Economic and market outlook 2026 

2025 has felt like a hugely consequential year, and 2026 is likely to follow suit. President Trump seems to have put the US on a different path to that trod since 1945, ripping up the old economic consensus. The aftermath of this administration will be felt for years to come, and its success will only be able to be fully judged decades from now. The growth of AI may also herald the start of a new era, although its consequences are unclear at this stage. All we can say with certainty is that it is likely to matter from an economic and financial market perspective.

Of course, as Yogi Berra once said, “it’s tough to make predictions, especially about the future”, but as investors we must try, and our annual outlook offers our thoughts on the global economy and markets. In 2025, the two big developments were President Trump’s trade agenda, which, after much alarm at the time, seems to have had only a modest impact on growth, and the ongoing AI boom. The former may fade further into the background as an influence on the global economy in 2026, while AI may continue to loom large.

In this paper, we address the main economic trends that investors should keep in mind coming into the new year.

Global growth should remain steady in 2026, led by a resilient US economy supported by solid consumption, fiscal stimulus from the OBBBA^[1], and a surge in AI-driven investment approaching USD 500 billion^[2]. Easing monetary policy and stabilising trade conditions should sustain momentum, while Europe benefits from German infrastructure spending and lower rates. The UK remains soft but fiscally stable, and Japan’s growth stays modestly above trend on rising wages and automation investment.

China’s expansion is likely to hold near current levels as weak domestic demand offsets gains in high-tech manufacturing and AI localisation. Beyond China, emerging markets should grow at a decent pace, supported by loose policy, a softer US dollar, and strong tech exports in Asia, though higher rates will weigh on parts of Latin America.

Global inflation is expected to stabilise around central bank targets through 2026, though with notable regional variation. In the US, tariffs should keep headline and core inflation elevated before easing toward the Fed’s 2% target in 2027, while wage growth remains contained and expectations anchored. Euro area inflation should hold near 2% as the drag from energy prices fades and softer wage growth tempers underlying pressures. UK inflation is set to decline sharply as temporary factors unwind and wage growth moderates, bringing it closer to the Bank of England’s target. Japan’s inflation should hover around 2%, supported by rising wages and tight labour markets, though recent policy measures, such as temporary VAT cuts, may dampen headline readings.

Elsewhere, inflation trends remain diverse. Australia is expected to stay within the RBA’s target range, while New Zealand should edge lower but remain above comfort levels. China is likely to remain near deflation as weak household demand and industrial overcapacity persist, with only gradual relief expected from policy support. In emerging markets, price pressures should remain contained overall, with inflation soft in Asia but still elevated in Latin America due to higher local interest rates and structural constraints.

Global monetary policy is expected to stay broadly accommodative in 2026, though central banks will move at different speeds. The US Federal Reserve is likely to continue easing, with markets pricing rates just below 3% by year-end, though cuts may slow if growth firms or inflation remains above target^[3]. The European Central Bank is expected to hold steady around 2% as inflation stabilises near target and growth improves modestly. The Bank of England may ease more aggressively than markets anticipate, with inflation falling back and activity still subdued.

Elsewhere, Japan’s central bank is set to tighten modestly, with at least two rate hikes expected as growth and inflation strengthen, while political dynamics could shape the pace of normalisation. The Reserve Bank of Australia is likely to deliver additional but data-dependent cuts, and the Reserve Bank of New Zealand may lower rates further amid spare capacity. In China, the People’s Bank is expected to maintain a cautious easing stance focused on targeted measures rather than broad rate reductions. Across emerging markets, policy divergence should persist, though stable inflation and resilient currencies provide scope for gradual easing.

Key global risks in 2026 we expect to be centred on technology, policy, debt, and geopolitics. The rapid build-out of artificial intelligence infrastructure has supported markets and spending, but the risk of overinvestment looms large. Elevated valuations and optimism around AI could expose investors if returns disappoint, while trade restrictions or new semiconductor tariffs could disrupt supply chains and pressure tech-reliant economies. Policy uncertainty may ease modestly but remains a concern, with US midterm elections and the appointment of a new Fed chair raising questions about monetary independence and legislative gridlock.

Rising public debt presents a growing medium-term risk, with major developed economies on unsustainable fiscal paths that require consolidation to maintain stability. Geopolitical flashpoints remain widespread, from the ongoing Russia-Ukraine conflict to persistent tensions in the Taiwan Strait, South China Sea, and Middle East. Although trade frictions have moderated, global political fragmentation continues to threaten market confidence and growth.

Global market positioning remains broadly neutral heading into 2026, reflecting an environment where growth, inflation and policy are converging toward long-term averages. Developed market equities are expected to see solid earnings growth driven by AI-linked sectors, though valuations remain elevated and performance outside technology is subdued. Emerging market equities present a mixed outlook, with AI exposure and a weaker dollar supporting some markets, while tariff risks and trade uncertainty weigh on others. Japanese equities remain a bright spot, benefiting from governance reform, improved profitability and attractive valuations. Small caps look inexpensive but are constrained by weaker fundamentals and limited exposure to high-growth sectors.

In fixed income, global government bonds are viewed neutrally, though UK gilts appear attractive given high yields and the prospect of deeper BoE cuts, while Japanese bonds face pressure from ongoing rate hikes. Credit markets remain supported by strong fundamentals but tight spreads limit upside; we believe frontier and Asian high-yield debt continue to offer better value. Commodity exposure is neutral, with gold supported by central-bank demand and oil expected to trade within a moderate range. In currencies, the outlook favours euro and yen strength against a softer US dollar, driven by narrowing rate differentials and improved European fiscal momentum, while sterling and the Swiss franc remain under pressure from weak domestic fundamentals.

The 2026 outlook for private markets and hedge funds is centred around three core themes:

• Exits: Dr. Jekyll versus Mr. Hyde
• The use case for artificial intelligence
• The democratisation of private markets