Focusing on 2026 & Beyond

As 2025 comes to a close, it’s time to turn our attention to 2026 and beyond.

Since the global financial crisis (2008-2009) the US has dominated both equity and fixed income investment returns. However, the global investment landscape is evolving with new opportunities, improving profitability and more attractive valuations in sectors and regions that so far have underperformed.

Within the US equity market, the earnings outlook has brightened for small-capitalization stocks and industrials. These areas, which are typically more highly leveraged than the rest of the market, will see profitability rise as the Federal Reserve trims interest rates and debt servicing costs fall. Financials should benefit from a steeper yield curve, better net interest margin and innovations in capital markets.

Similarly, prospects appear to be brightening outside the US. Over the next 12 months, earnings growth is expected to be as high in emerging markets as in the US. As US short-term interest rates fall, investors will be confronted with rollover (or reinvestment) risk in their money market holdings. We anticipate many will be incentivized to seek new opportunities in longer duration or global fixed income as well as alternative assets, including private credit and private real estate.

Globally, the primary beneficiaries of the AI era have been those firms that provide the hardware to launch its rapid growth and those that have made it accessible to business and individuals to enhance data gathering, search and analytics. However, the age of AI is only in its initial phase. Of all the investible themes associated with AI, one of the most compelling is the need to “feed the beast” to sate its vast energy appetite. New investment will be required in electricity production, transmission and storage as well as the build-out of its infrastructure, including data centers.

In summary, over the coming year we anticipate a broadening of investment opportunities, driven by global profits growth and by monetary policy easing. We expect yield curves will steepen and the US dollar will remain weak. The likely winners include emerging markets, European equities and more cyclically exposed US equities, like small-cap stocks. Returns in the US information technology sector will likely remain solid.

Risks to these opportunities include a pause in the Fed’s rate cutting cycle which would flatten the US yield curve and boost the value of the US dollar. Any surprises in higher inflation could result in weakness in both stock and bond markets. Finally, geopolitical shocks to global energy supplies would introduce unanticipated risk in both equity and credit markets.