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Matt Brennan, head of asset allocation at Scottish Widows, considers some of the broad opportunities and challenges that could potentially impact investment markets in 2026.
Global markets have entered 2026 against a backdrop of elevated geopolitical activity. Events involving Venezuela, Iran, and renewed Arctic strategic tensions have dominated headlines. Despite this, the longer term outlook for global markets retains several encouraging features.
Equities
While equities globally have made strong gains during a pretty sunny 2025, the stellar relative performance of the US in 2024 has not been repeated.
The S&P 500 Index in the US has risen a robust 17% in absolute US-dollar terms and over 9% in sterling terms, while its relative performance has trailed a bit behind the overall advance of stocks globally.
AI cold front or still a sunshine segment?
US equity markets have been defined in recent years by strength in mega-cap growth stocks, helped by an artificial intelligence boom. In 2025, US growth stocks again outperformed US value.
Despite gains in several of the largest tech stocks, like NVIDIA and Alphabet (Google’s parent company), the segment as a whole may be losing some of its lustre with investors. We believe that value sectors in the US in 2026 could see improved performance relative to growth, helped by valuation differentials.
Technology is still very much front and centre in terms of themes investors are talking about. In 2025, a handful of the US technology giants allocated hundreds of billions of capital expenditure (capex) to AI. This has been and is being poured into data centres and other infrastructure to meet the expected demand for AI-related services.
AI has been heralded by many as the dawn of a new age, with the potential to make an impact on the world in the same way as new technologies – such as the steam engine – did during the industrial revolution 200 years ago. It is being integrated into everyday life – for consumers and businesses – at great speed and there’ve been big predictions regarding the changes it will make to how we live and work. Others, however, are more sceptical, viewing AI as over-hyped and the capex levels as too high.
In our outlook last year, we said that we believed that the AI boom was likely to persist, but that we were mindful of the valuations across the industry. And given progress was unlikely to be smooth, there would probably be rainy spells as investors adjusted their expectations of the sales and profit potential of AI-related stocks.
We think that this argument remains valid, and that AI capex plans are now a very important consideration for investors. We also expect there will be increasing demand from investors wanting to see AI-led efficiencies and revenue-generating innovations coming through from business customers, as evidence of AI’s broad utility.
Clear conditions globally, or regional drizzle?
Global equity market performance over 2025 was less reliant on the US driving returns, with major equity markets outside the US outperforming the US market. Notably, equity markets in Japan, Europe, the UK, and emerging markets (EM) shone brightly in 2025.
We believe this relative strength in other markets globally may well continue in 2026. Japan’s stocks have benefited from positivity about long-term structural reforms, including improved levels of corporate governance, and share buybacks. This should remain an attraction over the coming years, but valuations will need to be carefully monitored, along with its worsening relationship with China, and steady interest rate increases as its monetary policy continues to normalise.
A weakening of the dollar, fiscal discipline in many countries and easing of trade tariff fears have helped EMs. Over the long term, we think EMs represent an important growth opportunity. Although the outlook for the US dollar remains mixed, in our view, any further weakness could prove beneficial for EMs.
Despite lacking obvious catalysts at the start of 2025, the UK generated strong absolute gains, helped in part by investor flows. Limited technology exposure may also have helped, as investors liked the defensive and global characteristics of the earnings of the UK’s largest 100 stocks.
Despite relatively limited gross domestic product growth, relative valuations remain muted. Europe performed broadly in line with global equities in 2025, in local currency terms, but if the political turmoil we saw in Germany and France doesn’t resurface and solid investment spending comes through, the region could see a relatively solid 2026. Note that in sterling terms, Europe outperformed global equity indices because sterling weakened against the euro over the year.
Bonds
High pressure or low?
Bonds yields have fallen, and bond prices moved higher, led by credit. Interest rate cuts at major central banks continued in 2025 but the pace of cuts has slowed, and we could be close to the bottom of their rate cycle.
Inflation has remained close to target in the US and Europe – though less so in the UK after a bounce from April onwards. Policymakers have signalled the need to monitor incoming data carefully. We believe interest rates may well settle higher than pre-pandemic levels over the longer term, with the possibility of structurally higher inflation and ongoing elevated government debt levels in many developed markets.
We continue to monitor government spending and debt levels, because as well as the longer-term impact this can have on economic trends, political budget spats could have market implications. In the US, budget problems led to the longest-ever government shutdown, while in France, budget disputes led to the resignation of a prime minister.
Given the potential vulnerabilities of extended valuations in some areas of the equity market, we think government bonds have an important role to play in portfolios, providing a shock-absorber for any volatile shorter-term market adjustments.
Corporate bonds, particularly high-yield bonds, outperformed government bonds in 2025. Credit spreads are extremely tight, so the asset class is likely less attractive for investors looking on a risk-return basis. However, given relatively strong corporate balance sheets, this asset class could prove attractive for investors focused on return maximisation. Additionally, we also believe emerging markets debt (EMD) could deliver robust returns on a medium-term basis. EMD has relatively attractive yields and valuations, in our view.
Other asset classes
Fair or inclement?
Slightly lower interest rates over the coming year could also have implications for UK and international commercial property. For example, REITs tend to benefit from lower debt finance costs, and therefore reduced investment costs, and this environment can improve property demand.
Amid strong performance and heavy market concentration in equity markets and robust returns across large parts of the bond market, alternative assets in the private market sphere, such as Long-Term Asset Funds, can prove useful in the context of a diversified portfolio, providing different return profiles and correlations with existing assets.
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Overall, we believe the outlook for returns over the longer-term remains robust, but we would not expect to see a repeat of the strength we’ve seen in equity markets over the last few years.
We may also experience volatility along the way, and as such, we’re closely observing themes and issues for their potential to influence financial markets, including geopolitics amid ongoing conflicts and disputes. Trade negotiations and tariff implementation also warrant close attention given the potential for this to disrupt supply chains and inflation trends.
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All index data are shown in total return sterling, unless otherwise stated.
Source: FE Analytics
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