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It is the start of a new year and after 3 years of a bull-market it is tempting to write a laundry list of what could go wrong in 2026. But the US S&P 500 market began 2025 at an historically expensive 21.5x earnings. It finished at 22.0x having made an 18% return for the year in USD terms. Of this return, just 3% came from the multiple expansion, 14% came from earnings growth and 1% from the dividend. As I wrote at the start of last year, if the economy holds on in there you can still make good money in expensive-looking markets. This proved right last year, even with Trump’s best efforts to de-rail the economy by raising the US effective tariff rate from 3% to 15% in just a few months.
Here, then, is a list of some things that could go right. For the more bearish or skeptical out there, this is also a list of things that could disappoint markets if they don’t turn up at all or underwhelm. And if you are thinking yada yada yada what does this mean for how you are positioned: we are positioned today much as we were for most of 2025. I feel like we have enough passive exposure to keep up if the US/AI/technology theme continues to deliver. But we are balancing this with cheaper international exposure. We could of course tilt this more in either direction (US technology or Europe old economy for example) but, today, we are trying to be as balanced as we can. It still looks too early to me to call the technology top.
- US GDP is expected to grow at 2.6% in 2026, China at 4.8% and the Europe at 1.3%. Don’t overthink it. These are good numbers relative to history for the US and Europe and are very good for China when you consider it is now the world’s second largest economy (and over 4 times the size of Germany for example).
- If this growth does materialize then it is typically a tailwind for more cyclical emerging markets. Emerging markets outperformed the US and Europe last year. This is just a reminder that there are opportunities outside of all things AI and technology.
- Europe also had a good 2025. One tailwind it should have in 2026 is lower energy prices as liquid natural gas exports from Qatar and the US finally start to arrive (see chart below). And Polymarket is showing a 51% chance of a peace deal in Ukraine for 2026. This unwinding of the 2022 energy shock should be helpful for the German manufacturing sector in particular. And for those worried about inflation: the expected increased oil supply you see below should help keep oil prices subdued for the next 12 months at least.
- Trump remains in power and, of course, that means we all remain exposed to Trump headline roulette. But I would note the US midterm elections are coming up later this year. The chances of these headlines being positive for US growth are probably rising. In particular, I would expect tariff surprises to be pretty evenly balanced from here. And we may yet see some tariff reductions, even for China.
- The AI technology revolution continues unabated. To illustrate the importance of this, JPMorgan calculate that, since Chat-GPT was released at the end of 2022, a narrow group of 42 AI related companies has generated 65%-75% of S&P 500 earnings, profits and capital spending (see below). And it goes without saying that if you want to have had good trailing three-year returns you just had to have had meaningful exposure to these companies. But if you drill down into the Magnificent 7 US technology stocks, they grew at 76% in 2023, 48% in 2024 and 23% in 2025. Given their size today, 23% is still very impressive but it looks to me like the law of large numbers is starting to apply. Global nominal GDP growth is around 5%-6% for comparison. But I mention this because the AI boom has been driven by real earnings and investment growth. I do not see AI usage slowing in 2026. In contrast, it feels like we are still very early on in this platform and technology revolution.
- If growth does disappoint then often governments will pick up the slack. The challenge today is that plenty of developed market governments, led by the US, have historically high deficit and debt levels even when growth is good. If growth does then slow, the risk is interest rates rise as governments are forced to pay up to borrow more even more. Slowing growth and rising rates were pretty toxic in 2022. What went right in 2025 was that government bond markets remained pretty stable all year (even during the tariff shock). This delivered inflation beating yields to bond investors without too much price volatility. This remains my base case for 2026. And if the risk is more Liz Truss style bond revolts, then shorter dated bonds still offer decent yields and naturally have much less price risk attached to them.
- One final take on the AI outlook. I showed the chart below in our longer quarterly review and outlook piece. It shows slower hiring for junior employees since the introduction of ChatGPT (hiring in the technology sector has seen a similar slowdown). If you think AI is ultimately limited in what it can do and is a bit of a bubble, then the good news is the impact on the jobs market should be limited. The bad news, though, is that we may not need all that data centre investment and AI stocks are at risk of a correction. I tend to lean the other way: one way or another we will end up needing those data centres and AI Stocks are not obviously in a bubble. But the challenge for techno-optimists is the jobs market. Productivity gains for companies will ultimately mean doing more with fewer people. How quickly, and effectively, we are able to redeploy those people into the rest of the economy is the question. One challenge for investors today is that, for AI at least, what could go right and what could go wrong in 2026 are inextricably linked.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
