Chart depicting the ISM Manufacturing PMI and the EPS growth of the S&P 500 as of September 30, 2026. The latest figures are 54.50 and 37%, respectively.
In each issue of Owner to Owner, we review aspects of the business environment on three fronts:
- Overall economy
- Credit markets
- Private equity (PE) and mergers and acquisitions (M&A) markets
Here, we examine the business environment as we near the end of 2026, marked by resilient economic growth amid elevated inflation, interest rates, and policy uncertainty; broadly available but more expensive credit; and selective PE and M&A activity concentrated in larger transactions, with artificial intelligence (AI) increasingly shaping investment and value creation strategies.
The economy
U.S. economic activity remains resilient despite ongoing conflict in the Middle East, elevated inflation and interest rates, and uncertainty surrounding monetary policy. Final second quarter 2026 real gross domestic product (GDP) growth was revised higher to 2.2% annualized (from 1.5%), while real final sales to private domestic purchasers rose 4.6%. In our view, this reflects strong underlying private sector demand, even when headline real GDP reads differently due to external inventory or trade drags.
While second quarter real GDP growth slowed from 2.5% in the first quarter, the Atlanta Fed GDPNow Index projects third quarter GDP growth of 3.6% as of October 19. Macro data, such as the ISM Manufacturing PMI, suggests the economy remains in expansion territory. This provides a positive backdrop for corporate earnings growth and reinforces our constructive view on U.S. equities across the style spectrum and sectors. The S&P 500 is expected to generate earnings-per-share (EPS) growth of 32.5% in 2026 and 15.9% in 2027, following growth of 13% in 2025.
Shifting to the U.S. labor market, the economy added 29,000 jobs in September 2026, lowering the average three-month nonfarm payrolls net change to 51,000 after July and August job gains were revised down by a combined 60,000. Despite the job additions, the U.S. unemployment rate (U-3) increased from 4.1% in August to 4.2% as the labor force participation rate rose, with more people actively looking for job opportunities. Elevated energy prices, particularly diesel, and ongoing supply chain strains are likely to remain headwinds for the labor market through year-end 2026 and into 2027.
Elevated energy prices, particularly diesel, and ongoing supply chain strains are likely to remain headwinds for the labor market through year-end 2026 and into 2027.”
As for monetary policy, the Federal Open Market Committee (FOMC) began what could become an interest rate hiking cycle in September 2026, raising the fed funds target range by 25 basis points (bps)1 to 3.75% to 4.0%. Assuming economic conditions remain largely unchanged, investors should expect at least one additional rate hike before year-end. As of October 16, the fed funds futures curve is pricing in another hike in December 2026 and two more in 2027. Our base case remains that the tightening cycle is more likely to be limited than prolonged, as current benchmark borrowing rates, including the 10-year Treasury yield, should gradually restrain interest rate-sensitive areas of the economy, such as housing and capital formation. Even so, stronger household and corporate balance sheets, along with continued AI-related capital investment, should help support ongoing economic expansion.
Much remains in focus as we move through the remainder of 2026, including the midterm elections, the path of monetary policy, a higher-for-longer interest rate environment, and the impact of AI on economic growth, to name a few. We will continue to monitor inflation and global growth developments closely.
The credit market
A familiar saying holds that life is about the journey, not the destination. For today’s credit market, however, the opposite may be true. Investors have spent the past several years focused on inflation reports, Federal Reserve (Fed) meetings, and the timing of rate changes. Yet for borrowers and lenders, the more consequential question may be where financing costs ultimately settle.
The Fed’s answer has changed in recent years. Its median longer-run federal funds rate projection increased from 2.5% in December 2023 to 3.2% in September 2026.2 The longer-run projection is often viewed as a proxy for the economy’s “neutral” interest rate, the level at which monetary policy neither stimulates nor slows growth. Because this rate cannot be observed directly, policymakers periodically adjust their estimates as economic conditions evolve. The increase indicates that policymakers have revised their estimates of the long-run equilibrium policy rate materially higher since late 2023.
Dot plot depicting the Federal Reserve’s median longer-run federal funds rate projection. Its median longer-run federal funds rate projection increased from 2.5% to 3.2% from December 2023 to September 2026.
