What is the outlook for the U.S. economy in 2026, and can it achieve a soft landing amid growth, inflation, and policy risks?

The U.S. economy in 2026 is expected to experience strong growth in the first half, driven by personal income tax refunds and robust business investment, especially in AI technology. However, as fiscal support fades and job growth slows, GDP growth is projected to moderate in the second half. Inflation may rise temporarily due to tariffs and increased consumer spending, but is forecast to ease by year-end. The Federal Reserve is likely to respond with interest rate cuts if labor market weakness persists. While business investment and consumer demand will support the economy, risks from tariffs, policy changes, and supply chain disruptions remain. Overall, the U.S. economy faces a year of transition, with the potential for a soft landing if downside risks are managed effectively.

What is the global economic outlook for 2026, and what are the main factors influencing growth in Asia, China, and Europe?

The global economic outlook for 2026 is cautiously optimistic but marked by regional contrasts and persistent uncertainty. Asia’s growth depends on export performance and its expanding role in the global AI supply chain, though trade tensions and tariffs remain key risks. China is focusing on long-term structural reforms, advanced manufacturing, and technology self-sufficiency to offset property market challenges and weak domestic demand, with limited fiscal stimulus expected. Europe’s growth is supported by positive fiscal policy and rising consumer confidence, especially in Germany, but faces risks from high government debt, fiscal discipline concerns, and potential tariff impacts. Globally, the end of monetary policy rate cuts and the need for credible fiscal plans are critical for sustaining growth, while market confidence and effective government spending will determine whether economies can avoid higher borrowing costs and subdued forecasts.

What is the outlook for global AI demand, monetization, and the challenges facing U.S., China, and Asia in scaling AI adoption and infrastructure?

Global demand for artificial intelligence (AI) is surging, driven by rising enterprise adoption, expanding applications, and robust investment in data centers and infrastructure. In the U.S., investors are questioning the sustainability of current valuations and the strength of AI use cases, while Asian exports—especially semiconductors and memory chips—are benefiting from AI’s growth. China continues to advance its AI sector despite U.S. export restrictions, focusing on solution-specific models and integration into services like finance, e-commerce, and manufacturing. Monetization is accelerating, with AI-native companies generating billions in revenue and enterprises willing to pay for advanced AI tools, though infrastructure bottlenecks and rising costs remain risks. The evolution of physical AI, such as autonomous vehicles and humanoid robots, highlights the transformative potential but also increases energy and infrastructure demands. Companies that can scale infrastructure, innovate monetization channels, and adapt to rapid changes are best positioned for outsized returns, while investors should remain aware of risks like uneven adoption, margin compression, and disruption of incumbent business models.

Are current high global equity valuations justified, and what factors support or challenge stock market performance in the U.S., Asia, and China?

Current elevated global equity valuations are partly justified by strong medium-term earnings growth, rapid AI adoption, resilient consumer demand, and supportive monetary policy, especially in the U.S. Lower interest rates, robust buybacks, and favorable tax provisions are boosting U.S. stock returns, while megacap tech and financials lead earnings growth. Asia is benefiting from expanding AI demand, supply chain shifts, and corporate governance reforms, with economies like Taiwan, Korea, and ASEAN seeing gains in tech and infrastructure. China’s self-sustaining AI ecosystem and high-yield sectors also support market resilience. However, risks remain, including over-investment in AI, tariff uncertainties, market volatility, and stretched valuations. Investors are advised to diversify portfolios, focus on defensive and income-generating sectors, and actively rebalance to manage risk and capture opportunities in a changing global equity landscape.

How will fiscal and monetary policies impact fixed income markets and investment strategies in 2026?

In 2026, fiscal and monetary policies are set to reshape fixed income markets by driving a steeper U.S. Treasury yield curve, as the Federal Reserve eases rates and fiscal deficits persist. Strong corporate balance sheets should support quality credit spreads, but as economic growth slows later in the year, investors may favor higher-grade bonds to manage rising default risks. Securitized assets like mortgage-backed and asset-backed securities are expected to benefit from stable housing and consumer fundamentals, while Asian hard currency debt remains attractive due to improving credit ratings and limited supply. Overall, active portfolio management and diversification into resilient assets such as U.S. Treasuries and high-grade bonds will be crucial for navigating market risks amid stretched valuations.

How are private equity, private credit, hedge funds, and real assets expected to perform and provide diversification for investors in 2025 and 2026?

