30 Mar 2026
Most major economies enter 2026 with inflation easing but still above, or only just at targets. The critical question is whether service costs and wages prove stickier than expected, particularly in the US and the UK. If they do, inflation break-evens may widen and long end yields could be forced higher, pressuring duration and rate sensitive equities.
Conversely, Europe’s low inflation environment could sustain euro credit’s carry advantage, creating opportunities for those willing to look beyond domestic markets.
A notable shift is underway in how corporates and financial sponsors are approaching capital deployment. The move towards re leveraging, driven by AI capex, debt dressed up as hybrid equity and M&A, suggests that higher investment grade net supply will increase while more fallen angels emerge.
This creates greater dispersion in investment grade and high yield bond markets, making credit selection critical. Investors can no longer rely on whole of market beta alone. Careful credit analysis and an understanding of balance sheet quality will be essential.
Central banks are approaching an inflection point. A pause after early 2026 cuts by the Federal Reserve and Bank of England, combined with the ECB on hold, creates an environment where policy surprises could drive episodic volatility. We also face the question of “politicisation of the FED” and the perceived and actual impact this might have. Meanwhile multiple emerging market elections add another layer of uncertainty, but with macro variance lower than in 2025, volatility should be contained rather than systemic.
We anticipate a continuing but modest yield curve steepening with 10 year US government bonds settling at around 4%. Investment grade debt spreads should trade in a 10–15 basis point range on average, while high yield spreads widen modestly. The boundaries around the average get wider.
Total returns of 3-7% across investment grade and high yield (depending on region) remain achievable. European mortgages and euro investment grade may modestly outperform US investment grade on technical factors.
Double digit global gains remain plausible, with the S&P 500 potentially reaching 7,500. Here again higher dispersion argues for quality and risk control rather than beta alone.
The concentration in US mega cap technology that characterised recent years is likely to moderate. We expect a move toward equal weighted US exposure and increased allocation to non-US markets including the UK, as valuations and fundamentals become compelling outside America’s largest names.
A gentle dollar softening appears likely, with EUR/USD moving toward 1.20 and GBP/USD approaching 1.36. Emerging Market FX carries favour where policy credibility and fiscal paths are improving.
Currency markets will increasingly reflect the divergent paths of monetary policy and fiscal discipline across regions, creating opportunities for those who can identify where fundamentals are improving relative to market expectations.
The overarching theme for 2026 is dispersion. Within and across asset classes, the range of outcomes will widen. This environment rewards active management, careful security selection and a willingness to look beyond consensus positioning.
Investors should focus on quality in credit, diversification in equities and positioning for a world where central banks have less room to manoeuvre than they did in the past decade. The opportunities are there, but they require work to identify and discipline to capture.
Stephen Jones
Global Chief Investment Officer
Stephen Jones is Aegon AM’s global chief investment officer.