Fast reading
- The outlook for the US appears bright, but we are cautious on the potential for consumer weakness. We are also constructive on Japan, following the election result.
- Our conviction in AI remains strong, although the opportunity is not without risk. 2026 will need to deliver tangible evidence that investment is translating into margin expansion.
- The concentration in mega-cap stocks presents challenges for active managers. A balanced approach will help to mitigate risk.
We remain optimistic about the macro environment as we head into 2026. US GDP growth is expected to strengthen, supported by potential deregulation, tax reform, interest rate cuts and the deployment of the remaining US$700bn in infrastructure funding. Corporate earnings should benefit from these tailwinds, alongside artificial intelligence (AI)-driven productivity gains and a possible easing of tariff tensions, which could unlock global economic activity and broaden market participation.
Japan’s outlook is also constructive. The election of Prime Minister Sanae Takaichi – a protégé of former PM Shinzo Abe – signals policy continuity, while interest rate normalisation and strong wage growth mark the end of a prolonged deflationary period, boosting consumption and nominal GDP.
Despite these positives, risks remain, including ongoing political instability in Europe, escalating US-China tensions, the war in Ukraine and elevated valuations. With markets near all-time highs and multiple sources of potential volatility, a diversified approach will be essential.
Key indicators to watch
The trajectory of US interest rates remains central, as expected cuts could reignite risk appetite and support equity valuations. Medium-term tailwinds also include US President Donald Trump’s policy agenda of potential tax cuts and deregulation.
US inflation trends will also be closely monitored – if inflation remains above central bank targets, it will stay in focus for investors. While strength across income levels is encouraging, if prices remain elevated for longer, consumer sentiment could shift quickly.
Fiscal and trade policy developments – particularly US-China negotiations – will dictate global stability and are, in our view, likely to receive the most attention.
Opportunities ahead
Falling interest rates should broaden the market rally, bringing fundamentals back into focus and benefitting diversified portfolios, particularly those exposed to sectors and styles beyond recent mega-cap leadership.
US housing stands out as a near-term opportunity, supported by improving confidence and mortgage market policy momentum ahead of the midterms.
Our conviction in AI remains strong, although the opportunity is not without risk. AI is an era-defining technology, and while the narrative is compelling, fundamentals and valuations cannot be overlooked indefinitely. We are mindful that the scale of capital expenditure (capex), combined with uncertainty around the timing and magnitude of returns, leaves the AI rally vulnerable to shifts in risk appetite. For sentiment to remain supportive, 2026 will need to deliver tangible evidence that AI investment is translating into margin expansion.
China also offers potential, with attractive valuations and improving domestic consumption, alongside its efforts to play a leading role in technology, particularly AI inferencing.
With markets near all-time highs and multiple sources of potential volatility, a diversified approach will be essential.
Long-term drivers
Sustainable companies have historically enjoyed a structural advantage, often reflected in premium valuations. However, the rise of the ‘anti-ESG’ movement and higher rates have pushed valuations of sustainable companies to a discount. ESG is evolving, with greater emphasis on governance and financial materiality. While some companies with weaker governance are currently performing well, history – and our research – suggests they struggle to deliver durable returns. We expect sustainability to regain investor focus over time.
Infrastructure investment is accelerating globally, driven by US and German fiscal stimulus, much of it tied to climate resilience and industrial demand. This aligns well with our approach, which favours companies positioned to adapt to or thrive in a reshaped global economy.
Finally, the concentration in mega-cap stocks presents challenges for active managers and, as markets broaden, more sophisticated risk tools – such as shorter-term models incorporating customisable factors like AI – are essential. A balanced approach across factors and styles will help to mitigate concentration risk.
Managing risks
US-China trade tensions remain a key risk, as both economies remain deeply interlinked (China relies on US consumer demand, while the US still depends on Chinese manufacturing) despite efforts to diversify and reshore. We expect a truce of sorts, but any escalation could hit sentiment.
With inflation still above target, potential US consumer weakness is another concern. Given the scale of US consumption, any sustained slowdown could have global repercussions. We continue to track key indicators – spending trends, employment data, inflation, and credit conditions – to assess resilience and potential vulnerabilities.
European political instability, particularly in France, is creating policy uncertainty. Leadership turnover and rising polarisation are weakening consensus-building across the EU, complicating its ability to respond cohesively to economic and geopolitical challenges.
We continue to emphasise diversification, disciplined risk management and idiosyncratic stock selection to navigate these challenges.
Potential surprises
A positive geopolitical surprise could come if President Trump helps broker peace in Ukraine, easing inflation and energy prices while supporting infrastructure and reconstruction-related equities.
In the US, midterm-related stimulus from Trump – such as mortgage market support – could buoy US markets in the lead-up to elections and be a boon for the consumer.
A pause in AI capex – whether driven by bubble concerns or disruptive innovation – could trigger a broader market correction. The risk is widely acknowledged, but its timing remains uncertain. Maintaining diversified exposure will be key, and our proprietary risk-management system MultiFRAME enables us to monitor and adjust risk dynamically as conditions evolve.
Finally, credit stress in subprime lending and regional banks have raised concerns about underwriting standards, so we continue to monitor this closely.
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