2008 was -$413 billion (a huge number itself!) with a median deficit of ~-$200 billion. The smallest annual deficit since 2008 was -$438 billion, with a median of ~-$1.1 trillion (2024 is estimated at -$1.9 trillion). That represents 6.5% of estimated GDP—in a decent economy! But comparing the deficit to the overall GDP mixes an “income statement” loss (deficit) to a related, but merely referential, total economic number (GDP). A fairer comparison is to compare the deficit to the actual revenue of the government of roughly $5.0 trillion in 2024. On that basis, the US is spending roughly 40% more per year than it receives in receipts.

The Congressional Budget Office Estimates a $2.7 Trillion Deficit Impact by the One Big Beautiful Bill Act, as Passed by the House of Representatives on May 22, 20251

We need to take action to try to get off this path, potentially soon. Time is running out. Getting out of this will be like shortening a 3-legged stool. You can’t cut one leg off, or the stool tips over. The only way to do it is to shorten one leg by two inches, another by two inches, and finally, the third by two inches. You repeat this process as many times as needed to achieve the desired height. It will likely take a decade or more for our country to return to something that can be sustained for future generations.

Success for the US economy will look something like 3% GDP growth, a budget deficit of 3% of GDP (so that as a percent of GDP, the debt quits growing—similar to how each of us can handle more debt as our income and assets grow). Throughout this, we need to keep productivity high, which means inflation must also remain under control. This is a tall task, for sure, but one we must attempt to tackle. The sooner the better; the later, the more painful. Markets can move quickly and violently to impose discipline, as observed in 2022 in the United Kingdom.

The big question, then, becomes whether the proposed budget, if passed, will enable us to achieve this target. We don’t know. Will it break the proverbial stool? Can we stay on track and not give up along the way if it (or something else) can get us there over some number of years? This is the challenge of our times. Whether it’s this or some other plan, we need to become unified in our goal of improving our financial situation. If we don’t, the capital markets will, and possibly in a much less comfortable way.

The continuing deficit is one of several reasons that the markets today are asking if US exceptionalism is over. Other concerns include expensive US capital markets relative to other countries and a potentially overvalued dollar. Believers are speculating that this means the US is, therefore, a less attractive investment destination for foreigners, who may be starting the process of bringing some of their capital back home. If true, this could be a long, slow process that pushes the US share of global stock markets (65%) down toward something closer to our share of global GDP (25%). It won’t happen all at once, and it won’t likely push our share of markets that low, but directionally, it would mean that other markets will mostly outperform ours for years to come. If the USD also loses global purchasing power, then Americans planning a European vacation will need to save a little more than they do today. As believers in the US and our economy, we remain adherents to Warren Buffett’s suggestion to “Never bet against America.” As global investors, we also have an ever-changing benchmark and will therefore not get too far out of step with whichever path proves correct in the coming years.

US Dollar Index Against a Basket of Currencies Has Shown Strength Since the Great Financial Crisis but Has Recently Dipped2

What Next

As for things more near to hand, the last quarter was the most volatile in a while. From its February 19 high to its April 8 low, the S&P 500 sold off 18.9%. According to Perplexity.ai, this has only happened in fewer days three times—during COVID-19, the Lehman collapse that punctuated the GFC, and the 1929 Crash that started the Great Depression. Not the sort of company one wants to keep. This may be why most TV news commentators, economists, and market prognosticators all sound so negative. Every night, we hear that a recession is coming along with higher inflation.

Why, during this time, are equity markets doing so much better? As we’ve said before, the stock market is a forward-looking, discounting machine. It dispassionately takes account of what is happening in the economy, politics, geopolitics, and other relevant areas, and estimates how that will ultimately impact the forward earnings of companies whose stock is traded on the exchanges. Investors are looking forward and seeing a brighter future than the prognosticators. We, too, are more optimistic.

Despite all the naysayers, the economy continues to hold up, at least so far. Real quarterly GDP growth was -0.5% in Q1 this year, primarily due to US businesses purchasing much more from abroad than they exported (likely looking to get ahead of tariffs), thus contributing -4.8% to Q1 GDP. Happily, the latest Atlanta Fed Q2 GDP forecast (based on data through June 18) is for 3.4% growth. US GDP forecasts for the year 2025 range mostly between 1.4% and 1.9%. Similarly, the number of jobs created this year continues to surprise to the upside, averaging 120k per month. This is just enough to keep the unemployment rate roughly stable around the 4.25% level. And finally, CPI inflation recently came in just 2.4% higher than last year, down from 2.9% at year-end. Meanwhile, year-over-year personal income growth through April 2025 is 2.94%. We are trying to stick to reading the numbers and not listening to more qualitative assessments. So far, at least, our read is that the economy and job creation continue to be solid, and the markets agree.

