Well-diversified portfolios are essential to protect against both AI-related growth risks, as well as the risk that inflation proves much stickier than expected.
With more fuel being added to the economic engine, global activity should broaden out across regions in 2026. We expect the US economy to be supported by positive wealth effects, rate cuts and ongoing artificial intelligence (AI) capital expenditure. European growth should accelerate against a backdrop of monetary and fiscal support.
There are, however, downside market risks to be aware of. If technology stocks falter, this could lead to major market and economic ramifications. Inflationary pressures could also prove frustratingly sticky. Well-diversified portfolios are essential to protect against both the risk that growth weakens if tech sentiment sours, as well as the risk that inflation picks up by more than expected.
Base case: Global growth broadens
Macro: Economic activity broadens across geographies. European growth surprises to the upside and narrows the gap with US growth in 2026 amid considerable fiscal stimulus and ongoing support from prior rate cuts. The US expansion continues, supported by further easing from the Federal Reserve (Fed). China’s economy is boosted by a stabilisation in the property market, while policymakers support growth in domestic AI technology.
Markets: Equity diversification is essential across the AI ecosystem and across regions, as well as across public and private markets. With the US dollar falling further against a broad basket of currencies, albeit in an orderly fashion, non-US investors should weigh the impact that currency moves might have on returns. Lower US rates support private equity and private credit.
Downside risk: Inflation resurges
Macro: Inflation accelerates, either acutely or slowly as prints creep upward. Acute inflation could occur if tariffs’ effects on US inflation turn out to be larger than feared, as companies pass on higher costs to a resilient consumer. Income tax refunds in early 2026, alongside any further tax cuts in the run-up to the midterm elections, would worsen the inflation problem. Chronic, creeping inflation could result from persistent fiscal deficits and questions about Fed independence.
Markets: A negative environment for stocks, with interest rate-sensitive sectors hit hardest. Rising yields in core fixed income lead to losses as stock-bond correlations remain positive. In an acute inflation scenario, real assets, such as timber and core infrastructure, would offer the best protection. In a chronic inflation scenario, gold is an important portfolio diversifier.
Downside risk: Tech stocks falter
Macro: AI sentiment sours, as it becomes clear that the demand for AI infrastructure was overestimated. This leads to overcapacity, falling prices and shrinking margins, as the return on investment of AI capex disappoints. US economic growth slows as AI-related spending stalls and a sell-off in stocks leads to negative wealth effects for US households.
Markets: A very negative environment for equities, particularly for the US. Defensive stocks outperform cyclicals and the negative stock-bond correlation returns. By contrast, this is a positive environment for high-quality, long-duration fixed income. However, private equity and private credit struggle given their tech exposure.
Upside risk: Productivity boom
Macro: Growth accelerates meaningfully, driven by an AI-induced productivity boom. Inflation is kept in check by rising productivity and, potentially, lower energy prices on the back of a Russia-Ukraine resolution. This allows central banks to cut interest rates more aggressively than currently priced by markets.
Markets: A very positive environment for stocks globally. Fixed income also sees strong returns, as policy rates move lower and credit spreads tighten to new record levels.