2026: What Could Go Right – and What Could Go Wrong?
As we look ahead to 2026, the prevailing sentiment remains cautiously optimistic. The economy appears resilient, with consumer spending holding steady, business investment remaining robust, and corporate profits continuing to impress. While the labor market shows some signs of softening, it is far from collapsing. A major tailwind will come from fiscal expansion, driven by the implementation of the One Big Beautiful Bill Act. This legislation is expected to inject significant liquidity into the economy through retroactive tax cuts, larger household and corporate refunds, and potentially even direct stimulus payments ahead of the midterm elections. Political incentives suggest policymakers will do everything possible to sustain growth and market confidence. Meanwhile, the technology sector continues to dominate headlines, with no indication that leading firms will slow their aggressive AI-related capital expenditures.
This trend should provide further support for equity markets, though it also introduces concentration risk. The AI trade has fueled extraordinary stock performance, but questions remain about the long-term monetization of these massive investments. Should the AI narrative falter, the repercussions could be severe, even for diversified portfolios. Inflation remains another key concern. Despite moderating pressures, strong economic activity and heavy AI infrastructure spending have kept U.S. consumer price inflation near 3%, well above the Federal Reserve’s target. Global risks persist, including potential volatility in bond markets from Japan to Europe, which could spill over into equity valuations. Finally, investor sentiment itself warrants caution. Bearish voices are increasingly rare, and even long-standing skeptics acknowledge the lack of an imminent trigger for a major downturn. While the outlook for 2026 is broadly positive, prudent investors should remain alert to concentrated risks, inflationary pressures, and the possibility that consensus optimism could set the stage for unexpected volatility.
Global Economy
The global economy enters 2026 on a resilient footing. U.S. growth remains strong, Europe shows modest recovery despite structural challenges, and Asia sees stabilization in China, moderate gains in Japan, and export-driven strength in South Korea. Overall, fundamentals support cautious optimism, though global risks persist.
USA
Recent U.S. economic data suggests that the economy is entering 2026 in strong shape, defying concerns of an imminent slowdown. While the latest employment report initially raised eyebrows with the unemployment rate ticking up to 4.6%, a closer look reveals a more nuanced picture. Private payroll growth remains steady once federal employment volatility is stripped out, and demographic trends such as aging populations and reduced immigration have lowered the neutral job growth threshold, making current figures less alarming. Consumer spending continues to provide a solid foundation for growth. October retail sales, excluding autos and gasoline, rose 0.5% from September, translating into an annualized pace of nearly 7%. Although retail data can be volatile, three- and six-month averages indicate nominal sales growth of around 5%, reinforcing the view of resilient demand. This strength is echoed in GDP figures: the U.S. economy expanded at an annualized rate of 4.3% in the third quarter, comfortably beating economists’ expectations of 3.2%. The upside surprise was driven largely by robust consumer spending on healthcare and technology, signaling that households remain engaged despite higher borrowing costs. Taken together, these indicators point to an economy that is not only weathering past monetary tightening but also benefiting from structural tailwinds. While risks remain, such as inflation persistence and global market volatility, the data underscores a positive baseline scenario for 2026. For investors, this environment suggests opportunities in sectors tied to consumer strength and technology, while maintaining vigilance against potential shocks.
Europe
The European economy is showing early signs of recovery, but structural challenges continue to weigh on growth prospects. Over the next few years, GDP expansion is expected to remain modest at around 1% to 1.5%, constrained by an aging population, limited immigration, and sluggish productivity gains. Fiscal stimulus is also relatively muted, leaving little room for a significant acceleration in activity. Inflation is projected to hover slightly below 2%, theoretically giving the European Central Bank (ECB) scope for further rate cuts. However, monetary policy decisions will depend on external factors such as U.S. import tariffs, global economic performance, and euro exchange rate dynamics. Our view is that these conditions will not justify additional easing, and by late 2026 or early 2027, we anticipate the beginning of a new upward rate cycle as stronger growth exerts pressure on inflation.
