Global Economic
Outlook 2026

I see the global macroeconomic environment as generally supportive of financial assets. Specifically, falling inflation and official interest rate cuts around the developed world, alongside reduced trade policy uncertainty, are the positives. There is also potential upside from a peace deal in Ukraine, but right now, given how many times this process has fallen through, I am not optimistic that acceptable terms will be found.

A growing political consensus in the US on issues like China, immigration, energy and industrial policy, including nuclear, critical minerals, biotech, quantum computing, defence technology, and re-shoring critical manufacturing, including semiconductors, pharmaceuticals and cars, will reduce policy uncertainty in relation to the equity market. This is a positive. Less clear is how attitudes to AI will evolve. Concerns about its impact on energy prices and employment are increasing amongst consumers, but strategically, it is clearly the number one priority for the government and the President, who has threatened executive orders to prevent states from slowing investment down.

Catalysed by what's happening in China and the US, I believe 2026 may be the year when political change in Europe starts to trigger a fundamental reappraisal of energy and industrial policy. Early signs of this may come through the relaxation of the timetable for phasing out ICE and hybrid vehicles and wider decarbonisation targets. Defence and the war in Ukraine will remain very high priorities.

If I am right and the EU starts to rethink its approach to these key issues, the UK will have to follow suit. First to go will be the UK's very aggressive and expensive energy and EV policy targets.

Lower inflation and interest rates will be good news for financial assets. In particular, I expect ten-year yields in the US and the UK to fall by at least 100bps.

In the US, valuation excess will constrain the S&P 500 and its leading constituents. Although I expect the index to rise in 2026, I believe it will be a modest single-digit increase. Opportunities in the market for better returns continue to exist in areas such as biotech and across the small- and midcap parts of the market.

The Eurozone index, the Euro Stoxx, should also register a modest gain in 2026, like the US, but will be constrained by valuation concerns and by low underlying economic growth in the Eurozone. As in the US, opportunities for better returns do exist, for example, in the semiconductor sector, where a cyclical recovery is well underway.

In China, a challenging macroeconomic backdrop will not be helpful for its equity market. Nevertheless, China's leading technology companies, whose valuations are considerably below US peers, still offer attractive upside, albeit less material than at the start of 2025.

The most attractive developed-economy equity market remains the UK, where economic growth will once again outperform consensus expectations, as will earnings in sectors exposed to the domestic economy. The market remains structurally undervalued, and the issues that have plagued the market for so long are now much less of a headwind. I expect it to deliver better returns than its peers once again in 2026 and would not be surprised to see a mid-teens percentage total return.

In the IMF's narrative that accompanies its forecasts, it writes about its concerns in relation to escalating protectionist measures, ageing populations and skill shortages and ends with a brief comment about an abrupt market correction in the pricing of technology stocks, which to my mind almost guarantees no such correction will take place in 2026.

This summary says nothing about the AI industrial revolution and its increasing impact on all aspects of a modern economy. The OECD does briefly touch on this important aspect and suggests that upside risks could emerge from easing trade restrictions. I agree and am hopeful for the upcoming Xi/Trump meetings, and from faster advances in AI.

As for both organisations' China forecasts, the economy is slowing in 2026, according to the OECD, to 4.4% growth and, according to the IMF, to 4.2%. Confidence in the accuracy of macro data in China is not particularly high, but these forecasts do reflect the challenges policymakers confront with whole-economy deflation, falling property prices, and depressed consumption spending. These are not new problems, and although I broadly agree that growth will be lower in China in 2026, I am equally convinced that policymakers are determined to address these issues with more targeted fiscal stimulus measures, the scale of which should increase next year.

Peering into 2026, I am once again more optimistic than the rather gloomy OECD and surprisingly in line with the IMF's 2.1%. I expect inflation to fall in 2026, not least because, as the year progresses, the economy will annualise the tariff base effects.

I am also still of the view that oil prices will be weaker rather than stronger, which will help food prices in particular and help to bring down the overall CPI. My guess is that the Fed is of a similar view and is more concerned about the labour market than tariffs.

As inflation edges down to 2% over the course of the year, I expect bond yields to follow suit. The OECD and IMF's concerns about “sticky” inflation are, in my view, mistaken and broadly inconsistent with a weakening labour market and the productivity upside that will follow the broader adoption of AI technology.

I expect ten-year yields to fall towards the 3% level as the year unfolds, which will, in turn, support the equity market. That said, I still have concerns about the overall market's valuation. So, although I don't believe in the bubble-bursting narrative at all, I am not bullish on the S&P 500. The best opportunities in the US equity market, in my view, are still tucked away in neglected sectors like healthcare and in the mid- and small-cap areas of the market.

