Beyond the hype: what matters most for investors in 2026

As the new year has just begun, the urge to forecast what lies ahead in financial markets returns with fresh intensity. Hedge your bets too much and you end up saying nothing at all. Go for implausible precision and you risk being proven wrong almost immediately.

Rather than attempting to predict the unpredictable, I believe the best approach is to identify the critical questions that will shape the investment landscape in 2026 and to offer a measured perspective on where the answers might lie.

First among these is the ongoing debate over Artificial Intelligence (AI). The question of “is AI a bubble?” will remain front and centre for investors in 2026. It is difficult to imagine a scenario in which AI does not dominate discussions this year. The scale of current investment and the pace of innovation mean that even the sceptics cannot ignore its influence on both markets and the real economy.

Turning to the macroeconomic environment, is also likely to be a key question for next year, particularly in the United States where indicators remain mixed. The labour market is showing signs of weakness, but consumer spending continues to hold up. The effects of lower policy rates have yet to fully materialise, suggesting there may be a policy-driven boost in 2026. The Federal Reserve’s recent upgrade to its 2026 growth forecast adds some weight to the optimists’ case. Notably, there is an increasing overlap between AI and economic growth, given that so much recent US expansion is linked to investment in technology.

Inflation remains another area of focus. Predictions of a resurgence in prices followed tariff increases in 2025, yet inflation has not reaccelerated in the way that many analysts expected. With prices still above target in much of the developed world, the question is whether this is merely a delay before inflation picks up again in 2026, or whether supply chains and policymakers have managed to navigate these pressures without a major shock.

On the policy front, government spending will continue to draw attention, but monetary policy is likely to dominate discussions. By this time next year, the conversation may have shifted from rate cuts to the possibility of renewed tightening in some developed economies.

Geopolitics inevitably looms large over any investment outlook. Historically, markets have demonstrated a remarkable ability to look past even significant geopolitical events. In 2025, for example, the hope for peace between Russia and Ukraine underpinned some optimism for European equities, yet peace remains elusive and European stocks have still performed well, particularly among defensive names. The lesson is that markets sometimes respond in unexpected ways to geopolitical developments.

Corporate earnings will also remain in sharp focus. US corporate profitability has shown notable resilience, with profit margins drifting higher over the past two decades even as complaints about the cost of living persist. The durability of these margins is a central question for this year.

The AI debate is still open

What, then, of answers rather than questions? The AI debate is still open, even if we come down on the optimistic side for now. Investment flows are vast and the benefits remain uncertain, yet company cashflows far exceed those seen during the dot-com boom. Valuations are elevated but not extreme, and the IPO market is more discerning.

Investor sentiment is more sceptical today than in previous bubbles, and with interest rates drifting lower rather than higher, the traditional triggers for a bursting bubble are not immediately apparent. It seems likely that swift AI adoption will keep the sector moving forward, though returns may be muted compared with the recent past. Predicting a gentle landing for a technology boom is always risky, yet the current conditions suggest that it’s a good possibility.

On growth, the combination of fiscal and monetary stimulus, together with persistent AI investment, should support an acceleration in US economic activity in 2026, which in turn is positive for corporate earnings. The outlook outside the US appears less dynamic, with the UK and Europe likely to continue their pattern of modest growth.

Inflation in the developed world should remain contained, though probably above the traditional 2% targets in both the UK and the US. This is likely to limit the scope for further rate cuts. If we do see US growth at around 2.5% in 2026, then there shouldn’t be much scope for long rates to decline, and we could be discussing rate hikes going into 2027.

Emerging market equities are likely to remain closely tied to the fortunes of US tech, given the sector’s weight in these indices. Investors seeking to diversify away from US tech may need to look elsewhere.

In China, growth is expected to continue slowing, albeit from high levels, but the key question will be whether corporate profitability can improve. Some of this improvement appears already reflected in current equity prices.

Regarding geopolitics, macroeconomic variables and corporate earnings are likely to outweigh most geopolitical risks. If these foundations hold, markets will continue to look past the inevitable noise. Nonetheless, significant risks remain, whether from Russia and Ukraine, China and Taiwan, or transatlantic relations.

In sum, 2026 begins with a sense of cautious optimism. The macroeconomic backdrop appears supportive, though much depends on the continued momentum of AI investment. The unusually close linkage between macroeconomic trends and corporate performance reflects the scale of this technological shift. Starting bond yields remain elevated and should help provide decent absolute returns. With equity valuations above long-term averages and recent years having delivered strong gains, more subdued performance is likely in 2026. Against this backdrop, multi-asset portfolios continue to offer a valuable approach for those seeking to build long-term returns in an uncertain world.