Asia
China closed 2025 with signs of stabilization. Its manufacturing PMI climbed to 50.1 in December, marking the first expansion in nine months. President Xi confirmed the economy was on track to meet the 5% growth target, supported by stimulus and resilient exports. The World Bank also raised China’s growth forecast, citing strong fiscal and monetary support. However, structural challenges such as a weak property sector and subdued consumer spending persisted. Japan experienced modest growth, estimated at around 1.2% for the year. A contraction in the third quarter, driven by weak residential investment and softer exports, weighed on performance. Still, the economy showed recovery in the final months, helped by corporate capital spending and rising wages. Inflation hovered near 3%, easing from earlier peaks, while domestic consumption remained steady despite global trade pressures. South Korea ended the year on a high note. December exports surged 13.4% year-on-year, pushing annual exports to a record $710 billion, largely fueled by semiconductor demand. Manufacturing activity returned to expansion territory, and inflation averaged 2.1% for the year, with December at 2.3%. Strong external demand and stable prices positioned South Korea as one of Asia’s most resilient economies. Overall, 2025 was a year of export-driven strength for China and South Korea, while Japan managed moderate growth amid global uncertainties. Looking ahead, all three economies face challenges from trade tensions and slowing global demand, but their fundamentals remain relatively solid.
Shares
Global equity markets sustained their upward momentum in 2025, though performance varied across regions and sectors. The MSCI World Index climbed nearly 19.5%, marking a second consecutive year of solid gains. In the U.S., the S&P 500 advanced 16.4%, a slower pace than 2024’s 23.3% surge but still strong amid moderating economic growth. Technology continued to lead, with the Nasdaq rising over 20% following its exceptional 28.6% increase the previous year, underscoring persistent investor enthusiasm for tech-driven growth. Meanwhile, the Dow Jones Industrial Average posted a more modest 12.97% gain, highlighting the divergence between industrial-oriented stocks and the tech-heavy benchmarks. The “Magnificent Seven” stocks delivered strong gains in 2025, led by Alphabet (+65.4%) and Nvidia (+38.9%). The AI sector was a major market driver, with chipmakers and infrastructure firms among the year’s top performers. Retail investor favorites also surged, repeatedly buying dips, while the most-shorted S&P 500 stocks outpaced the benchmark. Despite these gains, U.S. equities remain expensive. The S&P 500 trades at 22 times forward earnings, well above its 10-year average of 19 and surpassing roughly half of the valuation metrics seen during the dot-com bubble in March 2000. Current valuations echo historical extremes observed in 1929 and 2000, as well as lesser peaks in 1972 and 2007. These elevated levels underscore both the strength of recent market performance and the potential risks as investors enter the new year.
European stocks extended their gains in 2025, delivering a stronger performance than in 2024 and narrowing the gap with U.S. peers. Spain’s IBEX 35 was the standout, soaring 50.02% its best annual result in decades, driven by robust banking and cyclical sectors. The trend was mirrored in Italy. Italy’s FTSE MIB surged 31.47%, far exceeding its 12.63% rise in 2024, supported by financials, industrials, and energy stocks amid resilient domestic growth and improved sentiment. Germany’s DAX, the top performer in 2024, posted another strong year with a 23% gain, led by heavyweights such as SAP, Siemens, Rheinmetall, Deutsche Telekom, and major insurers. The UK’s FTSE 100 advanced 21.5%, its best run in years, benefiting from commodity strength and renewed momentum in banking and energy sectors. On the weaker side, France’s CAC 40 rose 10.4%, rebounding from last year’s -2.15% decline but lagging other major indices due to political risks, trade concerns, and soft luxury goods demand from China. Consumer goods companies weighed heavily on performance. Meanwhile, Switzerland’s SMI gained 14.4%, supported by defensive sectors likepharmaceuticals and financials. Overall, 2025 marked a year of broad-based European equity strength, with southern European markets leading the charge and core indices maintaining solid growth.
In the Asia-Pacific region performance was broadly positive but varied across markets. Japan’s Nikkei 225 climbed 26.2%, extending its strong 19.2% gain from 2024, supported by robust technology stocks and a persistently weak yen. Hong Kong’s Hang Seng Index surged 27.8%, significantly outperforming last year’s 17.7%. In contrast, Australia’s S&P/ASX 200 posted a more modest 6.8% rise, slightly below its 2024 increase of 7.5%. Chinese equities, represented by the CSI 300, advanced 17.7%, improving on the previous year’s 14.7% as domestic sentiment recovered and the technology sector showed renewed strength. Analysts highlight that China’s tech industry benefited from AI-driven demand and semiconductor innovation, and expectations for 2026 remain optimistic, with continued investment and policy support likely to sustain momentum. The standout story was South Korea’s Kospi Index, which soared an extraordinary 75.6%, reversing a 9.6% decline in 2024. This rebound was attributed to easing political tensions, booming memory chip exports, and renewed investor confidence.