Recent comments from Governor Christopher Waller provide context for at least one policymaker’s reassessment. In September 2026, Waller remarked that “there’s no more premium for safe, liquid U.S. government debt” and said this development had been “leading me to raise my neutral rate estimate.”3 He also cited competition for capital from AI investment and concerns surrounding the U.S. fiscal outlook. Importantly, these comments reflect Waller’s views rather than a formal explanation adopted by the full FOMC.
Waller’s comments are notable because similar themes are increasingly reflected across financial markets. Many market participants now describe a “new economics of capital,” characterized by structurally higher interest rates driven by larger government deficits, strong private sector demand for capital, inflation volatility, and rising term premiums.4 Investment in AI has become another frequently cited source of demand for capital.5
Public credit markets offer a useful perspective on how investors are pricing today’s environment. Treasury yields establish the benchmark rate upon which most borrowing costs are built, while corporate credit spreads represent the additional compensation investors require for assuming credit risk.
In September 2026, the Intercontinental Exchange (ICE) Bank of America (BofA) BBB U.S. Corporate Index option-adjusted spread – a benchmark measuring the risk premium investors require to hold lower-tier investment grade corporate debt – averaged 0.98%, hovering near historical lows since 1996 and sitting well below its long-term average of 1.88%. Meanwhile, as of late September 2026, the broad U.S. high-yield spread stood at 2.68% – above its all-time record low of 2.33% set in July 2007. The difference from prior record lows reflects continued caution toward the weakest borrowers. While investors remain willing to lend to higher-quality companies at relatively attractive rates, they still demand significantly higher compensation for taking on greater credit risk.
Meanwhile, all-in borrowing costs remained elevated. In September 2026, the effective yield on the ICE BofA BBB U.S. Corporate index averaged 5.89%, compared with a long-run average of roughly 5.3%. While only modestly above its historical average, the index yield remained well above levels that prevailed throughout much of the post-financial crisis period, when investment grade corporate yields were frequently below 5%. The combination of elevated yields and relatively narrow spreads suggests that higher benchmark interest rates, rather than unusually high credit risk premiums, have been the primary driver of borrowing costs.
In other words, public markets suggest capital remains available, but it is being priced from a higher-rate foundation than borrowers experienced during much of the previous decade.
Chart depicting the BBB effective yield, the 10-year Treasury yield, and the BBB option-adjusted spread from October 2023 through September 2026. The latest figures as of October 6, 2026, are 5.89%, 4.99%, and 0.98%, respectively.
Public markets tell only part of the story. For many privately held businesses, bank lending conditions matter more than bond market spreads. On the heels of several high-profile bank failures in 2023, banks reported tighter commercial and industrial (C&I) lending standards and weaker demand across businesses of all sizes. However, this conservatism has gradually moderated, as illustrated in the nearby chart. By second quarter 2026, banks reported largely unchanged lending standards relative to the prior quarter, stronger demand from large and middle-market borrowers, and steady demand from small businesses. Banks also indicated that prevailing C&I standards remained generally more accommodative than the midpoint of the historical range observed since 2005.
That stabilization coincided with stronger lending activity. C&I loans outstanding at U.S. commercial banks totaled $2.94 trillion in August 2026, while C&I loan growth accelerated to a 14.7% annualized rate during the second quarter. Combined with survey evidence showing stronger demand from large and middle-market borrowers and generally unchanged lending standards, this data suggests credit formation strengthened materially relative to conditions prevailing in late 2023.
Chart depicting the net percentage of domestic banks tightening standards for C&I loans (bar) and the amount of C&I loans (line) from 2005 through 2026. The latest figures are 8.1%, as of August 3, 2026, and $2,888, as of October 6, 2026, respectively.
Several credit market indicators have evolved materially since late 2023. The Fed’s median longer-run policy rate projection has increased, the Treasury curve has normalized, corporate spreads remain relatively compressed, and commercial lending activity has strengthened alongside stabilizing lending standards.
Taken together, the data suggests that credit remains broadly available across both public and private markets. The more significant change is the price of that capital. While much of the market’s attention remains focused on the path of monetary policy, borrowers and lenders may increasingly consider the possibility that the destination for overall financing costs has moved higher. In this environment, access to capital may be less constrained than in recent years, but it is likely to remain more expensive than many borrowers became accustomed to during the past decade. That makes thoughtful capital planning, debt management, and strong banking relationships increasingly important, and we remain well positioned to support clients through this transition.
