This article originally appeared in Connect magazine.
As we approach year-end, it’s fair to say that investors have enjoyed a much better year than expected given the challenging economic and political backdrop and the largely negative media headlines. We remain in a period of significant change and policy uncertainty, so nobody really knows where we are headed, but at this juncture, the investment outlook remains positive.
Global growth looks relatively stable, and the US is key here. Although there are some signs that the US economy may be softening and we are still waiting to see the full impact from tariffs, the risk of a serious slowdown or recession seems low at this point. The consumer remains strong, businesses are investing heavily in AI and new technologies and fiscal policy remains supportive. Importantly China, as the world’s second largest economy, is also embarking on targeted monetary and fiscal easing to improve its growth prospects. Additionally, it is encouraging to see Germany abandon its fiscal restraint and target “higher growth”, which will benefit the rest of Europe as well.
Equity markets have benefitted from a strong recovery in corporate earnings thanks to the resilient growth scenario. In addition, lower interest rates, continued excitement around AI and an easing of tariff concerns over the past few weeks have added to the positive story. Looking to next year, the combination of expansionary fiscal policies in many G7 economies, lower interest rates, cheaper energy prices and a further easing of the uncertainty around tariffs should see a modest acceleration in global economic activity. This will continue to support corporate earnings. In addition, inflation should not be a major issue for markets, at least for the next few months. Inflation remains uncomfortably above target in the US and UK, but it has stabilised. China continues to be mired in deflation, while in Europe and many emerging economies, inflation is less of an issue.
Going into 2026, there are plenty of reasons for caution, as there always are, but I remain bullish on the outlook for markets, and equities in particular. This is largely because I expect the positives that I have already outlined to continue to drive markets higher over the next year or so. For example, provided inflation remains stable, the Federal Reserve (“Fed”) should deliver additional interest rate cuts despite a relatively strong economy. The Fed has also announced the end of quantitative tightening, which will help alleviate any liquidity concerns within the US economy or banking sector whilst helping keep a lid on US Treasury bond yields. Indeed, there appears to be plenty of liquidity available in money market instruments and global reserves to support both economic growth and markets.
Another positive is that the AI story remains very strong. Whilst there are legitimate concerns that the potential returns on the huge sums being invested in the sector may disappoint, I think this story has some way to go. There is little doubt that AI and other tech innovations are having a profound and largely positive impact on productivity and hence growth. This is certainly true in the US but in many other economies as well, including China and Europe. Rising productivity would be bullish for global growth and corporate profits at the same time as helping to keep inflation under control.
Many commentators and investors are comparing the unfolding AI story to the Dot.com bubble in the late 1990s, which I remember very well. There are some similarities but there are important differences, too, in that the companies spending heavily on data centres and AI are very profitable with strong balance sheets and healthy cash flow. In addition, we are not seeing a big increase in new companies listing on the market, nor does there seem to be the euphoria and overly optimistic sentiment that prevailed at the top of the market in early 2000.
From a valuation perspective, whilst some areas of the market look frothy and expensive (mainly non-profit technology companies, cryptos etc), valuations look reasonable in many sectors and stocks, including the majority of US companies. Even the lofty valuations on the mega-cap tech stocks are largely justified by the strong financial fundamentals, such as profits growth, margins, return on capital and cash flow. In the meantime, there are lots of attractive investment opportunities outside of the US in Europe, emerging markets, China and Japan. This is especially true as these countries look to strengthen their growth prospects through easier monetary and fiscal policies and other means.
This macro environment is also supportive for bonds, although caution is required in relation to sovereign bonds, and especially longer dated maturities given rising fiscal deficits, the risk of higher long-term inflation, concerns over the long-term decline of the dollar and an ageing demographic. Gold, which has been one of the strongest performers this year, continues to be in a long-term bull market in my view. Central banks are big buyers as they diversify their reserves away from US Treasuries. At the same time, retail investors are attracted to gold due to rising deficits and debts, the devaluation of fiat currencies, and an increasingly uncertain geopolitical world. Other commodities could also be in the early stages of a bull market if global growth accelerates as expected and given the impact of the changing world order and fracturing global economy.
The key risks for markets include a worse-than-expected US growth slowdown, a major deterioration in US/China relations, a UK economic or financial crisis, a spike in energy prices on an escalation of the Russia/Ukraine crisis or a major disappointment around AI. Potential positive surprises include an end to the Russia/Ukraine war, an improvement in US/China relations, stronger-than-expected global growth and another very positive year for equities.
I am of the view that a different investment strategy will be required for the next 5-10 years than that which proved successful from 2008 until 2020. We are in a very different world to that which prevailed back then. For all of the reasons already discussed, and including a gradual decline in US exceptionalism, investors will need to be more flexible and adaptable in their approach, deploy different hedging/diversifier strategies, manage currency exposure more actively, understand that equity leadership is changing and manage risks very carefully. The good news is that the outlook is positive with lots of great opportunities for those investors that do adapt, which, of course, is our aim.