Lastly, regarding the Middle East war, our take on direct US involvement is balanced. As we write, the direct hit on Iranian nuclear facilities appears to have been successful at minimizing (still no IAEA confirmation) their potential nuclear threat for quite a while. This would be good (US stocks rose 2% in the two days after the strikes). World leaders are nearly unanimous that Iran should honor the treaty it signed and not become a nuclear power. This could portend a very positive future for the Middle East if it leads to Iran becoming a peaceful country, working to improve its citizens’ lives as most other countries in the region seem to be doing. In the short run, however, we don’t know if Iran or its proxies have cyber capabilities, sleeper cells, ballistic missiles, or anything else up their sleeves that could be used in a scorched-earth effort to remain in power. The next few months will be very important for the entire region. The good news seems to be that Russia and China are not coming to Iran’s aid (nor is anyone else), suggesting this could be the start of a brighter future for Iran and the entire Middle East.

Looking Ahead

Following his 90-day pause on “reciprocal tariffs,” Trump plans to enact specific new tariffs on 57 countries starting on July 9. If the administration’s use of current statutes is declared illegal, it will likely try other legal approaches to pursue the administration’s goal of imposing tariffs (note: we’d generally prefer not to have tariffs—as we consider tariffs to be taxes, and taxes slow the economy). For this reason, we aren’t yet out of the tariff woods. We are, however, starting to see that tariffs are very unlikely to remain anywhere near the levels Trump announced on “Liberation Day.” This is good. While July 9 may bring short-term market volatility and is unlikely to mark the end of the story, we remain confident that tariff negotiations will conclude by year-end. We also believe that in the second half of this year, Congress will pass a budget (the “One Big Beautiful Bill”) that keeps taxes low and will begin to reduce regulation. Both of these will be welcomed by markets in our opinion. As the uncertainty and, hopefully, the volatility subside, we expect to see more investors becoming optimistic about the future and stock prices working their way somewhat higher. Longer-term, AI will accelerate growth and improve the efficiency of almost everything. Self-driving cars (try a Waymo in San Francisco and you’ll love it) could become common this year, and in another few years, humanoid robots will break onto the scene. We may not all like these advancements, but businesses that embrace them will become more productive and profitable than those that don’t. This could improve GDP growth and help us get our deficit under control. We keep looking for hopeful ideas on this front, and for now, this seems to be our best remaining hope.

On the fixed-income side, our views on the deficit picture probably gave you a good idea that we still prefer hedge funds. Hedge funds should continue to perform better as a group than the Bloomberg Fixed Income Aggregate, and they provide much better alpha opportunities than fixed income. Our duration remains just short of 5 years vs. our benchmark at approximately 6 years. We would love to trim duration if yields on the 10-year Treasury get to 4.25% or below. Conversely, if yields get to 4.75% or so, we expect to add duration. We continue to anticipate the 10-year will trade in a 4.25% to 5% yield range this year. We will likely buy at the higher yields and sell at the lower yields. Interest rates will be impacted by the US budget and deficit progress (or lack thereof), as well as inflation changes—whether higher (as most expect) or lower (as a few expect). Nevertheless, there is better value in fixed income today than in many years.

Meanwhile our hedge fund portfolios continue to do well for us, and we like our manager roster. The proposals to raise the tax rate that “wealthy endowments” pay (to as high as 8%) could create opportunities for TIFF. While the opportunity is smaller now than it would have been at the originally proposed 21% rate, affected endowments may still look to reduce their tax burden. This could lead them to (1) move away from high-turnover hedge funds or (2) sell private investments now to avoid future gains taxes and create liquidity for rebalancing their private book.

Our eyes are wide open for opportunities to upgrade already strong manager rosters across all our portfolios.

For now, we remain very near our strategic asset allocation targets of 65% global equities/20% hedge funds/15% fixed income. We are also quite neutral relative to geographic and stock market sector weights, relying heavily on manager alpha to drive positive relative performance. Fingers crossed; this strategy has been beneficial so far this year, and today, we don’t see a compelling opportunity that would cause us to change from this positioning.

Where’s the Big Opportunity of the Future?