One risk factor that could be significantly reduced is the one related to trade and geopolitical friction with the US. The easing of tensions between the two countries in recent months and the fact that two face-to-face meetings between Presidents Xi and Trump are scheduled for 2026 suggest that there is further scope to reduce headwinds related to these concerns next year.

Ultimately, both countries are destined to remain economic and technological rivals for decades to come, but easing tensions in 2026 is a major upside. Whilst China remains seriously economically challenged by its intractable domestic issues, it is hard to see how growth can accelerate. However, I am confident that a relentless, determined policymaker approach to solving these issues will eventually yield positive results for the economy.

China's equity markets have had an outstanding year in 2025, and I believe there is scope for further strong performance next year, led again by the country's leading technology, AI, and battery tech companies. Valuations in these sectors, although higher than at the start of last year when many leading investment banks were saying China was uninvestible, can continue to expand, not least because many of these businesses will continue to demonstrate that they are genuine rivals to some of the US's leading and much more highly rated tech and AI companies.

Finally, the ongoing war in Ukraine continues to pose an existential threat to Europe both economically and politically. The dramatic shift in the US's approach to NATO and its effective historic commitment to fund Europe's defence also has profound implications for the region, which are yet to play out fully.

In 2026, France's political and budgetary crisis will continue to rumble on and may eventually lead to significant and potentially disruptive elections. The headwinds highlighted above will, of course, continue to affect growth across the region, so once again, my guess is that growth in the EU in 2026 will lag that in the US and the UK.

I have mixed feelings about EU equity markets. On the one hand, the low growth scenario is a major challenge, and after a period of aggressive ECB rate cuts (it has cut rates eight times since June 2024), there may be less support from looser monetary policy in 2026. In general terms, EU equity markets are also less appealing from a valuation perspective than the UK. That said, I can still find some very interesting specific situations across the region, just as in the US, where there appears to be significant further upside.

For me, the summary in the EU is one of missed opportunities. Higher growth could be promoted by less regulation and more sane energy and EV policies (interest rates are about as low as they can go at 2%), but the political climate has yet to change sufficiently for this to be a realistic prospect. So, in the meantime, it looks to me as if the EU will continue to experience subpar growth and a challenging political backdrop, especially in France and, potentially, in Germany as well, which also faces state elections next year.

Inflation in the UK was driven higher by the impact of Rachael Reeves' first budget. It increased employers' NI, which in turn increased the costs of employing people and, amongst other things, led to higher food prices. It also explicitly added to inflation through other direct measures, including increases in vehicle excise duty, private school fees, bus fares, the minimum wage, and air passenger duty, as well as other excise duty increases on vapes and tobacco. As a result of these measures and higher utility bills, inflation rose in the first half of the year and peaked at 3.8% in September. It has now started falling, and that descent will accelerate next year, and I suspect inflation will be close to the MPC's 2% target by the mid-point of the year.

Interestingly, the UK equity market has had a very good year and so far, with a gain of over 18%, it is beating the Euro Stoxx and the S&P 500, as I forecast that it would — not by much but significant for an index which has arguably been in the doldrums for over two decades. UK equity valuations remain depressed relative to both history and peers, and given the improving economic backdrop, I see no reason why 2026 will not be another year of good performance, which should, once again, surpass the performance of the S&P and the Euro Stoxx. Domestic equities, in particular, those most exposed to the slings and arrows of the domestic economy, are the ones I expect will again lead the market higher.

The summary UK equity market numbers are revealing. The All Share index sits on a 2026 PE of 12.4x, yields over 3.6% on more than 2x dividend cover, and has a ROE of 15.6%. The price-to-book ratio of 1.9x suggests a cost of equity of 8.2%, or, put another way, an expected return of 8.2%.

All sorts of longer-term data series show different things by way of comparison. For example, over the twenty years to 2023, the average return from the All Share Index was a bit over 6%, over fifty years, the number is about 5.5%. Even more interestingly, according to McKinsey, the long-term ROE of the UK equity market has been close to 13%. Over the long term, the US ROE is not much different at 13.7% but I suspect that, given the preponderance of the Mag7 and the high returns inherent in these businesses, this return will have moved up in recent years as it has in the UK.

In summary, what you now get from the UK equity market is a more profitable community of businesses (ROE of 15.6%) trading on a historically low rating (outside of crises) with an expected return (cost of equity of 8.2%) significantly above the long-term average.

Finally, by way of comparison, UK ten-year yields are currently just above 4.4%. Given what I expect to happen to UK inflation and base rates over the next twelve months, I expect this ten-year yield will fall to about 3.5% and possibly below this level by the middle of next year. This should also provide a very supportive backdrop for the UK equity market.