2025 was a year of significant market volatility, primarily driven by U.S. trade tariffs and shifting policy landscapes. Despite these challenges, global equities advanced 20% in U.S. dollar terms but much less in other currencies, as the dollar weakened significantly.
Notably, equity market leadership rotated away from the U.S., with countries such as South Korea, Spain, Poland, Chile, Italy, and Brazil outperforming. Sector-wise, communication services, materials, and financials led gains, while real estate and consumer discretionary sectors underperformed. The AI investment boom was a defining theme, helping the U.S. avoid a recession, though U.S. equities lagged global peers. Ongoing AI capital expenditure is expected to continue, but its impact on productivity will be gradual.
The capex boom is unlikely to boost employment by much, which will temper inflationary pressures. This, in turn, will allow the Fed to cut interest rates further. Even if inflation rises temporarily, we do not foresee the Fed responding by backing off its dovish stance. And especially not after May 2026, when a new Chair takes over at the Fed.
- Don’t Fight Trump
- Fundamentals Still Strong
- Regional Perspectives
- Our Baseline Scenario
- Releveraging the U.S. Housing Market
- The Venezuela Raid
- Is Iran Next?
- Risk Scenarios
- Bond Markets
- Commodities
- Our Portfolio Positioning
Don’t Fight Trump
President Trump has made the AI investment boom part of his national security agenda. At the same time, the Trump administration, and soon to be the Fed, will look to continue lowering borrowing costs in 2026. Don’t fight it. This is the way.
Another positive is that the trade war is basically over. The trade war was never popular with American voters, and it is highly likely that tariffs will come down in 2026.
Global GDP growth is expected to receive a boost in the first half of 2026 from front-loaded fiscal stimulus, particularly in the U.S., Germany, and China. Global core inflation has remained at 3% for two full years, and global inflation is unlikely to return to central bank targets without a period of sub-par growth that leads to a softer labor market.
We expect that AI spending will deliver another year of solid capex gains. While an AI spending wave could boost global growth, history suggests that the transition from capex spending to productivity gains takes time. With spending on AI still in its early stages, productivity dividends will be limited this year.
In 2026, we expect growth and inflation are expected to be basically in line with 2025, with a real GDP increase of 1.8% and core inflation of 2.7%. Inflation has remained sticky, and we expect that stickiness will persist next year. Although tariff pass-through has been less than expected this year, we believe the process will be more protracted than initially thought, and the effects could continue well into next year. Nevertheless, we expect the Fed to continue to cut rates.
While labor market momentum is likely to remain weak, we expect firm economic demand to cap the unemployment rate at 4.5% before we see a modest improvement in labor market conditions later this year.
Regarding the U.S. administration’s policies, uncertainty around immigration, trade, and fiscal policy has weighed heavily on growth prospects, dampening hiring more than capex in 2025. While business caution persists, investment is increasingly fueled by the expanding AI trend.
Fundamentals Still Strong
Looking ahead, despite tariffs, supportive financial conditions, further Fed easing, modest fiscal stimulus, and possible regulatory rollbacks, business confidence will be boosted. Assuming a recession is avoided, improved sentiment should spark renewed hiring alongside broader AI adoption. Deregulation could gain momentum as the administration enters its second year and approaches mid-term elections. A more business-friendly environment may be underestimated, with the potential to unlock productivity and capital deployment.
Regional Perspectives
The real macro question for 2026 is whether China, Germany, and the rest of the world will rise to the challenge of offsetting a decline in U.S. fiscal spending. The world needs a new global growth engine.
EUROPE
In Europe the trade war created uncertainty and impacted sentiment, but the Euro area economy saw trend-like growth at 1% in 2025. We expect faster Euro area growth in 2026 as German fiscal expansion steps up and recent ECB rate cuts take effect. At the same time, inflationary consequences of faster growth are likely to be modest, taking Euro area inflation below target in 2026. For the ECB, above-potential growth provides an offset to low inflation, keeping rates on hold.
A multipolar geopolitical context requires a massive capex boom, one that has already been happening. For example, NATO members in Europe have agreed to increase defense spending to 5% of GDP. Even if the rest of Europe is slow to ramp up spending, German fiscal stimulus is set to ramp up significantly in 2026. A potential Russia-Ukraine ceasefire would also be a positive for Europe.
We are already seeing credit demand picking up in Europe and the region also stands to benefit from an improving Chinese economic backdrop. We think that Eurozone earnings will grow more meaningfully this year, driven by stronger operating leverage, less currency and tariff headwinds, and better financing conditions.
