2026 Annual Investment Outlook: Resilience and rebalancing

• Resilience: Businesses have demonstrated a strong ability to absorb economic shocks. We expect this resilience to be further bolstered by interest rate cuts in the United States and fiscal support, such as government spending, across Europe, Japan, and China. We believe these measures should help lift the global economy out of its slowdown.
• Rebalancing: US equity markets, particularly the AI-driven tech sector, are seen as expensive, but we see compelling opportunities elsewhere. We believe stocks are more attractively priced in non-US markets, smaller-capitalization stocks, and cyclical sectors within the US (ones that tend to do well when the economy grows).²

We’re optimistic about the economy in 2026

We enter 2026 with optimism, confident in the durability of businesses, encouraged by the direction of central banks and fiscal support, and mindful of the need for diversification as the market evolves.

Key economic and investment insights for 2026

Diversification: Managing exposure to AI-driven companies

Investors are questioning whether the artificial intelligence investment boom is becoming overdone, and whether we are in a bubble. At this stage, we think the artificial intelligence (AI) investment theme plays out further and think some of the parallels being drawn with previous bubbles don’t fully hold up. However, we favor rebalancing portfolios to navigate growing risks. 

We believe there are AI opportunities that are more attractively priced, Chinese technology stocks, for example. The AI theme can play out along other angles. For example, companies that adopt AI may see cost efficiencies or new product offerings. Finally, strategies that broaden exposure beyond traditional market-cap-weighted approaches may be a prudent way to reduce the risk of overexposure to a few of the largest AI-driven stocks.

Europe: Policy is turning positive for the region. 

Eurozone growth has been disappointing for several years. However, we think that is changing now with Germany embarking on a period of higher military and infrastructure spending. We expect this to be supported across the region by higher military spending in many countries, continued growth in purchasing power, and recent interest rate cuts.

Pessimism toward the UK is too high in our view. We believe the Bank of England now has more scope to cut rates, and retail sales appear to be on an uptrend. Economic growth could surprise positively in 2026 and support UK markets.

Japan: Fiscal support, inflation may lift nominal growth

Japan is experiencing a structural return of inflation that has helped ignite a virtuous cycle where consumption is climbing alongside nominal wages. The labor market remains tight, and capital investment has been consistently stronger than most economies.

We expect Japanese growth will continue to improve and move above trend in 2026, helped by meaningful fiscal stimulus. We expect the Bank of Japan to hike rates slowly, keeping rates well in accommodative territory, which should help support growth and investment.

India: Outlook improves amid geopolitical challenges

India should see ongoing reforms and potential in 2026 alongside an improvement in US-India relations. That can help lift Indian stocks higher. We expect India to remain the world’s fastest-growing large economy, with growth modestly accelerating on Reserve Bank of India rate cuts. Domestic economic reforms remain crucial for future growth and resilience, in our view, and we expect gradual progress given political constraints.

Emerging markets:  Signs of continued strength

Emerging market (EM) equities posted outsized returns in 2025³, and we believe there are continued reasons for that outperformance to potentially continue in 2026.

• Chief among them is the anticipated weakening of the US dollar, which we expect would potentially benefit EM stocks.
• Rate cuts in the US also create room for EM central banks to continue lowering rates, supporting domestic demand and equity markets, in our opinion. 
• Many EM economies are expected to outpace developed markets in gross domestic product growth, driven by favorable demographics, rising consumption, and investment flows.
• Moreover, EMs are poised to potentially benefit from the global buildout of artificial intelligence infrastructure. China is investing heavily in AI and related technologies, which could serve as a powerful engine for equity market performance.

Private credit: Diversification potential 

We believe private credit remains an attractive option for those seeking diverse sources of income beyond traditional credit. Base rates remain above pre-pandemic levels,⁴ and an improved outlook for both the underlying real estate and cash flows of middle market borrowers should allow for private credit to perform well into 2026, in our view.

In addition, a more benign risk environment, better growth, and stable inflation, coupled with easier US monetary policy, are conditions that we believe should support private credit.