A number of people have started asking if the current chaos is creating opportunities that we believe could prove helpful in coming years. We mentioned some possibilities above when discussing how the proposed endowment tax changes could create access to new managers. Below, we will address the question in greater detail. TIFF will have our own favorite approach to tackling this potential opportunity, but our goal here is to outline which asset class/assets could generate better-than-average returns over the next 3-7 years. Let’s dig in.

Over the long run, different assets provide generally different returns. Money markets, for example, usually provide the lowest returns with the least risk and lowest volatility of annual return. Next up are bonds, where returns are usually a bit higher than money markets but they can be more volatile and you can lose money from time to time. Hedge funds are riskier and, in our opinion, higher returning investments. Public equities typically provide even higher returns, while private generally equity offers the highest return, but also carries the most risk. One of the features that makes private equity riskier than public equity is its lack of liquidity. When events conspire against the capital markets and you want to step aside, it’s only possible if your holdings are liquid. You might be able to sell your illiquid private equity holdings, but usually only at a steep discount.

This is why we own some illiquid private investments, but we try to limit our ownership to 1/3 or so of a portfolio. We like the higher expected returns but understand and incorporate the higher risk that comes with illiquidity. Others are willing to take much higher illiquid exposure than this and that could be presenting an opportunity today.

The Proposed One Big Beautiful Bill (OB3) Endowment Tax

The OB3 proposal introduces a progressive, tiered tax schedule on private higher education endowments (up to 8% from current 1.4%). We’ve written an overview of the latest Senate draft tax proposal [here] for the details. The proposal represents a substantial change in higher education taxation that, when coupled with possible modifications in other higher education governmental funding and student eligibility, could impact private markets in both the short and long terms.

In the short term, impacted investors may look to increase liquidity and rebalance portfolios. In the long term, impacted institutions may look to (1) increase their expected returns to offset the tax drag and/or (2) look to defer any potential tax liability by seeking long-hold assets.

We anticipate two possible short-term outcomes from these:

1. Increased use of secondary markets as institutions:
   • Rebalance portfolios in light of the tax
   • Manage the increased financial burden on endowment
   • Create potentially interesting buying opportunities on the other end of those transactions
2. Availability of capacity at some previously closed PE (and HF) managers as impacted endowments augment liquidity to new higher levels reflecting the new higher annual draw.

If this happens, we will try to add attractive managers to our roster, which we already like a lot.

Over the longer term, we expect affected endowments will find the right level of illiquidity for the new endowment environment. They will likely attempt to stay toward the higher end of target illiquidity levels by:

1. Tilting asset allocation toward return-enhancing alternatives like private equity
2. Preferring longer-hold assets aligning with private equity’s time horizon
3. Minimizing annual taxes by overweighting those that generate long-term gains taxed at lower rates, rather than consistent taxable short-term gains

In addition to the long-term role private equity will play in E&F’s, the “democratization” of PE is very likely to bring retail investors into this market as new buyers. New products that allow for smaller investors to invest in illiquid assets are emerging both in the US and Europe as regulations and structures increase the range of potential investors in this space. Over time, some estimates are that up to half of illiquid demand will come from this new source. We tend to believe that retail capital will flow to larger PE firms with more fundraising resources, which could further compress returns in larger cap PE strategies. However, this should provide a boost to smaller PE managers, who will eventually sell their portfolio companies into this market and be able to capture greater levels of multiple expansion at exit.

Our main conclusion here is that traditional PE investors may right size now, but they likely won’t abandon the consistently highest-returning asset class. Meanwhile, new investors who are gaining access could become a big source of demand in the future that will benefit returns in some parts of the private markets. In our view, private equity still benefits from some structural advantages, such as the ability to align interests, add value to portfolio companies, think more long-term than many public companies, get term leverage, and choose when to be fully invested. Private equity is thus likely to remain the best performing asset class in the future.

We started by highlighting that PE generates the highest and riskiest return stream. Below is the other factor that causes us to believe that now may be a better-than-average time to invest in PE. The chart below shows the annual PE return (blue bar) and the rolling 10-year performance vs. public equities (green dots). You can see both the excellent long-term performance and the uniquely poor last two years—the worst back-to-back returns in the last 22 years. In previous episodes of poor performance, subsequent years were recovery years. So far, that hasn’t happened this time.

1 Year and 10 Year Excess Return of Cambridge Associate PE & VC Index vs. MSCI ACWI3

We are not forecasting a monster year, but we do expect that the inherent advantages of PE noted above should continue to prove valuable to returns.

