Economic and business outlook 2026
In the particular case of the trade war, which took America’s average tariff from 2.5% to an effective 14.3% (accounting for consumption shifts). As they happen slowly, they give time to policymakers and businesses to adapt, which accounts for most of the resilience: lower oil prices, as a result of Saudi Arabia’s tolerance to higher oil output and pre-tariff inventories, allowed companies to initially absorb an estimated 65% of tariffs. However, with an estimated 96% of tariffs borne by US importers and consumers, we expect upward price pressures, which eat away into growth (real growth = nominal growth – inflation). We thus expect 2026 to be a year of more consequences.
What type of consequences?
This is becoming harder to calculate. For one, a record 40+ days of government shutdown in the US caused significant delays in the publication and issues in the calculation of relevant data. Second, we can’t be sure how many pre-tariff inventories are still available, and also what kind of hit on margins companies are willing to accept. These are microeconomic decisions that will likely severely impact the macroeconomy. Third, we must not forget the weak labour market and the possible impact of AI expansion, exacerbating an already problematic picture for consumers.
Outside the US, we expect more stunted growth in Europe, which adds the pain of the trade wars on top its own lacklustre growth. Asia will likely continue to grow at a pace slower than before, but still above that of developed markets. Consensus expects 1.9% GDP growth for developed economies in 2026, against a backdrop of 2.8% inflation for the same period. However, there’s significant divergence within growth projections, with US real economic growth expected to be near trend in 2026, at a pace of 2.4% against 2.7% inflation, while Europe is expected to grow its GDP by 1.5% against a 2% inflation print. Asia ex-Japan is expected to grow its GDP by 4.7% with just 1.2% inflation (the number is heavily influenced by China’s near-zero inflation).
Our view
First, we would argue that macroeconomic risks are broadly to the downside. A premature inventory cycle, which played out in 2025, will likely have a negative impact on growth for the first half. Second, with trade uncertainty still high, ex-tech business decisions have a tendency to be deferred or even cancelled. Third, inflation, which may well be underestimated, could be higher than the 2.7% predicted in the US and 1.5% in Europe. Especially in the US, tariff pass-throughs will likely intensify. If the Fed is successfully pressured to keep interest rates lower, it could de-anchor market and consumer inflation expectations, with significant risks for the economy.
Additionally, all regions will see benefits from lower oil prices leave the year-on-year data calculations, gradually from January to July. Unless oil falls below the $55-$60, the positive energy effects on inflation will likely dissipate after mid-year. Further disruptions of global supply chains could also cause inflation to grow. Our own prediction puts the 2.7% average annual inflation in the US near the lower end of the likely range, with 3.5% at the highest. Higher inflation could eat away into real growth, so we feel that the 2.4% growth number in the US and 1.5% in Europe, while plausible, would be on the higher end of our range. Having said that, and mitigating some of the aforementioned risks, a weak labour market and below-trend growth should prevent runaway inflation too.
A recession is a removed scenario, as long as markets remain calm and capital investments continue at a satisfactory pace. Possible productivity gains from wider AI adoption could help economic growth, while keeping inflation at bay, to be sure, but they could also weigh on unemployment.
Investment Outlook
While the economic outlook is difficult, due to the trade wars and policy uncertainty, the investment outlook is more benign and tactical overall risk tilt as we enter the year is positive. We are favourable towards equities, despite high valuations. Ex-tech and ex-US valuations are expensive, but materially below their historic highs. We are increasingly favourable on the second-order winners of the AI rally, i.e. the relative utilities and infrastructure firms that will likely benefit from the race towards AI dominance. Technology stocks themselves, which drive equities in the US and globally, is, of course, very expensive.
However, as the transition from Fourth Industrial Revolution (automation) to the Fifth (human-machine cooperation) plays out, we don’t feel that these investments should be seen only on the basis of present valuations. Equities also tend to outperform fixed income in times of moderately higher inflation (below 4%), as they benefit from funds coming from wary fixed-income investors. Politically-induced market risks (trade wars, geopolitical risks) remain manageable, while the equity markets benefit from the AI boom and the short-term bond markets from potential rate cuts.
We expect risks to manifest very differently across different asset classes. Thus, risk needs careful and professional management. Our insight with respect to Fixed Income, which has been the same since 2022, is that the 30-year bull market has effectively ended and that bonds will likely not be the absolute risk-mitigator for investment portfolios. The reason, especially on the longer end of the yield curve, is that inflation and policy uncertainties might well push yields higher in the US, which could have a spill-over effect on other markets too. This is the biggest challenge to long-term asset allocators, and also to risk-oversight authorities: that historic volatility doesn’t accurately portray the risks for defensive portfolios, which are predominantly comprised of fixed income. Inflation over 4% tends to have a negative effect on all assets. Gold and precious metals have been the greatest beneficiaries of policy uncertainty. Industrial metals prices have also risen as trade friction prompts companies to maintain high inventories.
As uncertainty persists, we expect prices to remain elevated. However, especially for Gold and Silver, we acknowledge that a) valuations are arbitrary, a result of demand and supply, and b) a lot of retail investing has followed institutional and central bank money, pushing the price above $5000/ounce, up from $1700/ounce just three years ago, making the valuation possibly less sustainable.
What are our key market risks for 2026?
- Debt market turbulence. Long-term bonds, which are sensitive to inflation, may see higher volatility as investors are worried over inflation.
- Fresh Trade wars. The investment world is just coming to terms with the new status quo on global trade. Further disturbance in global trade could cause downturns for risk assets.
- A non-independent Fed. While equity markets might simply focus on the positive aspects of lower cost of capital, including the benefits of a weaker Dollar, bond markets will likely convulse at the sight of a Fed that is compelled to lower rates even against a worsening inflation backdrop.
- Adverse AI developments, which could include a market crash due to high valuations, narrower adoption, China augmenting its technology and giving it to the world for free (upending the western model), heavier regulation etc.
- Carry trade inversion. For decades, the carry trade (borrow in Yen, invest in Dollars) has fuelled the US market. Higher inflation in Japan and a rapid rise in long term yields threaten to increase the Yen’s value, closing the tap on a big source of funding for US equity markets.
For all the space they occupy in the press, politically induced market risks remain manageable for the time being. The President’s turn toward Kevin Warsh as Fed Chair suggests that the White House is pragmatic about the dangers of an aggressive negotiating policy and sensitive about Wall Street volatility. Holders of risk assets have seen, time and again, that volatility remains managed. Instead, the bigger risks to investors that should command more attention stem from the variables that can’t be controlled by politics: the debt market, which is particularly susceptible to the most unpredictable of macroeconomic variables, inflation.
