What will drive markets in 2026?

By Darius McDermott on 10 December 2025 in Multi-Asset

At the start of 2025, investors were hopeful that the new administration in the US would unleash a wave of global growth. It hasn’t quite worked out that way, but the global economy has come through a turbulent and uncertain period, ending the year in reasonable shape.

This would suggest another strong year for risk assets, but stock market history suggests a pull back is overdue. While predictions are always fraught with risks, these are the themes we believe will dominate in the year ahead.

Artificial Intelligence

AI is a predictable choice, and it has been the dominant theme of 2025. We believe it is likely to tax investor thinking in 2026 as well. However, the nature of it may change. The focus could shift from the infrastructure build-out of AI to its practical application – are companies reaping the rewards of their AI investments? Is productivity increasing? This may see a new wave of companies come to investor attention.

Chris Ford, manager on the Landseer Global Artificial Intelligence fund, says: “The investment narrative is evolving from infrastructure build-out to monetisation, where productivity gains and data leverage drive value creation. AI has become the organising principle of digital transformation, rewarding companies with scale, proprietary data, and operational agility. We see continued strength in semiconductor and cloud infrastructure demand, alongside growing enterprise adoption across software and services.”

Improving global growth

There is likely to be a better backdrop for global growth in the year ahead. The fiscal stimulus measures in Donald Trump’s One Big Beautiful Bill are likely to produce higher growth in the US, while further interest rate cuts are expected from the Federal Reserve. The risk is an inflationary sting in the tail. Elsewhere, fiscal stimulus should support growth, notably in China and Germany, and it appears that inflationary pressures are ebbing.

The MSCI World has now seen significant gains for three years in a row*, a fourth year of gains would be unusual. There are plenty that will argue that the bull market is getting a little long in the tooth. However, a more optimistic view would be that a benign economic backdrop may give investors sufficient confidence to branch out beyond the US and explore pockets of growth elsewhere. There are plenty of stock markets around the globe on more attractive valuations – including the UK, Japan, parts of Asia and smaller companies.

A recovery in UK assets?

It’s been a busy year in the UK, culminating in a exhausting budget process. The ultimate outcome of the budget was, perhaps, not as bad as many had anticipated. Equally, the UK economy, despite the pervasive sense of gloom, is not awful. The year ahead could bring a tailwind from falling interest rates. That may revive the flagging small and mid-cap sector, which has notably trailed the FTSE 100 over the past year.

It may also be good news for UK government bonds. Stephen Snowden, manager of the Artemis Corporate Bond fund, points out that the UK government is at least trying to be fiscally prudent, unlike, say, the US or France. The country is still subject to a ‘moron’ premium that started under Liz Truss and has not been resolved since.

The OBR is forecasting a deficit of 2% by the end of this parliament. That’s quite sustainable. The UK isn’t that bad, and we’re not that far from a little bit of pragmatism solving the problems.

He remains a buyer of UK gilts at current yields.

Asia: from strength to strength

China has emerged bloody but unbowed in its spat with the US, typifying the increasing self-reliance across Asian economies. In the year ahead, its economy should be supported by more fiscal and monetary easing. The other major economy in the region, India, posted its fastest GDP growth in 18 months in the third quarter**, putting aside setbacks earlier in the year. The region also saw some major technological breakthroughs over the year – DeepSeek in China for example – and is increasingly cementing its position as an innovation powerhouse.

Jason Pidcock, manager of the Jupiter Asian Equity Income fund, says:

Another tailwind is the potential for the US dollar to weaken, which historically has been supportive for Asian equities. We also think Asia looks good on a relative basis, in that the region’s economy and markets are diversified and not overly dependent on a single industry.

Dollar weakness

Dollar weakness was a feature of financial markets in the first six months of 2025, but has subsequently stabilised. Falling interest rates in the US may see it start to fall again in 2026. Who wins? It would be supportive of emerging market and commodity-related assets, says Invesco in its Global Economic Outlook. “With the notable exception of China, EM local currency debt looks attractive. Improved global activity should offer some support to industrial commodities, too. Precious metals also tend to benefit from a lower dollar and lower policy rates.” However, fading geopolitical risks and strong gains in 2025 may take some of the heat out of gains in precious metals.

Ultimately, 2026 promises to be every bit as ‘noisy’ as 2025. We will need trusted skilled active managers to navigate it.

*Source: index factsheet, 28 November 2025

**Source: Reuters, 28 November 2025