Pictet Asset Management
Global equities should build on their gains next year, with emerging market stocks delivering among the best returns. In fixed income and currency markets, government bond yields could edge higher over 2026 while the US dollar is set to depreciate further.
Overview: Goldilocks(ish)
The global economy will be in something of a sweet spot over the coming year, and that is likely to be reflected in the performance of equities, which we see delivering returns of some 5% in 2026. MSCI All Country World Index Broadly speaking, we expect world GDP to grow at 2.6%, roughly in line with its long-term trend rate, which will limit inflationary pressures. Indeed, investors have turned more optimistic about growth and less pessimistic about inflation (Fig.1). At the same time, some 85% of central banks are easing policy against a backdrop in which the private sector is increasingly providing credit. The upshot is that solid growth and liquidity infusions makes for a potent combination for riskier asset classes.
There are, however, a couple of caveats. First, while interest rates will fall further, the pace of monetary easing will slow – which means investors should expect less of a liquidity fillip in the coming year than they had in 2025. Second, the US economy will lag many of its peers. There, we expect growth to slightly undershoot potential while inflation remains awkwardly high for the first few months of next year, before easing in the second half. Our economists forecast US GDP growth to dip to 1.5% in 2026 from 1.8% in 2025, while they see inflation rising to 3.3% from 2.9%. Given the US’s importance in the global markets, this could act as a brake on equity markets.
The US’s less than rosy outlook is being dictated by President Trump’s trade and immigration policies. The average tariff rate faced by American consumers has jumped from around 3% to more than 10% since ‘’Liberation Day” in April. Meanwhile, a dramatic drop in foreign-born US workers amid the administration’s crackdown on immigration has put pressure on labour supply and therefore prices.
We expect the US Federal Reserve to respond by delivering fewer interest rate cuts than markets expect, notwithstanding Trump’s efforts to undermine its independence. Our economists expect just one further cut in the Fed funds rate to 3.75% by the end of 2026. That could set up some disappointment in the bond market, where the consensus sees rates dropping to 3.0% over that same period. This could destabilise equities too, not least because US markets are trading at expensive valuations – stocks are trading at a multiple of 40-times earnings on a cyclically adjusted basis, which is only 10% below the peak reached during the dotcom bubble.
Nor do government bonds and corporate credit valuations look attractive. In fact, our calculation of the US’s composite risk premium – which encompasses equities, government bonds and credit – is the lowest since 2000 and, before that, 1974. US equity risk premium: 12 month earnings yield minus 10-year real Treasury yield. UScredit premium: US investment grade (66%) and US high yield (33%) spreads to Treasuries. US 10-year term premium is estimated using the US Federal Reserve’s ACM Model. Source: Revinitiv DataStream, IBES, US Federal Reserve, Pictet Asset Management. Data as at 14.11.2025.This clearly points to the possibility of below average returns for all major asset classes in the years ahead.
And while we don’t think AI stocks are in bubble territory yet, we think there are reasons to be concerned about a cluster of megacap stocks that sit a notch below the magnificent seven, a cohort we call the ‘Terrific 20’. Their valuations took off during 2025 without being underpinned by commensurate earnings growth, rendering them vulnerable to a sudden and dramatic reversal.
On the flip side, we think there’s a slightly higher chance – 25% vs 20% – of a market melt-up as there is of a major correction. There remains scope for a final bout of retail euphoria about the AI industry’s prospects that, judging by past episodes, could drive the market higher still. That’s truer still if the Fed is pushed by the US administration to cut interest rates aggressively, flooding the market with liquidity.
When it comes to fixed income, the long bear market in bonds looks to be over, although there’s the possibility of some upward pressure on yields in the US, euro zone and UK where core inflation seems to have settled a bit above central banks’ target. US Treasury bonds are undoubtedly still a core holding for investors, but they are also vulnerable to a negative shock if US inflation does heat up on the back of tariffs, tight labour market and fiscal stimulus. We expect investors to continue to hedge against accidents with gold, though the steep run-up in the precious metal has prompted us to pare back our positioning somewhat.
If we’re equivocal about some developments in developed markets, we’re much more positive about the emerging universe. Emerging market debt, credit and equity all look attractive thanks to a convergence of positive forces (for more detail see the equity and fixed income sections below). We’re particularly encouraged by the fact that developing markets are increasingly being driven by domestic macro- and microeconomic factors – growing domestic investor bases, sensible economic policy, more robust institutions, better infrastructure, higher quality workforces, the spread of AI beyond its Silicon Valley heartland etc. – rather than just a weakening of the dollar, as has been the case in the past.
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