The Backdrop Remains Supportive for Growth, but also for Volatility

 

A combination of positive economic and earnings growth, disinflation and growing money supply provided a supportive backdrop for many investment markets in 2025, despite a steep rise in geopolitical uncertainty, regional conflicts, and the maturing of the multi-year AI thematic into the capital heavy investment phase of infrastructure development.

In response, the road was somewhat uneven for investors, that saw a range of major asset classes including global equities, property, and gold driving strong positive results, while a range of others such as bonds, energy, crypto, and the US dollar had a much tougher time of things.

We enter 2026 with a continuation, and in some cases an expansion, of the key drivers of economic growth and investment markets. We see this as providing a positive ongoing backdrop for growth and risk assets, albeit we see several meaningful differences as outlined below, which when coupled with valuation fundamentals means that 2026 will require a much more nuanced and targeted approach to capital allocation in risk assets and portfolio diversifiers (including currencies and commodities).

 

The key building blocks of our outlook include:

• Corporate earnings growth is expected to remain healthy and provide support for asset valuations driven by both cyclical (global growth) and structural means (AI infrastructure and energy), continued growth in money supply, and consumption benefits from 2025 interest rate cuts. We expect earnings growth to broaden meaningfully to both non-technology companies within the US, and to many non-US countries, after recent years of substantial concentration of growth (and market value expansion) in the Mag 7 / US technology sector, and within the US itself.

 

• Commercialisation of Artificial Intelligence (AI) will continue to be a critical factor impacting markets, with anticipated productivity and profit benefits measured against the substantial size of the capital investment and energy required to build and operate Data Centres (DCs). How this impacts future profitability and return on investment for many of the world’s largest technology and AI companies is at this stage unknown. The rightful challenge for investors is assessing the likely return on investment from billions of dollars of upfront capital investment, when the benefits of AI to companies and consumers, and the commercial path to profitability for AI companies remains uncertain. Whether we are currently in an ‘AI bubble’ will remain front of mind and a driver of market volatility; we currently see only parts of the AI sector that exhibits such characteristics, however it is clear and in our view appropriate, that the market has moved from ‘universally bullish’ on AI, to a far less certain stance until these questions are answered.

 

• The largest declines for interest rates are now behind us with inflation proving more persistent than many Central Banks would prefer. This is certainly the case for the US, continental Europe, and Australia, where declining interest rates have provided a powerful tailwind supporting both consumption and higher valuations in asset classes like property and equities. Consequently, the positive impact from lower rates will be greatly reduced for further asset price appreciation in 2026, and we expect greater divergence in interest rate settings to drive variable outcomes across a range of asset classes, including bonds and currencies. We do however expect the benefit of lower interest rates from prior years will provide a meaningful and ongoing boost to both consumption and investment.

 

• Domestic politics and government debt levels will be even more impactful, as fiscal policies increase in importance over monetary policy in 2026. Stimulus driven by rate cuts will reduce while election cycles and populist politics will drive government spending across a range of countries and regions. US mid-term elections to be held in November has the potential to be a key market event, with the Trump Presidency seemingly determined to ‘run the US economy hot’ and focus on growth to deflate away high levels of government debt. US mid-term elections have historically been weak for sitting presidents, which could trigger headwinds for Trump-era policies. Similarly, in Australia, sustained high levels of government debt and spending means a focus on raising revenue which adds policy risk to certain sectors, including superannuation.

 

• Global unrest and geopolitical risks remain centre stage and a key determinant of market outcomes and volatility in 2026. The post-1945 rules based international order is being profoundly challenged and the system is under pressure increasing the risk of volatility and tail events. Notably geopolitical and economic confrontation has become the norm, not the exception, with substantial policy divergence on tariffs and export controls in important sectors such as AI, critical minerals, and energy.

 

• Commodity markets are particularly well placed to drive return opportunities and effective risk hedges, notably within a spectrum of industrial commodities and precious metals given both cyclical and structural drivers of growth (AI, technology, and energy transition), USD currency debasement, geopolitical risks, and persistent inflation.

 

We expect the outlook for investment markets in 2026 will be shaped by a range of key factors, including the positive impacts of resilient (albeit slowing) and broadening earnings growth, further understanding of the AI opportunity and commercial model, easing monetary policy, and increased money supply, balanced against an environment of elevated geopolitical tension and policy risk.

On balance, this provides a supportive environment for risk assets and warrants being fully invested, albeit with more moderate return expectations and targeted positioning, a greater need for diversification, and the use of active risk management strategies in portfolios to deliver returns while smoothing out the inevitable bumps in the road that will occur during 2026.

 

Tony Edwards
Chief Investment Officer

 

 

 

 

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