A forward-looking 2026 investment outlook examining AI capex, inflation, US policy, debt risks, market breadth, geopolitics and the dollar.
The strength and resilience of most asset markets in 2025 have led to a largely bullish consensus outlook for 2026. However, the surge in precious metals prices suggests that not all is well beneath the surface. Tension remains between Goldilocks optimism—characterised by resilient growth and easing financial conditions—and a growing list of structural risks.
For investors, the central question is whether this positive momentum can be sustained. Or will fundamentals buckle under the weight of excessive government debt, economic fragility, geopolitical friction, persistent inflation, and elevated expectations?
We have no better view of the future than anyone else. However, we believe there are several unresolved investment questions for 2026 that deserve close attention. In this article, we frame those questions primarily from a US perspective. The US remains the world’s largest economy, the dollar is the global reserve currency, US Treasuries are the world’s key collateral asset, and US equities dominate global market capitalisation. When the US sneezes, the rest of the world catches a cold.
The obvious, but cop-out answer to this question is both. The Gartner Hype Cycle reminds investors how technological change is routinely overestimated in the short term and underestimated over the long term. Jeff Bezos has described the current AI capex cycle as a “good bubble”: a necessary process to achieve valuable long-term benefits.
Bezos speaks from experience. Between 2000 and 2001, he suffered a huge drawdown in the value of his Amazon stake before emerging years later as the world’s richest man leading one of the world’s biggest companies. For equity investors, the critical issue in 2026 is timing. As enthusiasm for generative AI matures, scrutiny is shifting towards return on investment amid rapidly rising capital expenditure.
At present, direct AI revenues remain concentrated among a handful of companies, led by Nvidia. However, 2026 may mark the point at which second-order productivity benefits from AI adoption begin to emerge across the wider economy.
Since Fed Chair Jerome Powell first described post-lockdown inflation as “transitory” in January 2021, the US has recorded five consecutive years of monthly inflation readings above the Fed’s 2% target*. In the decade prior to 2021, inflation rarely exceeded 2.5%. Since then, it has barely fallen below that level*.
As the second Trump administration focuses on retaining its Congressional majority in October’s midterm elections, there is a risk of overstimulating an already hot economy. Lower interest rates, liquidity injections, and fiscal initiatives could reignite inflation pressures.
The upcoming decision on Powell’s successor may be pivotal in setting the tone for US monetary policy.
The FOMC has already paused quantitative tightening and introduced targeted liquidity support for the Treasury market. Rate cuts and potential balance-sheet expansion may follow. At the fiscal level, proposals such as tariff dividend cheques and long-duration mortgage reforms risk delivering a short-term sugar rush to voters.
For investors, the key indicators to watch in 2026 will be US 10-year Treasury yields and monthly inflation data. History suggests that the final stage of disinflation is often the most difficult.
While US employment has remained resilient, job creation has slowed. Further cooling in the labour market could trigger a retrenchment in consumer spending, which accounts for the majority of US GDP. Historically, rising unemployment can become self-reinforcing.
There are, however, two important caveats. First is the K-shaped economy. Significant imbalances of asset ownership and consumer spending complicate policymaking, particularly when asset prices are at risk.
The second caveat is immigration. Sharply lower immigration levels are constraining labour supply, even as AI reshapes workplace productivity. A plausible scenario for 2026 is one of jobless growth, where productivity improves while headline employment stagnates or declines.
The key risk lies in how quickly the labour market can adapt to changing demand patterns.
Rising public-sector debt remains one of the most significant unresolved risks for investors. In 2025, the US Treasury refinanced approximately $9 trillion of maturing debt at yields around 300 basis points higher, adding roughly $270 billion to annual debt servicing costs**.
In 2026, total US government debt is likely to exceed $40 trillion, with a similar refinancing challenge ahead. Debt management is increasingly precarious and intertwined with other areas of policy, particularly monetary policy (see inflation targeting above).
Treasury Secretary Scott Bessent has highlighted privately issued, US-dollar-denominated stablecoins as a potential new source of demand for Treasury issuance. This demand may prove critical as foreign reserve managers continue to diversify away from dollar assets and into gold.
However, this new price insensitive bond buyer might not come quickly enough as more vigilant private investors seek higher yields amid ongoing geopolitical tensions.
The canary in this coalmine is Japan’s government bond yields. The world’s most indebted large economy and largest owner of everyone else’s bonds is normalising its monetary stance with higher rates. Just as global capital is anticipating lower dollar rates. The risk that the authorities might “lose the long end” of their bond markets is rising.
In 2025, trade policy became firmly embedded as a tool of national security and foreign policy. Many of the issues raised during the “Liberation Day” announcements remain unresolved.
Strategic decoupling between the US and China continues, even if legal challenges unwind specific tariff measures. The broader direction of travel is set. Tariffs may bite harder than expected, supply chains remain vulnerable, and inflation risks persist.
In Europe, higher defence spending as a share of GDP now looks inevitable, regardless of improved ceasefire prospects in Ukraine. Yet, diplomatic rhetoric between the US and China has stabilised, if not warmed, raising the possibility of a broad agreement.
Presidents Trump and Xi are expected to meet several times in 2026, beginning with Trump’s state visit to Beijing in April.
Equity returns have been heavily concentrated in US large-cap technology stocks for several years. However, 2025 saw US equities underperform the global benchmarks for the first time since 2009, exacerbated for US investors by a weakening dollar. US valuations appear stretched while the UK, Japan, and most emerging markets remain more reasonably priced.
However, the sheer concentration in a relatively small number of US technology companies raises the risk of a chaotic, uncontrolled unwind. The structure of global equity values means that capital rotating from a top-tier US technology company to tail assets, such as the UK, is like draining the Hoover Dam with a garden hose. Such structural rotations can take years, but they can offer enormous potential for positive price action for under-owned assets. This is something we saw play out in 2025 in areas such as gold mining equities.
In early 2025, the trade-weighted US dollar index (DXY) stood at 108. Following Trump’s April Liberation Day address and a reassessment of the global order, it fell to 98. Since then, the DXY has traded in a narrow range between 98 and 100***.
The consensus outlook for 2026 is for further moderate dollar weakness, with the DXY expected to drift into the low-to-mid-90s. A weaker dollar tends to support non-US markets and can act as a deflationary force. For example, in the UK, the sterling cost of oil fell by nearly a third in 2025, with around one-third of that move driven by dollar depreciation. An indication of how historically cheap oil has become, but also the scope for deflationary tailwinds able to offset a largely inflationary backdrop.
In Part 2 of this series, we will examine key equity themes and the sectors that we believe offer the most compelling opportunities for 2026.
Sources:
*https://tradingeconomics.com/united-states/inflation-cpi
**https://www.firstnational.ca/commercial/resources-insights/article/will-the–9-trillion-maturity-wall-in-2025-force-u.s.-treasury-yields-higher
**https://www.deloitte.com/us/en/insights/topics/economy/spotlight/us-national-debt-fiscal-effects.html
*** https://tradingeconomics.com/united-states/currency
Written by Jeremy McKeown
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