Active multi-asset strategies should embrace slower growth, monetary easing and a tech-led equity market.
In a turbulent 2025 dominated by US trade policy shocks and geopolitical tensions, the global economy proved resilient. Fears of tariff-related slowdown and renewed inflation proved misplaced, as growth surprised to the upside and inflation continued to soften. The improving backdrop underpinned a strong year for financial markets. Equities, commodities, credit and duration all generated healthy returns, and diversification once again delivered meaningful benefits after several challenging years.
As the year progressed, investor attention shifted from trade tensions to more fundamental questions about the durability of growth, elevated valuations and the forces shaping the next phase of the market cycle. These questions are central to our outlook. US equity valuations are elevated, credit spreads remain tight and record capex on artificial intelligence (AI) infrastructure is climbing. Markets are increasingly focused on whether these investments can produce broad productivity gains and earnings growth—and whether concentration can give way to a more durable, diversified expansion.
We think the outlook is favorable for 2026. It’s still early in the cycle of AI investment and monetization, and new signs suggest market fundamentals support more than a handful of tech leaders. Meanwhile, the US Federal Reserve will likely ease policy more than markets currently expect, as it prioritizes a softening labor market—this policy backdrop should be supportive of risk assets. That said, elevated valuations, market concentration and uncertainty around the pace of AI monetization all point to a more volatile path forward—one in which diversification and active asset allocation regain importance.
How Resilient Is the Economic Cycle?
As fears of a sharp downturn fail to materialize, the key question for 2026 is whether the economy can remain resilient as the cycle matures. The US economy remains the primary engine of global growth, but divergences are emerging under the surface. Labor market momentum is softening—hiring is cooling and there are fewer job openings even as other parts of the economy show strength. For instance, corporate capex is robust, earnings revisions are near historical highs and profit growth has broadened beyond tech. The disconnect between labor and corporate fundamentals bears watching, but for now we see few signs of economic stress.
We think the consumer will remain a key source of stability. Household balance sheets aren’t meaningfully stretched, real wage growth remains positive and excess savings are diminished but not exhausted. Inflation is slightly above target, but we expect the Fed to put more weight on employment risk given the recent softening (Display). The central bank is likely to ease policy into 2026, and fiscal policy should be an added near-term buffer, with the front-loaded impact of recent spending measures supporting activity well into the year.