In 2025 and 2026, private equity activity is increasing, supported by nearly USD 1 trillion in dry powder and lower interest rates that boost transaction volumes, exits, and portfolio company investments. The secondary market for private equity is maturing, offering stable liquidity options for investors. Private credit continues to attract demand due to high yields and flexible deal structures, with most defaults limited to leveraged loans rather than pure private credit. Falling interest rates are expected to ease debt pressures, while direct lending supports private equity deals and continuation funds provide additional liquidity. Hedge funds and real assets are gaining popularity as alternative investments, offering portfolio diversification and resilience against market volatility and inflation. Infrastructure and digital assets, especially data centers, are in demand due to the global infrastructure deficit and AI-driven growth. Macro and relative value hedge fund strategies are well positioned to generate alpha and uncorrelated returns, helping investors build robust portfolios amid rising economic and market risks.

Why is investment discipline crucial for asset allocation and portfolio management in 2026, and how should investors position themselves amid economic and market changes?

Investment discipline is essential for successful asset allocation and portfolio management in 2026, as softer economic growth, easing monetary policy, and higher market volatility are expected. With elevated valuations in U.S. equities and non-investment-grade corporate bonds, investors should focus on diversification, balanced stock-bond allocations, and alternative income-generating assets. Fiscal discipline will be key, especially for longer-dated government bonds, as political uncertainty and deficit concerns may drive higher term premiums. Technology and AI companies must manage capital expenditures wisely, while financial institutions need robust risk management amid deregulation and credit quality risks. APAC investors are encouraged to broaden global equity exposure, with opportunities in emerging markets and sectors linked to AI. Option overlay strategies can help generate income from equity volatility. In fixed income, a barbell approach combining government and high-yield corporate bonds is recommended, with a shift toward investment-grade debt as growth slows. Alternative assets like infrastructure, transportation, and real estate offer stable income, and private equity remains attractive with careful manager selection. Overall, disciplined portfolio construction and risk management are vital for navigating market uncertainty and capturing opportunities in 2026.

Market Outlook 2026

As we look ahead to 2026, discipline could be the defining principle for investors navigating an increasingly complex and volatile market landscape. The year is set to be characterized by a distinct sequencing of economic growth: robust momentum in the first half, buoyed by fiscal stimulus and artificial intelligence (AI)-driven capital investment, followed by a transition to more subdued conditions as fiscal tailwinds fade and labor market challenges become more prominent. This shift underscores the importance of disciplined risk management and thoughtful portfolio construction, as the environment moves from “risk-on” to a greater emphasis on risk management.

In the early months of 2026, investors are likely to benefit from solid earnings, resilient consumer demand and continued business investment in technology and AI. However, as the year progresses, the moderation in growth, coupled with persistent policy uncertainties and elevated market valuations, will require a recalibration of risk allocation. The ability to rotate portfolios from risk assets toward a more balanced allocation with a greater role for income generation and diversification will be critical in generating returns and managing volatility.

Discipline will be the key differentiator—not only in asset selection, but also in assets related to the management of fiscal sustainability, technology investment and credit risk exposure. Investors who maintain a rigorous approach to diversification, manager selection and income generation would be better positioned to weather market fluctuations and capitalize on opportunities as they arise. In an environment where surprises—both positive and negative—are likely, disciplined portfolio construction and risk management will set apart those who can deliver resilient performance from those who may be caught off guard by shifting market tides.

Explore the outlook

Can the U.S. economy maintain the soft landing?
What is our outlook for the global economy?
Disciplined management needed to meet surging AI demand
Are the current rich global equity valuations justified?
How will fiscal and monetary policies reshape fixed income in 2026?
Alternatives: A disciplined approach to rapid growth
The power of discipline when allocating assets

The Fed is expected to respond to evolving conditions with further rate cuts, but the pace and extent will depend on incoming data and broader economic resilience.

The overall outlook remains cautious, with prolonged uncertainty likely to weigh on economic activity.

Business integration of AI is likely to be characterized by stops and starts, as organizations grapple with the complexities of implementation and change management.

U.S. equities remain exceptional, underpinned by healthy earnings growth, rapid AI adoption, strong investment and resilient consumers.

The case for a wider dispersion of returns in the fixed income asset class is emerging, and performance returns could grow uneven across 2026.

With rising market and economic risks, investors are increasingly seeking alternative strategies to build resilient portfolios that can withstand both growth and inflation shocks.

Diversification and income generation are fundamental investment principles that should always be applied, but they may be especially important in 2026.

Image source: iStock.
Diversification does not guarantee investment returns and does not eliminate the risk of loss.
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