As we look ahead to 2026, St. James’s Place reflects on the key market developments of the past year and explores where risks and opportunities may lie.
Their Chief Investment Officer Justin Onuekwusi and Chief Economist Hetal Mehta on navigating an evolving investment and economic landscape.
Justin Onuekwusi, Chief Investment Officer at St. James’s Place, said:
“Reflecting on 2025, global financial markets posted another year of admirable performance. However, the journey has not been without a few bumps in the road. Markets had to contend with President Trump’s changing tariff announcements and a whole raft of news surrounding the likelihood of an artificial intelligence (AI) bubble. Meanwhile, the general populace struggled with an unsettled employment picture and a continuing cost of living crisis, while national governments attempted to balance the books without choking off economic growth.
“After a correction in early April, most global equity markets notably recovered and moved towards all-time highs. While US equity markets were strong, the weaker dollar took the shine off these returns for overseas investors as US exceptionalism was challenged by policy uncertainty. Meanwhile, the much vaunted Magnificent Seven only had two constituents posting returns worthy of the ‘magnificent’ tag.
“Corporate bond spreads moved ever lower, supported by solid company balance sheets and ample credit availability. It was heartening to see, as the year drew to a close, that bonds were doing what they have historically done. That is to provide useful diversification in portfolios, along with a real yield, and with the added possibility of a capital return on top as central banks cut interest rates.
“In the US, by mid-December the possibility of another government shutdown at the start of 2026 was present, with tariff-related unpredictability also expected to linger.
“However, there are opportunities for those prepared to take a long-term view. In our opinion, the biggest risk for investors remains the elevated valuations for risk assets, especially in the US and within AI-related names. We believe that non-US equity markets continue to trade on relatively attractive valuations and present a more appealing investment proposition.
“As 2025 has shown, diversification is a reliable friend. We believe it will prove so again in 2026.”
Hetal Mehta, Chief Economist at St. James’s Place, said:
“Despite a rollercoaster of a year encompassing Liberation Day, the One Big Beautiful Bill, geopolitical concerns, US government shutdown and the UK Budget, the global economy fared relatively well in 2025. In most of the major developed economies growth slowed modestly, inflation moved lower, and labour markets cooled without a sharp increase in unemployment. While policy uncertainty has remained high, signs of economic resilience have come through, particularly with technology-focused investment spending. In the UK, elevated inflation has prevented the Bank of England from being able to cut interest rates aggressively despite tight fiscal purse strings.
“Going into 2026, some of the uncertainty headwinds are fading. Prime examples are those challenges stemming from tariff wars and the US shutdown. The latter of which is expected to have had a minimal lasting impact on GDP. Moreover, front-loaded fiscal stimulus and easing financial conditions should provide a lift to the economy. With household savings largely run down in the US, employment income and wealth effects will be pivotal to keeping the engine that is consumer spending going.
“A key theme in 2026 will be AI-related investment and its effects on productivity and GDP. As AI adoption broadens, productivity gains should continue. Whether this starts to have a more meaningful impact on job creation and job displacement remains to be seen; the likelihood is that the effects will take time to build up.
“Economies rarely just ‘fall’ into recession, and while we cannot forecast the unknown shocks that may occur, the fundamentals of the economy are good enough to have a higher confidence in growth remaining broadly in line with trend. As a result, we see the US recession probability for the next 12-18 months being around 25% (vs. 35% through most of 2026).
“When it comes to inflation, the progress made in 2025 has been hard won, with interest rates remaining elevated. If a new Federal Reserve chair is inclined to cut rates more aggressively than the inflation outlook warrants, that could raise questions about central bank independence. For the UK, 2026 will likely be a year in which the economy continues to grow at a trend-like pace, with monetary and fiscal policy dynamics largely offsetting each other.”