There are many nuances that our private markets team incorporates into their efforts to exploit opportunities that we’ve mentioned. However, we want to go on record suggesting that we believe today is as good a time as we’ve seen to consider increasing PE exposure if it fits your plan. In our opinion, we may look back on this period in 5-7 years as an unusually good opportunity. We also note that despite our views, timing PE is notoriously difficult due to the impossibility of knowing the investing environment for the next 4-5 years and the exit environment for the subsequent 5 years or so.

As always, we greatly appreciate the opportunity to manage your capital and help you achieve your organization’s goals. We are here to assist in any way possible, so please feel free to reach out to us with any questions or needs.

Your TIFF Investment Team

These materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Executive Summary

• Swift changes implemented by the Trump administration have led to increased market volatility and uncertainty.
• Recent tariffs imposed by the US on Canada, Mexico, and China have created significant economic uncertainty and negatively affected markets as we approach the April 2nd reciprocal tariff announcements.
• Economic indicators have weakened, with GDP growth expected to slow down and inflation predicted to rise, suggesting a challenging economic period may lie ahead.
• The administration’s focus on deregulation, including a regulatory freeze and efforts to rescind existing regulations, is expected to lead to legal challenges and further market unpredictability.
• Despite all this uncertainty we highlight the importance of maintaining a long-term investment focus amidst short-term volatility and avoiding hasty decision-making; stay focused on your investment goals.
• With that in mind, we are maintaining our strategic asset allocation with 65% in the All Country World Index (ACWI), 20% in hedge funds, and 15% in the Bloomberg Aggregate Bond Index (AGG).

Fast and Furious

In previous letters, we’ve mentioned a quote attributed to Vladimir Lenin:

“Sometimes nothing happens for decades, and sometimes decades happen in a week.”

We were referring to the rapid impact of AI on our world. Since Donald Trump’s re-election and return to the White House, events seem to be accelerating faster than ever.

Every new president promises change, but none has delivered as swiftly as Trump has in his second term. It is worth noting that he signed 26 executive orders on his first day back in office and has reached 92 as of March 20, 2025, in addition to the 220 he signed during his first term. For comparison, Biden signed 160 executive orders in four years, Obama 276 in eight years, and Franklin Roosevelt holds the record with 3,721 over 12 years. Keeping up with these changes has been challenging and exhausting for most.

There is significant debate among intelligent and honest people about the effectiveness and potential outcomes of most of Trump’s ideas. As new ideas emerge and are debated, they naturally create more questions and uncertainty. We anticipated significant change under Trump, but the pace of change has been dizzying even for us.

Let the Chaos Begin

On March 4, 2025, Trump’s first tariffs on Canada and Mexico took effect, along with an additional 10% tariff on China. The reasons given for these tariffs were sometimes economic and sometimes to punish a country for allowing fentanyl and other harmful agents to come into our country. Canada and China retaliated, and Mexico was expected to announce retaliatory tariffs. Markets are reacting negatively. Many were surprised that Trump went through with the tariffs on Canada and Mexico, who seemed to be calling his bluff. Similarly, the February 28 Zelensky conflict at the White House cast doubt on the Ukraine/Russia peace process, as Trump temporarily halted US aid to Ukraine and upset our European allies. A few weeks later, most of these tariffs have been changed (and will be again on April 2), and Zelensky and Trump seem to be back on the same team, depending on the day. The apparent chaos of recent weeks is causing concern both domestically and globally and has increased market volatility. This is likely to continue as tariffs increase and negotiations everywhere on everything continue.

While Tariffs are Still Below Historical Levels, They are Reaching the Highest Levels Seen in Nearly 30 years

US Duties Collected as a % of Total Imports1

With the Exception of China, the US Tariffs on the Rest of the World are Still Rather Low, Meaning If the Trump Administration is Serious About Increasing Tariffs, We May Have a Long Way to Go

US Effective Tariff Rate by Import Source Country, 12-month Rolling Average2

The most important tariff day looks to be April 2, when the US government plans to announce reciprocal tariffs. As we understand this undertaking, whatever tariff (including, in some cases, V.A.T) a country charges us is the tariff we will levy back on them. Ironically, this could either result in tariff wars or in a free trade relationship, depending on what tariff a foreign country chooses to charge us. The cone of possible outcomes around this is wide, increasing uncertainty. Several economic indicators have recently weakened, compounding the impact of this uncertainty and suggesting a challenging period may lie ahead for the economy and markets. The Federal Open Market Committee recently revised expected 2025 GDP growth down by 0.4% to 1.7% and inflation (core PCE) up by 0.3% to 2.8%. They expect tariff inflation to be “transitory” and left rates unchanged, noting that uncertainty has increased.