CHINA
China’s economic growth in 2025 proved more resilient than expected, supported by exports and fiscal policy. For 2026, we expect real GDP growth to slow to 4-4.5% amid continued disinflationary pressures. However, with production continuing to outpace demand, the resulting inventory heightened price competition, prompting the government to intervene with “anti-involution” measures. These actions slowed the pace of price declines in targeted sectors but also weighed on investment and production.
A core pillar of Chinese growth, manufacturing capex, has begun to contract sharply. Chinese policymakers will ultimately succumb to pressure on their economy throughout 2026. Given that President Trump will want to solidify the détente with Beijing ahead of the midterms and that Chinese assets remain relatively undervalued, we expect Chinese assets to have another strong 12 months.
JAPAN
The Japanese economy is gaining momentum. Fiscal stimulus will be steered towards more productive investments, and there are promising signs of corporate reform. More activist investing will also help a re-rating in stock prices. With the Japanese yen being the cheapest major currency, buy equities unhedged.
Our Baseline Scenario
We remain constructive on global equities into 2026, driven by the AI theme, additional support from further Fed easing and fiscal stimulus, and the expectation of some stabilization and a modest eventual labour market rebound. We continue to view the U.S. AI supercycle as a key investment theme for next year.
Policy headwinds that were seen as barriers to growth in 2025 are now fading, and tailwinds will dominate early 2026, as we head into a critical mid-term election. Trump 2.0 was wise to front-load economic drag, with most of the consequences of tariffs hitting in mid-2025, and the effects of immigration reform largely over by mid-year. Now, the benefit of three fresh cuts by the Federal Reserve, and the stimulus from the One Big Beautiful Bill, will gain traction as the year passes.
The deployment of AI productivity gains, potentially lower energy prices and the pro-business, deregulatory agenda of the U.S. administration should act as additional catalysts into 2026. Valuations and equity index concentration remain the main risks to our outlook. Should the Fed ease policy further as inflation dynamics improve, we could see greater upside in 2026.
The AI sector’s momentum is spreading geographically and across industries. Given that European, Japanese and Chinese stocks still trade at a significant discount to U.S. stocks, and that we still expect to see more U.S. dollar weakness, we continue to favor an overweight to international markets.
Our outlook for the dollar remains bearish, though the magnitude and breadth of weakness are expected to be less pronounced than in 2025. We expect a bearish dollar bias in 1H26, driven by Fed rate cuts and a global recovery, but weakness will be constrained by U.S. economic resilience. Risks to dollar strength remain if U.S. growth prompts the Fed to change course or if global growth momentum turns negative.
Releveraging the U.S. Housing Market
In the last few years, U.S. fiscal stimulus was the main driver for growth. Going forward, the U.S. will not be able to spend as much as it did in the past 9 years. Aside from a modest fiscal stimulus in the first half of the year, the U.S. has no meaningful fiscal room to stimulate the economy. This leaves very little room for boosting domestic growth. As such, it is up to the rest of the world to stimulate.
However, there is also another way that the U.S. could stimulate its economy in the coming years. There is significant spending power locked up in housing equity. Even as the U.S. housing market has cooled over the past year, a substantial amount of homeowners’ equity remains locked in property. After the Global Financial Crisis, households deleveraged, and mortgage debt has risen much less than property prices over the past 10 years. The Trump administration will seek to unlock the wealth in Americans’ homes. To that end, they need lower mortgage rates and greater use of home equity lines of credit.
Mortgage rates are already coming down, but there is more work to be done. A high spread between mortgage rates and bond yields is an invitation for policy intervention. The large spread with 10-year yield suggests that the Trump administration will have to get involved. The Trump administration is going to make a play for the 2002-2007-style shift between tech-driven growth and a non-tech economy. That is what they mean when they say that 2026 will be about the Main Street.
If, in the coming quarters, we see a rebound in residential housing market activity, that would be a bullish sign for the markets.
The Venezuela Raid
President Trump’s military action in Venezuela was similar to the 1983 invasion of Grenada. A way to flex American muscle in its ‘backyard’ while, at the same time, reducing U.S. global commitments elsewhere.
The U.S. attack on Venezuela is also remarkably similar to the 1989 intervention in Panama. In that attack, the U.S. invaded and occupied Panama until President Manuel Noriega surrendered to the occupying forces. The similarities between the two operations extend to the legal realm since Noriega was also wanted for drug smuggling.
