It is that time of year when we start reflecting on the past year and thinking about what the year ahead may bring. My personal view is people tend to be unrealistic and expect far more change in the year ahead than is likely to occur. With this in mind, I have been pondering some of the key influences on the global economy and investment markets this year and asking myself: will 2026 rhyme with 2025 or will it be markedly different?
The Trump effect
Donald Trump will almost certainly retain his ability to surprise the world and investment markets, but I expect this impact to reduce. We have all been reminded of his aggressive “shock and awe” style of government and his ability to swiftly change policy direction, so his “shock” effect has decreased. Additionally, his focus will begin to change; November 2026 brings the US mid-term elections so an increasing amount of his time will be diverted towards campaigning for the Republican party to get another term in government and possibly changing the legislation to allow him a third term.
Trade wars
Whilst the biggest shocks are likely behind us, trade wars will continue to be a significant influence on the global economy and investment markets. Next year we will see the wider impact of the tariffs imposed by America on its trade partners. Whilst President’s Xi and Trump have struck a deal it would be naïve to think that is the end of the matter. Global trade flows will change in presently unpredictable ways as America looks ever closer at the sourcing of goods to boost tariff revenues. At the same time, the best minds in business will be trying to minimise the impact of American tariffs upon their businesses and pondering how much business they wish to do with America in the future. We won’t have a repeat of the “Liberation Day” excitement but it is clear the US and China will continue to drift further apart, which will impact trade, capital, technology and rare earth mineral flows.
The AI bubble debate
The debate about whether AI stocks are in a bubble that is about to burst will continue and will be a source of volatility in investment markets. However, it is clear that investment in AI infrastructure will continue apace as businesses and countries race to try to achieve artificial general intelligence (AGI) in order to reap the benefits (whatever they may be). The flow of funds into the requisite infrastructure spend seems certain to continue for now as the funders of this investment have mostly provided equity finance funded from the cashflow of very profitable businesses, so there is plenty of scope to tap debt markets and retail investors to continue the infrastructure build out. Whilst we can all spend time debating whether Nvidia is expensive or not and whether the present investment binge in AI infrastructure will reap adequate reward, what is indisputable is that this infrastructure spend is having a meaningful positive impact on US and global growth, with analysts estimating AI investment will have added 1% to American GDP in 2025.
2026 will bring further evidence of the benefits of AI for business and individuals, but it is unlikely to bring a broad-based jump in productivity so the benefit will not be shared equally. Valuations of some technology stocks are undeniably frothy but have not hit the dizzying heights of the 1990s, so on balance it seems likely that the path of least resistance is upwards, but volatility will remain a feature and the pace of ascent may slow.
Government finances
It is widely accepted that the public finances of several major advanced economies are on an unsustainable path. America (and many other countries) is running a sizeable budget deficit (CBO estimates a US deficit of 5.9% of GDP for 2025) and has a debt burden in excess of its annual gross domestic product. After a period of artificially low interest rates (2009 to 2022), governments have seen the cost of servicing their debt rise significantly as long-dated debt matures and has to be replaced with debt that embraces the higher prevailing level of interest rates. This leaves them with less capital available to fund economic growth initiatives and make benefit payments.
The key question is: how much public debt is too much? There isn’t an absolute answer, but it is clear that 2026 will see further increases in debt levels and servicing costs, taking investors closer to a point where investment markets may lose faith in the government and a financial crisis erupts. Whilst we will continue to have questions raised about government finances (especially UK), and despite the parlous state of government finances, I suspect 2026 won’t be the year where a financial crisis erupts. Falling interest rates will be helpful and some fiscal restraint seems inevitable, and this will help to offset market fears.
The path of interest rates
Next year is likely to be a year in which global monetary policy continues to ease (except in Japan), but the pace of interest rate cuts is unlikely to meet present market expectations. Better-than-expected growth and stubborn inflation are candidates to cause a moderation in market expectations for interest rate cuts. Whilst President Trump will continue to put pressure on the Federal Reserve to lower interest rates faster, I expect him to ultimately be unsuccessful. The Federal Reserve will remind the President it is not an invertebrate and will continue to show its independence.
Summary
In many ways I expect 2026 to rhyme with 2025. Investment returns this year were largely determined by a handful of macro and market forces (Trump, trade wars, AI, government finances and interest rates) and those themes will continue to define the outlook for 2026 but a number of them may be less impactful. Therefore, whilst some are calling for a significant correction in investment markets my expectation is they will be proven wrong; investment markets will continue to climb the wall of worry and are likely to deliver returns ahead of cash rates and inflation. However, as some valuation levels are elevated, returns achieved in 2026 may be lower than those achieved in 2025 and the volatility and rotation in investment markets that we witnessed in 2025 are likely to continue to be features.
