No major economy is in recession, inflation is still falling back from its spike in 2022-23 and central banks have been cutting interest rates. The global economy has also displayed considerable resilience by shrugging off everything that has hit it in recent years. President Trump’s tariffs are the latest dog that didn’t bark and have not derailed the fundamentally benign economic backdrop. Moreover, corporate profits growth is very strong.

Defying fears about Donald Trump, sluggish economies, and an AI bubble, 2025 proved to be another strong year for stock markets (along with gold and other metals). US technology stocks were not the only game in town. Stock markets in Europe, Japan and many emerging markets outperformed the US in local currency and by even more once the weaker dollar was factored in.

Last quarter, we shifted our market outlook from "cautiously optimistic" to “neutral” on the basis that the optimistic and pessimistic scenarios are now evenly balanced, and are sticking to this view. The most likely scenario for 2026 is more of the same: benign economies, falling inflation and gradual interest rate cuts. The benign state of the global economy has been a critical and underestimated driver of the equity bull market. But there are important risks. Probably the biggest economic risk is a possible pick-up in US inflation, which would throw a spanner in the works by stopping Fed rate cuts and raising long-term bond yields. Another common refrain is that we are in an AI bubble. While we do not believe we are in a bubble, this does not preclude a downturn in technology stocks or the AI story. An upset in another corner of the markets or a geopolitical event are, of course, also possible.

Reasons to be optimistic

• Benign economic conditions: The global economy is continuing to recover from the post-COVID surge in inflation and interest rates. Although growth is not particularly rapid, economies are growing in unison globally, and no major economy is in recession. This is in itself unusual. Corporate profit growth remains strong, especially in the US. President Trump's tariffs have merely slowed and diverted global trade, but not derailed it. Moderate, mostly below-potential growth rates should help to squeeze out the last vestiges of inflation, particularly wage inflation, and allow central banks to continue lowering interest rates.
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• Tariff war less damaging than expected: Most countries and regions have struck trade deals with the US at a tolerable tariff rate of typically 15%. Those such as India and Brazil with punitive 50% tariffs have either negotiated some of these down (Brazil) or are expected to strike a trade deal soon (India). After a face-to-face meeting between Presidents Trump and Xi, the "Liberation Day" tariffs on China were suspended for another 12 months in November 2025. This storm appears to have largely passed for now, with less damage to the world trading system than feared. The Supreme Court is set to rule on the legality of some of the tariffs in early 2026 and is widely expected to strike some down. However, the president will likely be able to use other legislation to re-impose them.
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• Limited inflationary impact from tariffs: Even if the full impact has not yet been felt, so far there are few signs that Trump's tariffs are sparking inflation in the US. This has raised hopes that inflation will continue to ease in the medium term and pave the way for Fed interest rate cuts. OPEC (the Organization of the Petroleum Exporting Countries) has raised its production quota, which led the oil price to slide by 16% in 2025 and so also lent a helping hand in keeping inflation down. However, some observers believe hopes of further disinflation will be dashed.

Reasons to be cautious

• Risk of upturn in US inflation: The effect of President Trump’s trade tariffs is still working through the system. So far, tariffs are estimated to have boosted inflation by perhaps 0.7 percentage points. Even if the pass-through of tariffs increases in the coming months (which some observers believe it will), it would still be a one-off effect, which arguably the Fed should “look through”. A more serious risk would be an upturn in inflation due to the strength of the domestic US economy (caused, for example, by the tax cuts US consumers will enjoy in 2026). That could cause havoc in the financial markets by forcing the Fed to stop, or in an extreme case even reverse, interest rate cuts.
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• Change at the top of the Fed: President Trump is set to name his pick for the new Fed chairman to succeed Jerome Powell, who steps down in May 2026. The two names that are being most widely touted are Kevin Hassett, a Trump loyalist, and Christopher Waller, who is seen as a more conventional central banker. Whoever ends up being chosen (and confirmed by the Senate), there are fears that the new chair could attempt to do Trump’s bidding by cutting interest rates more rapidly than justified by economic fundamentals, with possibly damaging effects on inflation and the dollar.
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• Could the AI boom turn sour? Some observers believe AI is a bubble comparable to the dotcom mania of 1999-2000, but others draw comfort from the strong business models and evident profitability of the leading tech companies. Capital spending on AI infrastructure by the “hyperscalers” Microsoft, Meta, Alphabet and Amazon will reach colossal levels in the next few years. Any disappointment in the uptake of AI or shift in expectations about the dominant product could hit this capital spending, weaken the tech companies’ profitability and threaten market valuations, with knock-on effects through the economy.

