2025 has delivered strong stock market returns across the globe – but the economic and investment outlook for 2026 is mixed, says Emma Wall, Chief Investment Strategist, Hargreaves Lansdown, as she shares her economic outlook for the year as well as 3 themes which the HL team think offer opportunities for investors in 2026 and beyond.
Wall said: “The outlook for 2026 is mixed. We close 2025 having seen strong stock market returns across the globe. Both the US and the global tech sector, driven higher by fantastical returns from AI companies, are at historically very high valuations. These companies are ‘priced for perfection’ – forecasts that are perpetually beat, competitive spending that only increases. There is significant scope for productivity enhancements across all sectors, and AI will be additive to GDP, but it is unclear whether current valuations flow through to benefits seamlessly.
“While we think there are some star players within the sector that will be crucial to charging global growth, there is risk that the wider sector is overvalued. If sentiment shifts – whether for macro reasons or company specific concerns emerge, all companies – even those with strong fundamentals – will be impacted.
“In the UK, recent forecasts from the Office of Budget Responsibility upgraded inflation expectations for 2026 from 2.1% to 2.5% thanks to higher wages and services. This is still a downward trend however, and as such, we should expect interest rates to also come down through the year – though not at the velocity that households might hope.
“In the US, there are more complex factors at play. The US economy is not going gangbusters. The jobs market is weakening, adding to expansion concerns heading into 2026. But Trump is keen for it to do better as he heads into mid-term elections next year. President Donald Trump has mooted the idea of tariff cheques on social media, echoing the covid cheques that helped boost GDP during the pandemic. The so-called One Big Beautiful Bill also drip-feeds tax cuts and spending into the system, adding more debt to a country already running a record deficit.
“If you pump too much stimulus into the system, and stoke too much demand, inflation will re-ignite. This in turn could mean the Fed is forced back into a hiking cycle, which equity markets will not like. It is a difficult balance to get right – and it will create volatility in the bond market, which in turn creates opportunities for the tactical investor.
“We are bullish on neither the pound nor the dollar as we move into 2026, though for different reasons. The recent UK Budget saw the pound initially rally as the Chancellor delivered her speech, but as the market digested the OBR’s lower growth forecasts, and the lack of near-term economy-boosting policies in the days that followed, sterling gave up its gains. We do not see enough evidence to contradict the market. A weaker pound is good news for the FTSE 100, as three quarters of the companies’ earnings are ex-UK.
“We are similarly lacklustre on the dollar. The world’s reserve currency has had stiff competition over the past year as the preferred store of wealth. Global central banks have instead been buying up gold – stoking the record highs. Gold’s shine is relative. Trump’s erratic approach to tariffs and global diplomacy, and the threat of Russia having its assets seized by global players supportive of Ukraine has made the metal a more attractive neutral reserve. Dollar weakness can create investment opportunities however – it is good for US-based firms with global revenues, and good for emerging markets.”
3 themes for 2026
Nimble bonds
Bond markets offer opportunities for income now and the potential for total return as yields come down. For investors looking to take advantage of the market volatility an active approach is best. Pick fund managers with a proven track record trading across the market, as changing rhetoric through the year is likely to create opportunities. Actively managed funds can take advantage of the market volatility, and we think the potential for opportunity here outweighs the additional cost of an active approach. Look for funds that can invest in government and corporate bonds, across different geographies.
Emerging markets
Emerging markets offer ongoing opportunities, shaped by shifting tariff policies as emerging economies move away from US supply chains to inter-Asia and inter-emerging market trade routes. Valuations are attractive on a relative basis and emerging markets offer some much-needed diversification alongside the crowded US megacap trade.
There is potential for the India market to rally following weakness in 2025, we expect the dollar weakness to benefit the broader sector.
Quality The ‘quality’ style of investing means companies that have characteristics which should do well regardless of economic backdrop. This is typically because they have stable and predictable cashflows and little to no debt. This often includes companies in sectors such as utilities, consumer staples, healthcare and industrials. This has been out of favour in recent years as either high-growth tech firms, or value-biased companies have led returns. We think this has created a potential buying opportunity to rebalance portfolios and should markets take a down-leg these companies are likely to hold up better.”