While much of the market’s attention remains focused on the path of monetary policy, borrowers and lenders may increasingly consider the possibility that the destination for overall financing costs has moved higher.”
The private equity and mergers and acquisitions markets
The U.S. PE market continues to navigate macroeconomic uncertainty, elevated financing costs, and pressure to return capital to investors. Through third quarter 2026, buyout and growth deal volume declined year over year, while capital invested increased, reflecting a concentration of activity in larger, higher-conviction transactions. Exit activity remains challenging, limiting liquidity and weighing on fundraising, while capital continues to consolidate among a smaller group of established managers. In this environment, success is increasingly driven by disciplined deal selection, operational value creation, and a clear path to exit.6
AI is emerging as both a major investment theme and an increasingly important operating tool for PE firms. In the 2026 BDO Private Equity Survey of 400 U.S. fund managers, deal partners, and operating partners, 94% of respondents said AI is materially changing their investment approach, with firms applying the technology across the deal life cycle, from sourcing and due diligence to portfolio management and exit planning.7 Sponsors are investing in AI infrastructure, energy, and computing while evaluating portfolio companies’ AI readiness, disruption risk, and ability to use AI to improve productivity, margins, and growth. PwC’s 2026 outlook similarly identifies AI as a key driver of deal activity, valuations, portfolio strategy, and competitive advantage.8 As a result, AI is becoming a central consideration in investment decisions, value creation strategies, and long-term competitiveness.
According to L.E.K.’s 2026 PE Pulse survey, investors continue to view the deal environment as challenging, with 61% describing current conditions as weak and 72% taking a selective approach to capital deployment.9 While third quarter deal activity improved from the previous quarter, levels remained well below those seen in the second half of 2025 and first quarter 2026. An estimated 2,467 deals closed in the third quarter with a combined value of $233.8 billion, representing modest growth in both deal count and value from the prior quarter. Although activity has not matched the rebound experienced in late 2025, sponsors appear to be adapting to changing market conditions by adjusting transaction size and structure rather than stepping away from opportunities altogether.10
| Year | Deal value ($B) | Deal count |
|---|---|---|
| 2016 | $469.6 | 4,841 |
| 2017 | $595.0 | 5,415 |
| 2018 | $660.0 | 6,314 |
| 2019 | $696.5 | 6,594 |
| 2020 | $620.9 | 6,665 |
| 2021 | $1,277.0 | 10,432 |
| 2022 | $953.5 | 9,523 |
| 2023 | $727.6 | 8,273 |
| 2024 | $847.3 | 8,664 |
| 2025 | $1,155.1 | 9,013 |
| 2026 | $729.8 | 7,189 |
PE exits remain subdued, adding to the backlog of unrealized investments. L.E.K. found that 70% of investors expected to exit fewer than 20% of their portfolio companies over the next year. Although third quarter U.S. exit value rose to $165.5 billion across 405 transactions, activity was driven largely by a small number of sizable deals. Strategic buyers accounted for $86.6 billion of exit value, while sponsor-to-sponsor transactions remained the most common exit route, with 142 deals totaling $46.6 billion. High financing costs continue to constrain smaller exits, leaving liquidity concentrated among larger assets.11 These conditions are also pushing firms toward larger, higher-conviction investments, with returns increasingly dependent on disciplined pricing, operational improvements, thoughtful financing, and early exit planning.12
| Year | Exit value ($B) | Exit count |
|---|---|---|
| 2016 | $331.3 | 1,286 |
| 2017 | $360.8 | 1,368 |
| 2018 | $398.9 | 1,472 |
| 2019 | $309.2 | 1,368 |
| 2020 | $442.6 | 1,255 |
| 2021 | $842.2 | 1,974 |
| 2022 | $328.5 | 1,478 |
| 2023 | $289.5 | 1,357 |
| 2024 | $388.8 | 1,442 |
| 2025 | $729.5 | 1,611 |
| 2026 | $428.1 | 1,174 |
Fundraising is expected to finish 2026 below 2025 levels, marking a third consecutive annual decline in both capital raised and funds closed. Through the third quarter, 348 funds reached final close and raised $222 billion, with funds of $1 billion or more capturing a record 83.4% of total capital despite representing only 15.5% of fund count. As institutional capital becomes harder to secure and holding periods extend beyond five years, limited partners are increasingly prioritizing liquidity and favoring managers with strong distribution track records. As a result, firms must clearly differentiate their strategies, while private wealth is likely to become an increasingly important source of capital.13, 14
| Year | Capital Raised ($B) | Fund Count |
|---|---|---|
| 2016 | $189.2 | 432 |
| 2017 | $256.0 | 519 |
| 2018 | $227.6 | 471 |
| 2019 | $354.9 | 552 |
| 2020 | $249.9 | 539 |
| 2021 | $381.4 | 828 |
| 2022 | $376.9 | 1,098 |
| 2023 | $405.8 | 1,061 |
| 2024 | $370.6 | 849 |
| 2025 | $329.9 | 677 |
| 2026 | $222.0 | 348 |
[F]irms must clearly differentiate their strategies, while private wealth is likely to become an increasingly important source of capital.”
