For an investor in a balanced 60/40 stock-bond portfolio, 2025 has been a great year – provided they stayed invested. At the mid-December point, a 60/40 global equity-U.S. aggregate bond portfolio delivered 17% total returns in USD – well ahead of the long run average of around 7%. But for those who sold in early April, spooked by “Liberation Day¹” volatility, returns more than halved – even if they re-entered their positions by the end of that month. In our view, 2025 is a case study in the power of tuning out the noise and staying invested for the long haul.

New year, old cycle

We enter 2026 with a sense of optimism, though we are mindful that the U.S. economy has taken on a distinct late cycle tone. We anticipate modestly above-trend growth, driven by an ongoing investment cycle and a small pickup in consumption. The risk of recession declines to 15% for the next 12 months as the impact of the Federal Reserve (Fed) easing cycle percolates through the economy and consumer focused stimulus in the One Big Beautiful Bill Act² kicks into gear.

Scope for regulatory easing and an acceleration in primary markets and deal activity likely keep the economy and markets buoyant. But observers of cycles past will note that such an environment often characterizes an economy in late cycle. Also indicative of a late-cycle economy is the diverging picture across consumer cohorts: asset appreciation and wealth gains are powering the top end, while cracks are forming in the lower-income consumer base. This cycle may have some way to run, but it is starting to borrow growth from the future – a dynamic to watch as we move through 2026.

The labor market is key to consumer sentiment, and here the data remain mixed. Initial claims are low, but continuing claims are elevated – a “no fire, but no hire” equilibrium. The backdrop explains sluggish consumer sentiment but also suggests only a muted risk of an inflationary wage-price spiral. As the dual impact of fiscal and monetary policy supports the economy in 2026, we see unemployment drifting down to the low 4% range, but the lack of wage pressure will likely allow the Fed to maintain a neutral, even slightly accommodative policy setting.

While the focus on tariffs that dominated 1H25 may be in the rear-view mirror, newsflow on trade remains material for the economic outlook. Actual tariff revenue appears to be levelling off given various exemptions and there may yet be as much as USD 100 billion in tariff refunds coming, depending on court rulings on the legal status of tariffs.

Internationally, Europe’s outlook is improving. Purchasing manager indices (PMIs) are above their 1H25 averages, pointing to eurozone growth of around 1.6%. Fiscal and capital investment should boost growth in the first half of 2026, with the consumer likely driving gains later in the year. Low consumer confidence has spurred the highest level of household savings outside the pandemic, despite record low eurozone unemployment. But we think rising investment should cap savings and boost both confidence and spending by the second half of 2026.

Asian economies are also moving forward. Chinese fiscal easing is driving above-trend growth, and targeted measures are lifting sentiment in the property sector. Loose credit conditions broadly support asset markets. In Japan domestic demand remains robust despite a third quarter dip in GDP, and we expect growth to improve in 2026.

Bubbles, budget deficits, and balancing risks with opportunities

Our constructive economic outlook, predicated on rising investment and the delayed tailwind of easier financial conditions, calls for a pro-risk tilt. We continue to overweight (OW) stocks and remain closer to neutral on credit. On duration our stance is neutral, but with a steepening bias and a play for regional divergence in rates. We underweight (UW) USD. The recent market narrative of an AI bubble is, in our view, premature. But concern over fiscal deficits has merit and highlights the role gold continues to play as a portfolio diversifier.

Within our OW to stocks we favor the tech, communication services and financial sectors in the U.S.; regionally we prefer Japan, Hong Kong and emerging markets over Canada and Australia. While the Mag-7 tech stocks have delivered exceptional performance since the pandemic, it has been accompanied by strong cash flows and profitability. Comparisons to the dot-com bubble are inevitable, but premature: the tech sector’s capex ratio today³ stands at 24% compared with the dot-com peak of over 35%. With investment surging, hyperscaler and tech sector revenues for 2026 look secure.

The financial sector stands to benefit from economic momentum and deal activity. However, credit stress among lower-income consumers is consistent with late-cycle conditions, and performance will likely skew toward quality and size. Smaller banks and non-prime lenders warrant close attention as indicators of broader economic health.

Late-cycle corporate activity often favors shareholders over bondholders. Public credit markets find support in solid corporate balance sheets and low default rates, reflected in high yield spreads of 270 basis points (bps). All-in yields near 6.75% are attractive, but with limited room for further spread compression, we maintain a neutral stance. Emerging market debt is an exception, as expected negative net issuance and ongoing inflows seem likely to further tighten spreads.

U.S. 10-year Treasury yields at 4.15% are close to our estimate of long-term fair value. We see a trading range of 3.75%-4.50% in 1H26, with the potential for modest steepening as the Fed delivers one more cut and real growth ticks up. While we are neutral on global duration, we have a regional preference for Italian BTPs and UK Gilts over Japanese JGBs and German Bunds.

Higher U.S. debt issuance is a concern, but we expect more of it at the front end of the yield curve. Deficit fears are more likely to weaken the USD than drive yields sharply higher. Anticipating higher euro area growth and USD weakness, we believe EURUSD could test the low- to mid-1.20s range. Currency debasement risks also support a case for gold in portfolios. We note, however, that the volatility of gold is closer to that of an equity than a bond, so we favor an allocation within a 60/40 stock-bond portfolio of no more than mid-single digits.

In sum, we expect a modest acceleration of the global economy in 2026, fueled by rising investment, improving consumer sentiment and the delayed impact of policy easing. Cooling inflation helps to extend the cycle, but late-cycle dynamics are clear. Greater investment and deal activity support equity returns, while fiscal concerns and increasing stress among lower-income consumers demand attention. A balanced 60/40 portfolio should perform well, but resilience through gold, real assets, and international diversification is essential to navigate the evolving global trends and a late-cycle environment.

¹ Liberation day on April 2 , 2025 marked the imposition of widespread tariffs on U.S. trading partners

² The One Big Beautiful Bill Act, signed into law in July 2025, is a package of fiscal incentives totaling ca USD 2.7 trillion

³ Capital expenditure as a percentage of revenue

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