As we look ahead to 2026, the global investment landscape is set to be shaped by a powerful mix of higher government spending and continued central bank rate cutting, which should support financial markets. After a period of uncertainty driven by shifting political priorities in developed economies, the outlook for the year ahead currently appears slightly more benign.
Inflation is less of a concern for central banks, with around three interest rate cuts expected from the US Federal Reserve, a couple by the Bank of England, and the European Central Bank potentially cutting further from already low levels. This backdrop should help underpin risk assets such as equities.
In the US, technology company earnings are expected to keep growing at a healthy, if slightly slower, pace as demand for artificial intelligence (AI) and its cost-saving potential remains strong. However, valuations are still high, reflecting elevated investor expectations, and the increasing web of circular deals is tying the fortunes of the world’s largest companies ever closer together. While today’s tech stocks are better supported by profitability and strong balance sheets than during the dot com bubble, the sustainability of profit growth remains uncertain. Investors should be mindful of concentration risks, as tech and communication services now make up over a third of global equity indices.
Outside the tech sector, US equities are seeing more mixed trends. Parts of the economy exposed to lower-income consumers are struggling, and while a January tax rebate will help, more job creation and lower interest rates would have a greater impact. Tariffs are also affecting some firms, with the full impact yet to be seen, making selectivity essential.
European equities are set to deliver positive returns in 2026, supported by higher government spending, especially in Germany, and greater corporate certainty following recent trade negotiations. Company earnings forecasts are improving, and sectors like defence, and infrastructure should benefit from increased spending and stable energy prices, which are expected to remain low due to additional supply and storage.
Closer to home, UK businesses have faced challenges in 2025, from US tariff announcements to higher costs from the previous budget. The economy slowed to just 0.1% growth in the third quarter of 2025, but the Autumn Budget, while introducing tax hikes for the future, provides some clarity. Growth in 2026 is expected to be similar to 2025, around 1.5%, with inflation gradually falling to about 2.5%, allowing for a couple more rate cuts. However, despite consumers and businesses now more aware of what lies ahead in terms of taxation, a significant pick-up in spending remains unlikely. This will remain a headwind for domestically focused stocks, but earnings growth should accelerate, helped by ongoing company share buybacks, stabilising energy costs, and falling interest rates. The large share of overseas revenues for major UK companies means currency movements will continue to influence reported profits.
In Asia, Chinese tech companies and exporters are well positioned for further gains, supported by state backing, early adoption of robotics and automation, and rapid AI uptake. While domestic demand in China remains subdued, exports are growing at a healthy pace, with the government continuing to promote manufacturing-led growth. Japanese equities also look attractive, with corporate reform and strong earnings momentum driving potential gains, though currency risk and geopolitical tensions remain factors to watch.
Turning to fixed income, markets will be shaped by the balance between inflation risks and central bank policy. If inflation stays subdued, further rate cuts should support bond returns. However, investors must remain alert: a resurgence of inflation, perhaps from overly aggressive Fed rate cuts, could push yields higher and hurt rate-sensitive sectors.
For 2026, our message is clear: financial market returns are likely to be well supported but risks remain. A new Fed chair could change the central bank’s approach, market concentration is rising, and the possibility of an asset bubble is increasing. This underlines the importance of discipline – investing based on fundamentals, not hype – and diversification, especially when global equity indices are so concentrated.
As always, a well-diversified portfolio remains the best defence against uncertainty, helping investors capture upside potential while protecting against inflation, inevitable market corrections, and shifting global sentiment.
This communication is issued by Quilter, a trading name of Quilter Investment Platform Limited.
Approver: Quilter December 2025
Q 26953/34/14266
