As we take our first steps into 2026, we can look back on a period of strong investment returns in 2025 – and, indeed, over the past three years. This progress came despite persistent concerns around global trade, pressure on corporate profitability, rising inflation, and increasing geopolitical instability.
In the end, the initial tariff “bark” proved louder than its bite – a reminder that while nothing in markets is guaranteed, they often find ways to climb a wall of worry. At the same time, a more fragmented global economy, with resilience now the strategic priority, is reshaping supply chains and creating both new opportunities and fresh risks.
A reasonable backdrop
Global growth looks steady, if unspectacular. The International Monetary Fund expects modest expansion across both developed and emerging economies, while inflation – long the bogeyman of bond markets – is now more manageable, though not fully conquered. As a result, central banks appear set on a gentler policy path. Any easing in interest rates should provide a measure of reassurance to equity and bond investors, even if volatility remains a fact of life.
Equity markets have been dominated by the so‑called “Magnificent Seven” mega‑cap technology giants in recent years. But we expect returns to broaden out in 2026. This trend began to emerge in the latter part of 2025 and has continued into the new year, with opportunities appearing across smaller and mid‑cap companies. Further strength may come from sectors connected to long‑term structural themes: the energy transition, digital infrastructure, and healthcare innovation.
Valuation risks remain
The biggest risk to the 2026 outlook is valuation and investors should be cautious about chasing momentum. The “easy money” made by passively buying broad indices is likely behind us. The S&P 500 sits at elevated levels after riding the artificial intelligence wave for three consecutive years. The market must now adjust to a new era: structurally higher interest rates than in the post‑Covid era, diverging global growth paths, and a more fragmented geopolitical backdrop.
The Magnificent Seven has driven a large share of US equity gains for investors, but as we enter 2026, conditions at the top are becoming more difficult. Earnings growth among the mega‑cap tech names is starting to decelerate. While the sector still offers opportunities, returns are likely to be more muted.
Greater market dispersion
This sets the stage for a wider dispersion of outcomes. Small and medium-sized company stocks – among the most overlooked asset classes of the past five years – are beginning to reawaken. We expect the valuation gap to narrow, and even a modest reversion to the mean could see smaller companies outperform meaningfully, particularly in the US if domestic economic momentum holds.
Meanwhile, a softer US dollar combined with potential Federal Reserve rate cuts could give Asian and Emerging Market central banks more room to ease monetary policy. Historically, these regions have tended to outperform during periods of dollar weakness, as this typically reduces financial stress, attracts capital flows, and lowers energy and commodity import costs. As such we anticipate these regions could be in a sweet spot.
Risks, of course, remain. Soaring government debt and political uncertainty – from elections in major economies to renewed trade tensions – could unsettle sentiment. Tech valuations, still elevated after years of enthusiasm, may come under scrutiny if earnings disappoint, with spillover effects across markets. And although inflation has largely been contained for now, supply disruptions or commodity shocks could still provide unwelcome surprises and put further interest rate cuts on ice.
In summary, 2026 should favour those who combine prudence and imagination: blending resilient, defensive holdings with exposure to long‑term structural growth themes and keeping enough dry powder to take advantage of opportunities when markets offer them.
To help guide your thinking further about the year ahead here are three important mistakes to avoid.
Don’t take too much, or too little, risk
Investing is always a balance. Taking risk is necessary to generate an acceptable return ahead of inflation but take too much at the wrong moment and you can end up derailing your plans. There are plenty of risks out there. Events may come along to test or disrupt this year with markets likely impacted by news on inflation, economic policies in the US, and how global growth fares. Yet there are also great long-term opportunities and a well-thought out and diverse portfolio should stand long term investors in good stead.
When considering the inevitable ups and downs of investing, it can be easy to equate it with gambling, but that would be a mistake. In gambling there is, realistically, an expectation of a negative outcome. You might win some bets initially, but the more you do it over time the more likely you are to lose money. Investing is the reverse. It’s perfectly possible to lose money, and many people do, especially over short time frames or by focusing too much on a single stock or area, but over the longer term there is expectation of a positive outcome. That means longer you keep doing it the more likely it is that you will make money.
The problem is events, especially unexpected or ‘Black Swan’ occurrences, often cause investors to panic and sell out at just the wrong moment. Instead, it’s generally best to keep going, stay invested and adjust portfolios according to where a good balance of risk and reward lies. That could mean tilting more towards more risky areas at times but being more defensive at others. Yet ultimately having a portfolio that takes sufficient risk to secure strong long-term returns while being sufficiently diversified so not to be reliant on a particular scenario playing out, or a small number of stocks or areas doing well.
Don’t reach blindly for yield
Investors are naturally attracted to investments producing a high yield, the yardstick by which the income an investment produces is measured. Generally, this is the amount it has paid over the past year divided by its price, expressed as a percentage. Although some yield calculations, notably for bonds, are forward looking and include the capital return or loss built in too.
Bear in mind that a high yield can also be a warning sign. There is likely to be a very good reason why it looks so good. For bonds, higher yield means higher risk and there is more chance of default and capital loss. For shares it may mean there is a strong chance that dividends, the pay outs to shareholders, are going to fall rather than rise.
This is especially relevant at present as the higher interest rate environment has created corporate winners and losers. Those with low levels of borrowing, or even net cash on their books, are in a strong position, but for those with lots of debt to service there may be difficult times ahead if earnings falter.
It is therefore worth considering a selective approach in the riskier high-yield end of the bond market where defaults are more likely to arise. Meanwhile, for those focusing on dividend-paying shares it suggests a focus on quality and strength is important, as well as a need to harness enduring structural growth themes. 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.
Don’t be ‘absolutely’ wrong (it's OK to be a bit wrong)
Football managers frequently say they learn more about their team from defeats than from victories. It’s a similar story for investing. Mistakes are inevitable, and they can be helpful as they can reveal flaws in your approach, so it’s good to analyse them and question how they might have been avoided.
Never forget that a result by itself tells you nothing about how it was achieved. A good gain might have been attained through careful, well-informed investment or it could have been a wild gamble. To expand the football analogy, a team might be fortunate enough to win the match with a speculative shot from the halfway line, but that’s not going to help with tactics against the next opponent.
Picking winning stocks is very difficult because, at the risk of stating the obvious, the future is uncertain. Uncertainty about how companies might compete, expand and adapt; industry changes, the effect of regulations; demographic trends; economic challenges – the list is endless. What you see each day with share prices erratically moving up and down is investors trying to grapple with these uncertainties and price them in. The world is challenging for companies to navigate and that is especially the case today as the pace of technological change and disruption is so rapid.
How can investors stand a better chance of winning? Falling back on another sporting analogy, rather like a successful tennis player it’s more about making as few mistakes as possible than it is about attempting spectacular, higher-risk shots that impress the crowd. Avoiding the problem stocks and overvalued areas that result in permanent capital loss is more important than pinpointing all the winners – it’s far better to be about right through diversification and risk control than it is to be absolutely wrong.
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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