Venezuela is now led by the Vice President, Delcy Rodriguez, who has been endorsed by the Trump administration. But the regime is, in reality, stabilized by the country’s military. President Trump’s statement that the U.S. will “run the country” and that he is not afraid of “troops on the ground” indicates the U.S. will negotiate with the military and the opposition during the transition. The extraordinary success of this operation required considerable human intelligence on the ground. That suggests that members of the current regime, particularly the military, have been in contact even before the raid.
Let’s be clear, the American action in Venezuela is not about oil but is about U.S. control in Latin America. Trump has made it clear that he sees the Western hemisphere as America’s natural sphere of influence.
The raid on Venezuela has a limited impact on oil prices. Even though Venezuela has enormous oil reserves, its exports peaked at over two million barrels per day (bpd) in the early 1990s. Today, the production is at 900,000 bpd. As such, there is little additional upside to current production, even in the best-case scenarios. And boosting that output will require capital and time.
Is Iran Next?
Trump has already warned the regime in Tehran that he may intervene militarily if they continue to suppress the ongoing protests in the country. Unlike the combined Israel-U.S. attacks in the middle of 2025, which did not threaten the regime existentially, a military attack on behalf of opposition protests would be perceived as existential by Tehran. As such, their retaliation may be a lot more significant. Exposure to energy remains a good hedge against further geopolitical uncertainty.
Risk Scenarios
The most positive scenario for risk assets would involve a broader AI theme, a disinflationary effect, upside from global fiscal stimulus, and further tariff rollbacks. A quick realization of AI-driven efficiency and productivity gains should drive stronger GDP growth.
At the same time, the AI boom is also the biggest risk to the U.S. economy and markets, as there is no real evidence that AI adoption is accelerating or that it can sustainably contribute to productivity growth. And yet, the commitment to the data center capex buildout remains. A capex buildout driven by optimistic enthusiasm about the underlying technology is a boon to multiples. But that could turn into a bust if the underlying technology loses its shine.
The positive risk scenario for the Euro area hinges on a positive multiplier for the growth arising from German fiscal expansion, with the wildcard of a geopolitical solution to the Russia/Ukraine conflict potentially leading to a peace agreement, with dividends to the growth outlook from lower energy prices and a reconstruction investment boom.
Bond Markets
We think U.S. Treasury yields will continue to stay within a range of around 4%. Thanks to tariff revenue, bonds have been well-behaved thus far. One key risk for bond markets is the upcoming Supreme Court ruling on Trump’s tariffs. We think it is unlikely that the court will completely strike down the legal basis of the tariffs, but it is a risk. If we are wrong, the Supreme Court could imperil the $3 trillion in revenue that tariffs are expected to generate over the next decade. The bond market will likely sell off amid U.S. policy incoherence. Tariffs may not be a great way to raise revenue, but they are an effective way to do so.
Within fixed income, we favor government bonds because corporate bond spreads are at historically low levels. We do not expect a recession anytime soon, but any disappointing economic news could trigger wider corporate bond spreads, especially in the high-yield segment. When you are not compensated for risk, we prefer not to take it. We believe the best way to profit from credit exposure is through private credit, as it better compensates for the risks taken.
Commodities
We remain bullish on Gold as continued demand from the long-term trend of official reserve and investor diversification into gold to push prices towards $5,000. Silver’s sharp gains appear less durable. Tariff-related distortions, speculative excess, and unchanged Chinese export policies suggest that the late-year rally reflects sentiment rather than fundamentals.
We are turning more positive about industrial metals as demand will outpace supply. Especially when countries get more serious about investing in infrastructure and defense spending for national security. Demand for industrial metals will only rise in the coming years, while supply growth is limited after years of underinvestment in the sector.
We expect oil prices to remain stable, with limited upside. Global oil supply is forecast to outpace demand, placing the burden on supply to rebalance and avoid a potentially significant decline in global oil prices. We expect the market to reach equilibrium through a combination of rising demand, driven by lower prices, and production cuts. That said, energy prices will provide a hedge if geopolitical tensions spike again, especially in the Middle East.
Our Portfolio Positioning
As the key economic fundamentals have not changed, we are not making any changes to the portfolio strategy at this moment. We continue to favor international diversification, as we feel international markets can continue to outperform. As the positive effects of AI are broadening, we might further diversify the portfolio in terms of sector exposure in the coming months, including adding more value-oriented sectors.
