The latest outlook from our specialists on key investment themes in 2026

Surprising market resilience amid geopolitical risks

The last few months have again provided an extraordinary experience for investors. 2026 started brightly, with markets soaring, followed by a period of intense volatility in March, which then gave way to one of the fastest and most powerful market recoveries on record in April and early May. Extraordinary, and exhausting. But let’s be honest, this has been the experience of the ‘turbulent twenties’ so far, so we ought to be used to it by now!

The bumpy ride we’re experiencing this year reflects renewed geopolitical risks – most prominently the conflict involving Iran – as well as ongoing concerns around energy prices and inflation. While these developments increase uncertainty, we believe that the global economic backdrop is more adaptable than initial headlines suggest. In fact, markets have recovered rapidly, fuelled by the brilliant corporate results revealed over the last few months.

Now we are seeing an almost daily struggle in markets, between the concerns around the effects of the war in the Middle East versus the confidence arising from power-packed corporate earnings reports. Using the five key investment themes of our asset allocation framework, let’s discuss which factor will ultimately win out in the year ahead. 

The global economy: slowing, but resilient

The key macroeconomic question is how damaging the Middle East conflict will be for global growth. Energy prices have risen significantly, as natural gas and electricity prices moved higher over recent months, although outcomes vary considerably by country and region. 

Crucially, these moves currently remain smaller than those seen during the 2022 energy shock, and this is important in assessing the path ahead for the global economy. 

The US economy continues to be an important driving force for the rest of the planet. Like him or loathe him, President Trump is not wrong when he describes the American economy as ‘the envy of the world’.

Labour market data suggest balance rather than weakness, with job openings now roughly in line with the number of unemployed. Other indicators paint a similarly steady picture: hiring rates have picked up, the services sector remains in expansion territory, and new home sales rose in February and March. 

Most importantly, capital expenditure related to artificial intelligence (AI) remains exceptionally strong. This investment cycle is providing a meaningful boost to capital expenditure and consumption and makes a US led global recession difficult to envisage, even if sections of the world economy, most notably in parts of Asia and Europe, remain under pressure.

History does, however, support an argument for caution. Previous oil shocks have tended to affect economic activity with a lag. Growth often slows most sharply approximately four quarters after the initial shock, while the full impact on output levels can take longer to emerge. Equity markets typically respond to the economic damage caused by energy shocks rather than the shock itself – and again, often with a lag. So we need to remain watchful. One could argue that the resilience that has surprised so many people reflects timing as much as it does fundamentals.

For now, several factors are cushioning the global economy and preventing worse outcomes:

1. Oil inventories are being drawn down
2. Fiscal support remains in place in some countries
3. Precautionary buying has supported near-term activity
4. The AI investment boom continues to support growth
5. Many households and businesses appear to expect energy prices to ease over time, encouraging consumer spending and discouraging firms from making immediate job cuts - let's hope that this indeed proves to be the case.

Inflation: more volatile, but more contained

Inflation risks have increased as higher energy and transport costs filter through to prices. However, we see important differences relative to the post COVID-19 inflation surge. The current energy shock is smaller, and economies have already adapted by reducing energy intensity and improving supply chains. In addition, the global economy is in a very different state now (compared with when it was recovering rapidly in 2022), with government funding, credit and pent-up demand fuelling an incredible year of strength. 

As a result, while inflation will rise in the next six months and may remain volatile in the near term, based on the current economic conditions we do not believe there will be a sustained reacceleration.

That said, some pressures are evident. Tighter supply chains, rising input costs, and elevated freight charges – particularly in manufacturing and chemicals – could weigh on margins and prices if they persist. These pressures are, for now, being offset by continuing demand and pricing power in many sectors. 

Interest rates: near the upper end of expectations

Central banks are navigating a period of exceptional uncertainty. Policymakers remain cautious and ‘data dependent’, but markets have already allowed for further tightening in some regions. In Europe, market pricing (reflected in interest rate futures) suggests that the European Central Bank is likely to raise interest rates to around 2.85% over the next year. In the UK, markets expect the Monetary Policy Committee to raise interest rates three times to roughly 4.5%.

While these outcomes cannot be ruled out in the current fluid situation, we find it difficult to see rates rising meaningfully beyond what is already priced in, unless inflation proves far more persistent than expected. Indeed, we are still far from convinced that the Bank of England will raise rates at all, preferring instead to ‘look through’ the coming rises in inflation and focus on the medium term. 

In the US, by contrast, we do not expect near term rate cuts, given the underlying activity and investment, but we would still envisage the next move being to reduce rates. Overall, this suggests a ‘higher for longer‘ rate environment, albeit with markets already pricing in a worst-case scenario. 

Markets: earnings are doing the heavy lifting

The key question of the last few months has been: why have financial markets shown such incredible resilience despite geopolitical stress?

Corporate bond and equity markets are in positive territory so far this year and both rose sharply in April, led by the US equity market, which saw its best monthly performance since late 2020. 

Undoubtedly the key driver has been corporate earnings. In equity markets, these earnings typically set the tone and direction, and results have been exceptionally strong. Our accompanying article ‘adapting and recovering – the case for equities’ explains this in more detail. 

It is no surprise that American companies have delivered broad based earnings growth, with many companies exceeding expectations. Analysts have responded by revising forecasts higher for the coming year, helping to justify the recovery following the conflict-related sell off earlier in the spring. Importantly, earnings strength is no longer confined to a small group of large technology stocks. While AI-linked companies remain important contributors, growth has broadened across financials, industrials and consumer focused firms. This breadth enhances the durability of the earnings cycle.

Obviously, there are some weaker sectors. Higher costs linked to energy, logistics and supply chains could begin to exert pressure on margins if they persist. But for now, these headwinds continue to be offset by healthy demand and efficiency gains.

Valuations and positioning: an improved starting point

At the start of the year we suggested that valuations of both bonds and equities were ‘full but fair’. Those views haven’t changed. Equity markets have risen, but so have earnings expectations, leading valuations to be lower than they were late last year. This is a positive. In fixed interest (assets such as bonds and gilts), risks around inflation and interest rates exist, but yields have increased to reflect this and offer attractive returns. 

Looking ahead: cautious optimism, not complacency

There is no doubt that the global economy faces meaningful challenges, but there are also reasons for optimism. Strong US demand, the powerful AI investment cycle, and robust corporate earnings provide important support. The negatives centre around delayed economic effects and the persistence of energy shocks. 

For now, fundamentals justify a balanced, disciplined approach rather than a wholescale retreat from risk, but as ever throughout this turbulent decade, we need to remain patient, proactive and flexible. 

Even in uncertain times, and as stated in our Investment Outlook at the beginning of 2026, we continue to stand by our mantra that ‘volatility is the friend of an investor, not an enemy’.