2026 Outlook: Key themes for investors

Investors who stayed patient and remained invested through 2025 were generally rewarded. Despite a challenging start to the year and uncertainty around US trade policy, most major asset classes – including equities, bonds and alternatives - delivered positive returns. With global stock markets near all-time highs, it’s natural to ask whether caution is warranted.

Caution Over Interest Rate Cuts

Summary:

2025 rewarded patient investors, with most major asset classes delivering positive returns despite early volatility and uncertainty around trade policy.
The outlook for equities in 2026 remains constructive, supported by expected interest-rate cuts, increased government spending and sustained investment in AI driving earnings growth.
Risks remain but do not change the bigger picture, making diversification and staying invested the most effective way to navigate short-term market swings.

Looking ahead, the backdrop for growth-oriented investments such as equities remains broadly supportive. Expectations of lower interest rates in many major economies, increased government spending across the US, Europe and Japan, and continued strong investment in artificial intelligence (AI) should all help support global economic growth and company earnings.

Of course, risks remain that could create periods of market volatility. These include the possibility that AI adoption takes longer than expected, a weaker US jobs market, or a deterioration in geopolitical relations. Any of these could lead investors to reassess the outlook for global growth and result in short-term market fluctuations.

However, periods of market volatility are a normal part of investing, and do not necessarily signal a change in the longer-term outlook. Our central view is that equity markets should continue to deliver solid returns over the year ahead. In this environment, remaining invested and maintaining a diversified portfolio remains an effective way to manage short-term market movements.

The Global Economic Backdrop

The US economy has outperformed other major regions for over a decade, helped by its strong position in new technologies. Despite higher import tariffs and the inflation they caused, the US still grew faster than Europe and Japan in 2025.

We expect the US to extend its lead in 2026, but importantly, we also expect solid growth across most advanced economies. Two major forces will likely drive this:

1. Governments are spending more

In the US, new tax and spending measures should support the economy.
Japan and Germany are also increasing investment, partly driven by a global push toward greater self-reliance following changes in US policy.

2. AI investment is booming

The largest US technology companies dramatically increased their investment in AI infrastructure in 2025 – and plan to keep doing so in 2026. This spending benefits not only the tech sector but also many supporting industries, creating a ripple effect through the wider economy.

In the UK, growth is expected to slow but remain positive in 2026, with softer business investment, subdued household spending and easing labour demand. This could lead to higher unemployment and slower wage growth, helping inflation move lower. These conditions support the case for several Bank of England rate cuts, potentially more than markets currently expect. That said, the UK accounts for less than 4% of global equity markets, so its impact on the wider investment outlook is limited.

What This Means for Markets

Against this economic backdrop, the implications vary across asset classes.

Equities
We remain positive on global stock markets. Governments in the US, Japan and Europe are planning more spending, and businesses, especially those investing in AI, are set to invest heavily again next year. This supports healthy economic growth and, in turn, corporate profits. In this environment, US shares should maintain their higher valuation relative to other key equity markets.

Corporate Bonds
Strong company finances and steady economic growth should keep defaults under control in 2026. However, companies are likely to borrow more to fund their AI investment plans, which could put mild upward pressure on borrowing costs and limit returns in corporate bonds relative to equities.

Interest Rates and Government Bonds
Interest rates aren’t likely to move in the same direction everywhere. In the US, strong growth may keep the US Central Bank, the Federal Reserve, from cutting rates as much as markets expect. In the UK, weaker growth and lower inflation could lead the Bank of England to cut interest rates more than is expected by markets. Against this backdrop, UK government bonds, or “gilts”, appear relatively attractive, supported by both the expected path of interest rates and comparatively high yields.

A Closer Look: US Leadership and AI

US stock market leadership

US shares, especially the big technology companies, have led global markets for many years. In 2025, Japan was the standout performer, but the long-term drivers of US equity market leadership haven’t changed.

A big debate in markets is whether AI will genuinely transform productivity or whether the excitement has created a bubble. Views differ widely, even among major policymakers and CEOs. Our position is clear:

We continue to see US equities as attractive

The US market still benefits from world-leading companies that are best placed to turn new technologies, especially AI, into profits. That ability has supported earnings growth for many years and, we believe, can continue to do so.

Are the big US tech companies in a bubble? We don’t think so.

Most of their share-price gains have been backed by strong earnings, not just hype.
Their valuations have stayed relatively stable for years while their profits have grown substantially.
These companies have structural advantages: huge scale, powerful competitive advantages in areas with high barriers to entry, loyal user bases and the financial strength to keep investing for the future.
AI adoption plays to the strengths of the seven dominant tech companies, known as the Magnificent 7, as widespread adoption most likely comes with integration of their products. Strong earnings growth, rather than a sentiment driven increase in valuations, will likely be the key driver of performance in 2026.

Where we have some caution

Outside the major tech names, parts of the wider US market look more expensive. But this isn’t significant enough for us to change our positive view on US equities overall.

Does market concentration worry us?

The largest seven US companies make up more than a third of the S&P 500 index. Historically, similar periods of concentration haven’t reliably predicted weaker returns or higher volatility. So, on its own, concentration isn’t a reason to have a negative outlook on equities.

You can read more about our thoughts on US market concentration here.

Risks to Watch

While we’re optimistic about the year ahead, there are several risks that could influence markets. These include:

If the US job market continues to cool, which could weigh on consumer spending.
AI investment delivers less benefit than expected or takes longer to pay off.
A further deterioration in US-China relations.

While these risks could lead to periods of market volatility, they do not, in our view, alter the broader investment outlook.

What This Means for Investors

Overall, the environment remains supportive for growth-oriented assets such as equities. Expectations of lower interest rates in many regions, increased government spending and sustained investment in AI should continue to support global growth and corporate earnings.

Market volatility is likely to occur at times, but this is a normal feature of investing. Our central view is that equity returns can remain solid over the year ahead. Remaining invested and maintaining a diversified portfolio remains a sensible way to manage uncertainty and participate in long-term market growth.