2026 Economic and Market Outlook
2025 started on a high for equity markets. Excitement about generative artificial intelligence abounded, as did predictions for an economic soft landing in the U.S. Then, as so often occurs, a catalyst emerged to disrupt the complacency. DeepSeek’s debut as a potentially low-cost large language model (LLM) in January sent the AI trade into reverse.
Markets stabilized into early April, at which point the Trump administration’s “Liberation Day” announcement shocked investors as it represented a dramatic realignment of U.S. trade and fiscal policies. Significant uncertainty was introduced and the S&P 500 briefly fell below 5,000 before the U.S. administration started backtracking on some of the announced tariffs.
Equities staged an impressive rebound off the April lows, a move that’s continued into year-end. Driving the move has been AI capex and its massive contribution to U.S. growth. Notably, investors have remained bullish despite above-target U.S. inflation and an economy which overall does seem to be weakening—although it’s been helped to some extent by the tax cuts contained in the “Big Beautiful Bill”.
Not surprisingly, the so-called Debasement Trade has shown legs in 2025. Worries about inflation and the role of the dollar as the dominant reserve currency have led many investors to seek the refuge of hard assets such as gold and silver. Lingering concerns about the future independence of the Federal Reserve have likely added to demand for precious metals and non-U.S. dollar assets.
U.S. and European fiscal policies have been reflected in steeper yield curves over the course of 2025. This is a development worth underscoring. Typically, when central banks are cutting rates, the long-end of the curve falls—partly because of weaker expected growth, and partly due to lower real rates. This time around, the long end has stayed flat amid central bank easing. Essentially, investors are looking at the state of government balance sheets and demanding a premium to lend money for longer.
Looking Ahead to 2026
We think the global economy will avoid a serious slowdown in 2026, but growth and inflation may vary significantly across regions.
In the U.S., despite asset price boosts from tax incentives and refunds from the “Big Beautiful Bill” in the first quarter or two in the year, we see low or anemic real growth. Our view is that the Fed will keep an easing bias and deliver multiple rate cuts in order to be accommodative, even though price pressures remain. As well as a lower price of liquidity, the quantity of liquidity will remain ample with the Fed continuing its purchases of T-bills well into 2026. For now, the market is pricing a terminal rate of 3.10% which we think is fair to high.
Inflation is not especially well-contained as we enter the new year, and this may be a risk for both the economy and markets. Rate cuts could be limited by the cost-of-living crisis (and its attendant political pressures), although some food-related tariffs have been taken off the table as of late.
We see signs of a recurrent case of short-term K-shape economy, where the haves, those who own assets (capital), benefit from accommodative monetary policy, while the have-nots (labor) continue to be squeezed from all sides.
The U.K. faces issues on both the growth and economic fronts. Growth is weakening yet inflation is a big problem, so policymakers must grapple with what amounts to a case of stagflation. Adding to the U.K.’s woes are elevated long rates and a dreadful fiscal deficit. All told, the Bank of England may be hesitant to enact many rate cuts in 2026, fearing the effects on inflation and a revolt from the bond market.
The situation in continental Europe is better. Inflation is not an issue right now, and the growth picture looks better. Governments (such as Germany’s) have lower deficits and hence more room to spend to generate growth. Increased spending on defense and infrastructure are two potential bright spots. With regards to defense, the EU already has an agreement to spend more, and 2026 should see these plans put into action.
In Japan, real growth remains anemic, but inflation pressures have increased. Long rates have increased substantially relative to history and for good reasons. The chosen path by the fiscal authorities appears to be to boost growth via spending. Ultimately, Japan is likely to inflate away its debt, which poses a very large risk for the Yen in the years to come.
China will continue to take advantage of the post Bretton Wood regime to become the second pole in a bi-polar world. Despite the urging of Western economists to increase domestic demand, the country will continue to rely on exports to generate growth. With protectionist policies from the U.S. and Europe, China will likely seek support for its trade surplus in the rest of Asia and emerging markets.
Finally, Emerging Markets have benefitted in 2025 from an unexpectedly weak U.S. dollar. This could continue in 2026 as dollar hegemony further erodes.
Rates
Overall, we think positioning at the front end of the curve makes sense in developed markets, as long ends remain volatile amid fiscal deterioration (and inflationary pressures). Long end risk-premia have yet to rise sufficiently to compensate for long-term sovereign “credit risk”.
Our view is that UK rates should be avoided altogether—the long end is risky, and with the Bank of England reluctant to cut there’s little to be gained from owning the short end of the curve either.
In the U.S., we like TIPS. Real rates are high and you can get significant positive yield along with inflation protection and virtually no credit risk. For European rates, we suggest staying along the core (Germany, especially) given that core-periphery spreads have significantly compressed. We believe investors should avoid Japanese debt entirely.
Credit
Credit spreads remain tight, to the extent that some investment-grade issues even trade negative vs. U.S. government debt.
We think investors should underweight credit due to the risk of spreads widening and hold government bonds. Corporate bonds should be focused on short duration.
As with government bonds further out along the curve, we don’t believe long-term investment-grade yields currently compensate for risks right now. A sell-off might present opportunities, however.
Equities
We still like U.S. equities, and particularly those in the AI infrastructure space. That said, yellow flags are emerging in the form of circular vendor financing deals, and the sector’s equities are fully valued. Lower short rates should help valuations, though. Given the weak U.S. economy, a barbell position in both the technology sector, sensitive to lower rates, as well as the defensive sectors strikes us as wise.
European equities should benefit from increased government spending and higher earnings. There’s already been a repricing of the defense sector given plans for a build-up across the continent, but this should continue in 2026 as plans turn into reality. Indeed, defense spending has the ability to spread across several sectors. Earnings were flat for stocks in 2025 due to the stronger Euro but 2026 should deliver positive year-over-year growth.
Currencies
The debasement story should continue in 2026 for the simple reason that there won’t be fiscal responsibility any time soon. We prefer non-U.S. currencies, especially the Euro and a basket of Emerging Markets. Due to their budget deficit and sky-high debt, we think investors should be underweight the Yen.
Precious metals should enjoy more demand from the debasement trade. Central bank plus retail buying continues to be strong and investors keep looking for alternatives to fiat. Silver as the “poor man’s gold” should benefit from more catch-up buying. The silver market is also very supply constrained, and this ought to support prices.
Cryptocurrencies, despite their extreme volatility and frequent bouts of deleveraging cycles, may also be a beneficiary of the anti-fiat trade.
Commodities
Industrial commodities haven’t moved much in 2025 given slow U.S. growth. This should continue, but perhaps copper (the AI trade) and silver (a quasi-industrial metal) will buck the trend. We could see bouts of commodity strength in other supply-constrained markets, as we’ve seen lately in cocoa and coffee.
If monetary policy delivers substantial cuts in 2026, the end of the year could be bullish for commodities, assuming that the economy gains traction.
Volatility
As the world transitions from a uni-polar to a bi-polar world, there will be bouts of sudden volatility. The shift will also increase uncertainty in markets as they realign. And as most developed countries lower rates, investors who need income will need to search elsewhere. Both factors argue for owning volatility as an asset class in 2026.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation. There is no guarantee that past trends will continue, or forecasts will be realized. Our opinions are as of the date of this commentary and may change prospectively.