What’s in the mix for 2026?

What’s in the mix for 2026?

Global equities had a good year in 2025, but can the momentum be sustained in 2026? Here are just a few of the issues facing investors in the year ahead.

AI – will the ‘bubble’ burst? 

Market returns became even more concentrated amongst a smaller number of US, Chinese and Asian tech stocks as AI euphoria continued, with AI chipmaker NVIDIA briefly breaking through the $5 trillion valuation ceiling. NVIDIA alone dwarfs most European stock markets, so the fortunes of the US tech majors could have a major bearing on the performance of various share indices in 2026.

The argument continues over AI. Some of the very biggest US tech stocks have massive cash piles with which to fund AI capital investment plans. However, others do not and markets have become more concerned given the scale of recent bond issuance by some AI businesses. Either way, questions remain about the sheer scale of capital investment required and what revenue this will actually generate. Perhaps in 2026 we will see the market mood change from assuming all AI is a winner to picking the winners and losers. Depending on where the big tech stocks fall in one of these two categories could also be important for the performance of various global share indices.

Will AI impact Fed interest rate policy?  

AI will also continue to impact the US economy. Capital spending in AI, such as on data centres, is helping support economic growth and will boost productivity. However, AI may also weaken employment. This will be an interesting call for the US Federal Reserve (Fed), which is expected to make two further interest cuts in 2026.

Will tariff uncertainty and US fiscal concerns linger?

Markets have settled into life under Trump tariffs, but the Supreme Court ruling on Trump’s IEEPA tariffs could yet throw a spanner in the works. A ruling is due in the first half of 2026 and if the court deems in some way to curtail Trump’s use of his executive powers, this may reduce the effective tariff rate and could impact trade flows and federal revenues. With the US deficit projected to be above 6.5% of GDP, the capacity to support the US economy in the event of a downturn would appear to be limited.

Will there be another US government shutdown?

Markets shrugged off the longest US government shutdown in history in 2025, but it delayed the release of important US economic data, which has added to the Fed’s challenges when considering interest rate policy. The current stop-gap funding expires on 30^th January, so history could repeat itself.

Are Trump and Xi Jinping the best of friends?

Having reached a temporary trade truce, there is no doubt that relations between the US and China remain stretched. Trump has eased restrictions on some AI chip exports and China has eased rare earth export controls. However, in 2026, China has already introduced export controls on silver, which could impact global EV, solar and electronics production. Will US/China trade relations remain cordial? The IMF has already warned China that it must fix ‘significant’ imbalances in its economy, including deflation that has driven a depreciation of the renminbi and boosted exports.

Will there be a continued rebalancing of global power?

The war of attrition in Ukraine is almost into its fifth year. Trump is losing patience and appears to have adopted Putin’s narrative on the war. A hybrid war is underway between European NATO members and Russia. Defence spending will need to be ramped up regardless of the outcome of current peace talks, as Europe still looks unprepared. Trump wants to focus on China and the South China Sea, a key shipping route. China still wants to assimilate Taiwan and will militarily have the capability by 2027. It has recently carried out live fire military exercises surrounding Taiwan after the US approved an $11bn defence package for Taiwan.

How committed to Taiwan’s defence would Trump be, given his stance on Ukraine? Australia, South Korea and Japan are also ramping up defence spending. Taiwan remains a key component of global manufacturing supply chains because of its dominance of semiconductor chip production. Meanwhile, Trump has become increasingly isolationist, and Russia and China are continuing to chip away at the dominance of the US Dollar.

Are we facing more elections?

November 2026 will see the US midterm elections which are likely to follow the historic pattern of anti-incumbent midterm sentiment. Many lower income US households are concerned about the rise in the cost of living. Domestic US politics will intensify leading up to the midterm elections. Meanwhile, in the UK, PM Sir Keir Starmer could face a leadership challenge following the local elections in early May. However, more local elections are being postponed as Starmer continues to fret about Nigel Farage and the Reform party.

A change of direction in the Labour Party leadership towards the left could risk pushing gilt yields higher. Chancellor Rachel Reeves’ competency is also still being questioned after two consecutive Budget shockers and numerous U-turns.

Do central bankers still have our backs?

The leading central banks are likely to halt their interest rate cutting cycles by the end of 2026.

In the US, the Fed is expected to make at least two further cuts, although questions are likely to remain about the independence of the Fed and who replaces the retiring Chair Jerome Powell. A Trump candidate may push for further interest rate cuts. In the UK, the Bank of England is expected to make two further cuts. In Europe, the ECB is now on hold, but the odds of an increase in rates by the end of 2026 are still quite low.

By comparison, the Bank of Japan has increased interest rates to a 30-year high and has signalled more. In China, further economic stimulus is expected given the ongoing weak economic data. Meanwhile, China has been exporting deflation as it sends cheaper products such as EVs to new markets outside the US to avoid Trump tariffs. However, China’s ‘anti-involution’ policies, which aim to reduce overcapacity and increase profitability in certain industries, could see China start to export inflation. Meanwhile, global bond yields remain elevated as more governments run sizeable budget deficits, which are not being helped by higher defence spending commitments.

Finally…… will risk assets have another good year in 2026?

2026 looks likely to be another eventful year, but it starts with a supportive interest rate backdrop as well as supportive fiscal policies in a number of regions, such as Germany.

US technology valuations and the uncertain return outlook for the staggering sums being invested in AI capex remain key sources of risk. Nevertheless, we continue to see attractive valuations and opportunities in other sectors and regions of the world and as such we believe that selective investment in risk assets will be rewarded in 2026.

Chancellor Rachel Reeves has been attempting to take some credit for the FTSE starting the year at a new high. And ‘a vote of confidence in Britain’s economy.’ Whilst welcomed, the FTSE-100 is not a fair representation of the UK economy and attention should focus on the more domestically oriented UK mid-cap.

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.