22 Dec 2025
Financial markets enter 2026 on solid footing. Resilient economic conditions, robust corporate earnings growth and sustained enthusiasm for large-scale investment in artificial intelligence (AI) should support risk assets throughout the year. Anticipated US interest rate cuts should provide additional tailwinds.
Global GDP growth forecasts are trending higher as tariff concerns ease, although the consensus baseline remains subdued. Most large economies are expected to slow modestly or stay roughly stable. Household and corporate balance sheets are in good shape, and private‑sector borrowing and spending can increase, supported by the interest‑rate cuts delivered since mid‑2024.
Fiscal policy is expected to remain broadly supportive across major economies in 2026. Key drivers include:
Combined with resilient balance sheets, easier monetary policy, and supportive fiscal actions, the balance of risks tilts towards the upside.
Inflation in advanced economies remains above typical central bank targets of 2%, yet further rate cuts are anticipated in the US and UK. The combination of monetary and fiscal easing in a non-recessionary environment should create a favourable environment for risk assets.
Corporate earnings are projected to grow at an above-trend pace in 2026, led by technology and financial sectors, with additional growth across other sectors. Technology companies continue to benefit from accelerating investment in AI infrastructure which is expected to expand further. While the ultimate returns on these investments remain uncertain, large-cap technology firms possess the balance sheet strength to sustain elevated spending for at least the next two years.
Financials, meanwhile, enjoy structural advantages from higher interest rates introduced since 2022, supporting margins and returns even as policy rates ease. Higher bond yields also bolster financial sector profitability through improved investment income. Strong underwriting, premium growth, digital efficiencies, and robust balance sheets reinforce this positive outlook. We expect these sectors to lead performance in 2026, with financials particularly attractive given their relatively modest valuations. Beyond these areas, attractive opportunities also exist in unexpensive sectors such as healthcare and utilities.
US earnings growth continues to outpace other major markets, although this strength is at least partly reflected in elevated valuations. Outside the US, investors can find compelling opportunities at more attractive valuation levels. The UK remains appealing on valuation grounds, while European industrials stand to benefit from Germany’s fiscal expansion, which prioritises infrastructure and defence spending. Asia offers strategic exposure to semiconductors and other critical AI infrastructure supply chain components, providing both growth potential and diversification away from developed markets.
In government bonds, short-dated yields should be anchored by declining policy rates, while long-dated yields may face upward pressure from inflation and deficit concerns. Credit spreads are near historic lows, leaving limited room for compression, so returns will likely be driven by carry.
Rising issuance for AI-related capital expenditure, increased M&A activity, and higher leverage could soften supply-demand dynamics, but absent a material deterioration in credit quality (which we do not expect) the market should absorb additional supply. Investors should favour short-duration exposure in both government and corporate bonds.
Selective opportunities exist across currency markets. High-yielding emerging market currencies with elevated local interest rates, such as the Brazilian real, provide attractive yield and diversification benefits. Developed market currencies are likely to remain mixed. The US dollar, which was volatile in 2025, is unlikely to follow a sustained trend in 2026, as it is caught between lower policy rates and support from relatively stronger US growth and ongoing AI optimism.
Risks to this constructive backdrop include any loss of confidence in AI’s commercial viability. Some tech valuations have surged following OpenAI’s large-scale infrastructure spending announcements, despite the company being currently loss-making and projecting profitability no earlier than 2030. While higher tariffs have had less impact than initially feared, the risk of a delayed effect remains, which could weigh on growth and push inflation higher. A reassessment of central bank policy paths - triggered by inflation surprises - could significantly disrupt markets, though this risk appears limited for now.
Despite these risks, the backdrop remains broadly supportive: resilient economic growth, strong earnings data, and favourable policy tailwinds underpin our positive outlook for 2026.
 |
Economic backdrop: |
Growth remains resilient, supported by expansionary fiscal policy across major regions. |
 |
Policy environment: |
Anticipated US and UK rate cuts plus fiscal stimulus underpin risk assets. |
 |
Earnings outlook: |
Technology and financial sectors are expected to lead, while healthcare and utilities offer value opportunities. |
|
|
Regional view: |
US remains strong but expensive; UK attractive on valuation; Europe’s industrials benefit from targeted fiscal expansion; Asia offers strategic AI exposure and diversification. |
|
|
Fixed income: |
Prefer short-duration bonds; credit spreads remain tight with returns driven by carry. |
|
|
Currencies: |
Selective emerging market opportunities; developed market currencies remain mixed. |
|
|
Key risks: |
Uncertainty around AI viability and inflation-driven policy shifts. |
Important information
Colin Dryburgh, CFA
Investment Manager
Colin Dryburgh, investment manager, is a member of the multi-asset group. He is co-manager of the Diversified Growth Fund. Prior to his current role, Colin worked for Aviva Investors, where he was a European equity analyst.