The new administration also is focused on removing regulations. In addition to implementing a regulatory freeze pending review and halting all new regulations, they aim to keep the total incremental cost of all new regulations in fiscal year 2025 to “significantly less than zero.” Agencies are directed to identify and rescind regulations inconsistent with Trump administration policies, and for every new regulation proposed, 10 must be identified for repeal. This leads to many de-regulation efforts being challenged in court, slowing their impact and likely sending some to the Supreme Court. It is a busy, unique, and chaotic time in Washington. The desired changes could lead to significantly better or worse outcomes, keeping markets on edge.

The Department of Government Efficiency (DOGE), which we hope can reduce the US government’s annual deficit by eliminating waste, fraud, and abuse within the Federal government, is off to a mixed start. While the website “polymarket.com/doge” suggests they have already identified $115 billion in annual savings, the media focus has been more on Elon Musk and the number of jobs potentially impacted. A respected research service recently increased their estimate of government worker layoffs before July 4, 2026, to more than 10% of current employees. This adds to current economic concerns and raises questions about the follow-on impacts, further exacerbating market uncertainty.

US stocks have accordingly fallen, dropping over 9% from peak year-to-date gains of nearly 5% to now sit near -4% for the year. Meanwhile, ten-year treasury bonds have rallied in price by about 3%, pushing the yield from 4.6% in January down to 4.2%, near the lowest since last September. This performance combination usually suggests a weakening economy and slowing earnings, ultimately pulling inflation down. Interestingly, while President Trump and his team believe targeted countries will pay the tariffs, most economists view tariffs as a tax that US businesses and consumers will pay through higher prices. Stocks could decline in either case, but if inflation rises rather than falls, the current decline in bond yields may be temporary.

S&P 500 Pulled Back to Pre-Election Level Following Strong Market Growth

S&P 500 Net Total Return (12/31/2023 – 03/31/2025)3

A Word of Caution

Before we get into what we are doing about this elevated uncertainty, let us tell you what we aren’t doing: we aren’t getting swept up in the short-term day-to-day uncertainty. When investors start making major decisions based on short-term changes in macro numbers, we think that is risky. We’ve recently read that the most important decisions one needs to make today include whether the US is going to become partners with Russia, how the Middle East will end up, how much tariffs will increase inflation, how badly the DOGE layoffs will impact the economy, whether US exceptionalism is dead and US equities should be underweighted, etc. We don’t profess to know the answers to these questions. Yes, we have hunches and opinions like everyone else, but we also have enough experience to know that we don’t know nearly enough to correctly predict any of these outcomes let alone the preponderance of them.

Making too many decisions is usually harmful to long-term returns. I’ll briefly share my first lesson on this. On Black Monday, October 19, 1987, the Dow Jones fell by 22.6%, the largest one-day percentage return on record. Many people believed this signaled that the US was entering a depression ala 1929, the previous largest one-day percentage decline (-13.5%). As a 20-something-year-old, how could I disagree? I read all the “analysis” of the day, which was very lopsided, suggesting it was a fait accompli. My then CIO, Dick Huson, admitted that he didn’t know but strongly encouraged us to appreciate that nobody else did either, and so we should stay the course. He noted that the drop was many standard deviations above average, and it was a poor time to sell (it turned out to be a 28 standard deviation event, equivalent to a man who is 300 miles tall!). One month later, the S&P 500 returned 7%, and three months after that, it appreciated 18%. There was no depression; instead, we had elevated volatility and attractive returns.

Another event worth mentioning is the Global Financial Crisis of 2008, the biggest peak-to-trough loss since the great depression. The S&P peaked on October 11, 2007, before the US housing bubble-inspired credit crunch brought the financial world to its knees. As the world watched, the Fed let Lehman Brothers collapse, and financial contagion threatened further collapses. Markets fell precipitously before cooler heads finally prevailed, but not before the market had fallen nearly 57% by March 9, 2009.  Four years later, the S&P had gained 150% (nearly 26% per annum) to recover to its previous high. Ten-year returns from the pre-crash high in 2007 were 104%, equal to 7.4% per annum.