North American M&A activity remained resilient in second quarter 2026, though a small number of large transactions accounted for much of the activity. Total deal value reached $787 billion despite declining 24.3% from the first quarter, with transactions valued at $5 billion or more contributing $424.4 billion. Energy activity remained well above its five-year quarterly average, supported by rising power demand, while healthcare and information technology also outperformed historical levels. Financial services and materials and resources lagged, while activity in business-to-business and business-to-consumer sectors remained broadly consistent with recent trends. Corporate buyers drove many of the largest transactions, often using stock to benefit from strong public market valuations, while PE firms remained less active.15
| Year | Deal Value ($B) | Deal Count |
|---|---|---|
| 2016 | $2,006.7 | 14,191 |
| 2017 | $1,638.1 | 14,855 |
| 2018 | $2,065.5 | 16,180 |
| 2019 | $1,975.6 | 16,054 |
| 2020 | $1,587.0 | 15,533 |
| 2021 | $2,747.2 | 22,057 |
| 2022 | $1,955.5 | 20,101 |
| 2023 | $1,825.1 | 17,728 |
| 2024 | $1,973.5 | 18,117 |
| 2025 | $2,842.7 | 18,573 |
| 2026 | $1,826.5 | 9,306 |
Looking ahead, M&A activity should remain steady but uneven through the remainder of 2026, as well-capitalized buyers focus on larger, higher-conviction opportunities. At the same time, valuation gaps, geopolitical uncertainty, and tighter underwriting standards are likely to continue influencing transaction timing and structure. Companies are also expected to use M&A to accelerate transformation, gain access to technology and infrastructure, and reposition their portfolios for long-term growth, with AI-related demand supporting the redirection of capital toward core priorities.16
Conclusion
As 2026 draws to a close, the business environment remains shaped by continued economic expansion and a higher-for-longer interest rate outlook. Stabilizing lending standards and strong credit formation suggest capital remains accessible, even as elevated benchmark rates place a premium on thoughtful financing decisions. Against this backdrop, PE and M&A investors are emphasizing disciplined deployment, operational value creation, and clear exit pathways as AI reshapes both investment priorities and long-term growth strategies.
If you have any questions about navigating today’s business environment, reach out to your BBH relationship manager.
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1One basis point (bp) is equal to 1/100th of 1%, or 0.01%.
2The Federal Reserve Board, Summery of Economic Projections.
3Reuters, “Fed’s Waller says safety premium for Treasuries is gone, pushing neutral rate higher.” September 3, 2026. https://www.reuters.com/business/feds-waller-says-safety-premium-treasuries-is-gone-pushing-neutral-rate-higher-2026-09-03/
4EY, “The new economics of capital.” September 30, 2026. https://www.ey.com/en_us/insights/strategy/the-new-economics-of-capital
5Morgan Stanley, “AI Dispersion in Credit.” March 24, 2026. https://www.morganstanley.com/im/en-us/institutional-investor/insights/articles/ai-dispersion-in-credit.html
6PitchBook.
72026 BDO Private Equity Survey.
8PwC Global M&A Trends in Private Capital.
9L.E.K. Consulting PE Pulse 2026.
10PitchBook.
11Ibid.
12CohnReznick Private Equity Q3 2026 Market Outlook.
13PitchBook.
14S&P Global PE Trends 2026.
15PitchBook.
16EY M&A Activity Insights.
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