Tech & AI

Is there an AI bubble?

These days there is much talk of an AI bubble and no shortage of experts warning that the current equity bull market is destined to end in much the same way as the dotcom bubble of 1999-2000. It is certainly true that the Nasdaq index has risen inexorably in recent years, doubling since 2023. But this is relatively slow compared to the dotcom boom, when the index doubled in just six months between October 1999 and March 2000.

Perhaps the most important difference between then and now is that today’s leading technology companies are all hugely profitable and, in some cases, quasi-monopolies.

Our conclusion is that we are not in an AI bubble and do not face a re-run of the dotcom crash. Which is not to say, of course, that there will not be a correction at some point in technology stocks, either because AI adoption is slower than expected or for other reasons. By their nature such corrections are not pre-announced and are often fast and severe. But a peak-to-trough drawdown of almost 80% like we saw in 2000 to 2002 is highly unlikely in our view.

Q3 results for the Tech Titans

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How have the markets performed?

Interest rates

Currency themes and risks

The following themes are intended as food for thought and do not represent a formal currency forecast.

EUR/USD

Recent trend: neutral

Outlook: ambiguous

GBP/USD

Recent trend: neutral

Outlook: neutral to up (weaker dollar)

EUR/GBP

Recent trend: neutral to down

Outlook: neutral to down (stronger sterling)

Which asset classes should we consider?

Our “neutral” outlook on the financial markets implies holding a moderate allocation in all mainstream asset classes. It would not be surprising if non-US and emerging stock markets outperform the US in 2026, just as they did last year. However, if there is a market downturn in 2026, ironically, US markets could outperform (and the dollar might also rise).

The way to deal with market downturns is to hold a well-diversified portfolio that cushions stock market losses and, in most cases, stay invested and await the upturn that inevitably follows in time.

One of the standout assets in 2025 was gold, which rose by a further 65% and is up over 100% over the last two years. As we have highlighted in past quarterly reports, the rally has been driven by a veritable cocktail of concerns, the most potent of which is possibly the weaponisation of the dollar, encouraging central banks to increase their holdings irrespective of price. While it is impossible to call the top for gold, we can be fairly certain that this year’s performance will not be repeated. Although gold remains a valuable hedge, there could be a case for lightening up on holdings or at least not adding at current levels.

Bonds are in some ways the linchpin asset class in 2026. If inflation continues to fall and central banks carry on cutting interest rates, bonds should perform well, but equities would probably remain the best-performing asset class. If, however, there is an inflation disappointment and central banks, particularly the US Federal Reserve, stop cutting interest rates, there could be a sell-off in the bond markets, which could potentially pull the rug from under the equity markets. In these circumstances, bonds would probably outperform equities. A downturn triggered by other risks, such as geopolitics or a market accident, would probably have similar effects.

Conclusion

Stock markets have had another good year. We are now neutral between optimistic and pessimistic views of the future, which implies pegging back risk a little. It is more important than ever to maintain a well-diversified portfolio, maintaining a moderate and geographically diversified exposure to all mainstream asset classes depending on each individual's situation. With our help, constant dialogue with your investment manager is the key to understanding your own risk/reward asset allocation.

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Mark Estcourt

CEO