Timing the exact moment to get out of and then back into the markets is very difficult. This is why we partner with some of the very best managers in the world and why we try to limit the number and size of decisions we make. The stock market can be volatile and can go down. Nevertheless, we have not found a liquid asset that can provide better, reasonably consistent, above-average long-term returns to hold in our portfolios. This is why we are careful not to get underweight equities and will only modestly overweight them if we believe a significant opportunity exists. When asked, we counsel others to do the same if they are trying to generate above-average long-term results.

Enough, what are we doing?

For now, we assume mainstream economists are correct in believing tariffs will negatively affect the US economy. Estimates are changing quickly, but aggregating estimates from different sources suggests that the US GDP is expected to slow down by 0.5% – 1% due to the expected newly implemented tariffs. This could lead to job losses of up to 200,000 on top of those laid off by DOGE, and consumer prices could rise by 1%. Combined with immigrant deportations and strict border control, this should reduce aggregate consumer spending. On the flip side, the current tariffs could raise $1.5 trillion over the next 10 years. A 10% universal tariff could raise $2 trillion, and a 20% universal tariff could raise $3.3 trillion over that period. However, these estimates do not account for potential retaliatory actions by other countries or the duration of the tariffs. Our economic future is murkier than it seemed three months ago.

Are we trimming our equity holdings, you ask? Not yet. Looking forward, we see continued productivity gains in the US and globally from the adoption and incorporation of AI within businesses. Some early adopters are experiencing radical productivity improvements, as noted in ARK Investments’ “Big Ideas 2025” report. They highlight how AI software engineering contributions have risen from 4% to 72% of work. In new drug development, the number of new hypotheses a research scientist could test in one year rose from 20 hypotheses tested in 2023 to 200 tested in 2024. ARK expects technological breakthroughs like these, and others in AI, Autonomous Mobility, and Humanoid Robots, to turbocharge economic growth over the next 5 to 10 years, potentially to as much as 7+% per annum. While this view is uncommonly bullish, AI is a very unique technology, and early adoption will accelerate productivity gains, living standards, and possibly markets.

One other area we are exploring is Europe. While the US is experiencing tremendous change, Europe is in the throes of generational change. We believe Europe’s newfound focus on self-reliance, more rational energy and fiscal policies, reduced austerity, less regulation, and more defense spending (much of these changes have been foisted upon them by a now undependable US) may allow Europe to emerge from what many perceive to be a self-induced 15- to 20- year malaise. The internal debate continues about whether Europe presents opportunities for additional investment in our portfolios.

Wrapping it Up

We have strayed further than intended in this letter. Our main point is that things are moving very fast. Volatility is likely to remain elevated for a time and will cause some investors to lose focus on their long-term goals and instead make unnecessary decisions that will likely need to be reversed. We try to avoid making too many decisions with poor information during these times and instead continue to look forward and stay focused on what the future world might look like. Skating to where the puck will be is always our goal.

Rather than make decisions under uncertainty, we believe now is a good time to look over the potential valley and ask ourselves how AI might impact the world in the next 3-5 years and what could that mean. We don’t know if markets will pull back as they did after the internet bubble or if the advancements this time are so significant that technology’s full valuation has not yet been realized. Combining an expected more volatile short-term period with a brighter long-term view, we will navigate this period by owning more hedges designed to capture market unease while partnering with the best managers globally and remaining invested for the long term. If the economy weakens and inflation decreases, bonds may perform better. Bonds could perform better still if the DOGE succeeds in cutting the budget deficit.

Equities are expected to experience increased volatility this year as the political environment seeks a new equilibrium and tariff uncertainties get answered. While tariffs may slow economic growth and boost inflation—potentially triggering stagflation fears—the expected productivity gains and growth benefits from AI adoption should help temper any excessive market pessimism.  This period should be temporary. Subsequently, we can imagine a scenario where conflict fatigue leads to a calmer global environment. In this scenario, the potential success of the DOGE combined with lower taxes, less regulation, and more efficiency may allow the US to ease its tariff program, creating a more favorable cycle for both global GDP and equity markets. As we move forward, we will continue to share our thoughts and insights with you. For now, we are staying close to our strategic asset allocation targets: 65% in the All Country World Index (ACWI), 20% in hedge funds, and 15% in the Bloomberg Aggregate Bond Index (AGG).

As always, we greatly appreciate the opportunity to manage your capital and help you achieve your organization’s goals. We are here to assist in any way possible, so please feel free to reach out to us with any questions or needs.

Your TIFF Investment Team

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

These materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.