2025 has rewarded investors with broadly strong share market gains despite geopolitical tensions, tariff disputes and rising debt concerns. Major central banks easing interest rates and resilient corporate earnings drove markets higher, and 2026 could well build on that momentum.
In the US, the administration is likely to intensify efforts to spur growth and restore voter confidence before the summer. If achieved, this will help to bolster approval ratings and mitigate the risk of electoral losses that could leave President Trump politically weakened for the remainder of his term.
The global economy is also now deep into the interest rate-cutting cycle. While inflationary bumps may slow progress, the backdrop of gradual quantitative easing remains supportive for shares and bonds. Allied to that, continued weakness in the US dollar should continue amid easing monetary policy, and prove supportive of areas such as Asia and emerging markets where a cheaper greenback can encourage investment.
Tech valuations and AI
The fly in the ointment is valuations, especially in the technology sector where AI infrastructure build has reshaped the investment landscape and fuelled growth. Here, it’s harder to discern who the ultimate winners are, and investors need to be conscious of the top-heavy nature of the US and global indices that have become ever more skewed to the tech behemoths. A stumble for these names would be highly consequential.
AI remains a structural growth story, but real-world constraints such as energy supply or infrastructure bottlenecks could create volatility. Meanwhile, commodities and energy stocks may benefit as demand increases, making them a potentially useful hedge against inflationary pressures as well as an alternative way to benefit from the AI boom.
A new dawn for Asia and emerging markets?
2025 has seen catch-up gains in Asia, Europe, and Japan, highlighting the benefits of diversification. While many previously cheap areas have already re-rated, smaller companies and emerging markets could still offer attractive entry points. We should perhaps expect a continued rotation in 2026 as investors increasingly seek value beyond the US, but perhaps with the emphasis on more specialist areas left behind.
Meanwhile, bond markets still face inflation risks, amplified by nations prioritising domestic manufacturing and resource security. Still, current yields provide a cushion, and faster-than-expected rate cuts could deliver a return kicker. With this in mind, we think they still represent an important part of a broad portfolio. For investors concerned about the potential for inflation to flare up again, the higher yields – albeit higher credit risks – of corporate bonds can provide a bit of a buffer, and specialist shorter dated bond funds can be deployed to bolster portfolios further.
As always, diversification by sector, geography and type of asset is wise to help reduce risk and ensure you are not overly reliant on one area or on certain circumstances.
Four tips on how to navigate 2026
- Diversify globally: Keeping a foot in the AI camp seems sensible to benefit from the long-term potential, but it’s worth ensuring a portfolio isn’t flying on one engine of US tech. Emerging Markets and Europe, as well as selected smaller companies where it has been largely a period of famine rather than feast this year, can also offer growth prospects without the risks of reliance on just a handful of companies.
- Balance growth and resilience: Expect intermittent volatility from inflation and geopolitics. Blending defensive, income-orientated assets and sectors with structural themes like AI could keep returns ticking over during more difficult periods.
- Consider some ‘real’ assets: Commodities, energy and infrastructure assets can hedge against and inflation shocks as the virtual world increasingly collides with physical one.
- Configure bond exposure intelligently to balance return opportunity with inflation risk. Longer-dated government debt could continue to be the most volatile part of the fixed income spectrum, which cuts both ways depending on the outlook for inflation. Yet solid income-driven returns should be available from shorter-dated high-quality corporate debt.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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