For investors calibrating their portfolios over the next 6-12 months, the prevailing theme is not one of directional certainty, but of managing heightened volatility amid a precariously balanced macro backdrop.

The consensus among asset allocators is that even if the Strait of Hormuz has reopened in the near term, potentially easing oil supply restrictions, central banks are still facing inflationary pressure in the second half of 2026.

And with the Federal Reserve adopting a “wait-and-see” approach amid conflicting signals from the labour market and inflation data, the primary objective is to build resilience against potential policy surprises.

The central question for markets remains the trajectory of US interest rates. Despite a hawkish sentiment among some members of the policy-making Federal Open Market Committee ( FOMC ), the consensus is that the Fed will likely hold rates steady for the remainder of 2026.

But while inflation remains a concern, the recent cooling in fuel and energy prices – previously the primary drivers of headline inflation – suggests that the Fed has the bandwidth to remain patient, according to J.P. Morgan Asset Management chief market strategist Tai Hui.

Based on FOMC data, Hui argues that the policy rates, forecast by the Fed at 3%, are currently still above the long-term median ( see graph ), suggesting that it still has room to keep rates stable in the second half of the year.

Risk of growth deceleration

Looking ahead, Hui says the interest rate outlook tilts towards a potential easing cycle, although the path is contingent on a delicate balance.

“The Fed must avoid overly restrictive policies that could stress corporate financing costs, particularly for growth and tech sectors that have anchored their strategies around current yield levels,” Hui says during JPMAM’s 3Q26 Guide to the Markets briefing. “Any move to aggressively hike rates could inadvertently engineer a growth deceleration, a risk the Fed is likely keen to avoid.”

Given the lack of a clear fiscal catalyst and the potential for increased bond market volatility – exacerbated by shifts in Fed communication strategies – investors should prioritize defensiveness and flexibility.

To navigate this environment, Hui recommends the following strategic positioning: short-duration fixed income, inflation-linked securities, and quality-focused equity strategy.

“Investors should concentrate on the short end of the yield curve, specifically two-year instruments. This minimizes exposure to duration risk, which remains sensitive to fiscal uncertainty and fluctuating rate expectations,” he says.

Favour value companies

To hedge against inflation, investors can incorporate inflation-protected bonds that will provide a critical hedge should inflation prove stickier than expected, forcing the Fed into a hawkish corner as these assets are better positioned to outperform, Hui notes.

On the other hand, to deal with volatility in the equity markets and the expectation of “whipsawing” market conditions, investors should favour high-quality value companies.

“These firms tend to offer more stability compared to tech-heavy portfolios, which remain highly susceptible to volatility in the rates market and potential pressure on funding costs,” Hui says.

In terms of currency plays, a long position on the US dollar serves as a strategic counter-weight as the greenback typically stands to benefit in the event of higher-for-longer rates, or if the Fed is forced into a series of rate hikes.

The situation next year will be defined by the tension between above-trend growth and the need for policy moderation.

Investors should resist the urge to place high-conviction bets on a single narrative.

Instead, by shortening bond duration, emphasizing quality value in equities, and utilizing inflation-hedging instruments, portfolios can remain robust against the persistent uncertainty inherent in the current economic cycle.