2026 Global Market Outlook

Executive Summary:

We expect 2026 to extend many of the dominant macro trends of the past year: slow growth, continued disinflation, a softer U.S. dollar, and a Federal Reserve easing cycle. Markets are likely to experience periods of elevated volatility, with a meaningful risk of equity correction in the second half.

Key Tailwinds:

Monetary and Fiscal Support:

The Federal Reserve enters 2026 with substantial room to ease policy. Potential fiscal measures̶ such as tax cuts or rebate programs could further support spending. A benign inflation outlook reduces upward pressure on yields and improves fixed-income conditions.

Steady but Modest Growth:

Global GDP growth is expected near 3%, with U.S. growth between 1.75‒2.25%. These levels remain above recession thresholds and support a continuation of rate cuts.

Weakening Dollar:

A softer dollar would enhance returns for emerging markets and improve global risk sentiment.

Labor Market Dynamics:

Labor shortages should continue to limit unemployment levels. Pandemic-era bargaining power has faded, helping suppress wage-driven inflation.

AI-Driven Productivity:

Ongoing investment in AI may improve productivity. Corporate buybacks could help stabilize markets during early-year pullbacks.

Steady Inflation:

Global inflation expected to be around 2.75%-3.25%, historically favorable for equities.

Stable Bond Markets:

US bond yields may rise in the first half alongside with nominal economic growth, but a slowdown can lower 10 year yields in the second half within the 3.25%- 4% range. Not huge spikes are favorable for equities.

Key Headwinds:

Stretched Valuations:

Equity valuations remain elevated, with earnings expectations priced for near perfection. The current bull market is mature, heightening fragility and strengthening the case for defensive assets.

Dollar Weakness and Inflation:

A weakening dollar could reintroduce upward inflation pressure and slow the Federal Reserve’s easing trajectory.

Midterm Election Year:

2026 is historically the weakest year in the presidential cycle, increasing uncertainty.

Trade and Tariff Uncertainty:

Tariff ambiguity weighs on CEO and consumer confidence, suppressing capex and discretionary spending. Slowing wage growth may further weaken sentiment

Lack of Margin Expansion:

Hard for companies to expand on margin on top of sales growth later in the business growth cycle.

Later in the Bull Cycle:

Current bull is one of the longer ones on record, getting difficult to stretch it further out.

Softer Labor:

AI-related job cuts may increase and a rise in unemployment is expected.

Summary:

2026 may bring muted inflation risks, slower economic growth, soft labor markets and stretched valuations. These may be balanced or offset with economic gains boosted with productivity growth, monetary and fiscal easing and AI capex spending. Later in the growth and bull cycle, without a recession, muted gains expected in stocks and bonds.