Overall, 2025 reinforced the resilience of global markets, with technology remaining the dominant driver of returns.
Bonds
In December U.S. Treasury yields experienced clear movement in response to the Federal Reserve’s policy shift. Following a widely anticipated 25-basis-point cut to 3.50–3.75% at its December meeting, short-term rates dropped, pushing 2-year yields lower. However, long-term yields, particularly on the 10-year and 30-year, moved higher. The 10-year yield climbed from roughly 4.01% to 4.14% over mid-December, while the 30-year hit around 4.79%, leading to a bear-steepening of the curve. This occurred because investors factored in slower Fed easing and persistent inflation, despite the rate cut. Treasury volatility also hit its lowest level since October 2021, reflecting a more subdued environment as the Fed reassured markets via cautious messaging in its minutes and forward guidance. Corporate bonds’ environment was similarly supportive. Investment‑grade spreads tightened modestly – corporates outperformed duration-matched Treasuries and credit conditions remained solid thanks to strong underlying earnings, low defaults, and ongoing demand, even as IG durations slightly lagged.
European government bonds saw yields edge higher as markets responded to the European Central Bank’s decision to keep rates unchanged and maintain a cautious stance. The ECB held its deposit rate at 2.00% and signaled no imminent cuts, which anchored short-term yields but pushed longer maturities upward. The euro-area 10-year benchmark rose to around 3.13%, up from roughly 2.97 in December, while 30-year yields hovered near 3.84%. German Bunds and other core sovereign bonds followed a similar trend, reflecting expectations of steady policy and strong issuance, particularly from Germany. At the same time, credit conditions improved, with investment-grade spreads tightening as investor appetite remained strong amid easing financial conditions
We expect the yield on 10-year German government bonds, currently near 2.85%, to remain within a range of roughly 2.7% to 3% for the foreseeable future. However, a decisive move higher is likely once U.S. 10-year yields begin to rise significantly.
Commodities & Currencies
Thanks to strong performance last year, gold is expected to gain further popularity among investors, especially as growing concerns over public finances have reduced the appeal of government bonds as a safe haven and made inflationary policies more likely. Central banks continue to purchase gold as an alternative to dollar reserves, reinforcing long-term bullish expectations for the metal. However, in the coming months, we anticipate a sideways trend or even a decline in gold prices. This outlook is driven by expected upward pressure on real interest rates and fading speculation about a more accommodative Federal Reserve policy. Additionally, a rapid peace settlement in Ukraine could reduce demand for gold as a safe-haven asset. From a technical perspective, a consolidation phase is likely, which could manifest as a prolonged sideways movement or a downward correction. In the latter scenario, gold prices could fall toward the 3,500 – 3,900 range.
Oil prices are currently under pressure, weighed down by slower-than-expected demand growth due to the rapid adoption of electric vehicles and increased supply from OPEC production hikes and more efficient U.S. shale operations. Technically, WTI faces a critical support level at $55; a decisive break below this could trigger a further decline toward $45. At present, oil prices are historically low, making exploration and development of new fields unattractive, which could eventually constrain supply. If prices continue to fall, OPEC may respond by cutting production to stabilize the market. Despite the current bearish sentiment, much of which is already priced in, this environment suggests that after a period of weakness or consolidation, a sharp rebound in oil prices is likely. For now, the outlook for the coming months remains cautious, with sideways movement or further declines possible before fundamentals and supply adjustments drive a recovery. The U.S. dollar is expected to remain under short-term pressure due to concerns about a cautious Federal Reserve and the country’s large twin deficits. However, as growth prospects improve and speculation about further rate cuts fades, the dollar is likely to strengthen later in the year. The euro is projected to move sideways overall, with expansive fiscal policies offset by tighter monetary conditions driven by higher long-term yields and its appreciation on a trade-weighted basis. Positive factors for the euro, such as peace in Ukraine and increased consumer spending in Europe, are unlikely to materialize in the near term. Meanwhile, the Japanese yen is anticipated to rise in the coming year. Increased volatility in currency markets could lead to a reversal of carry trades, boosting demand for the yen, while expected rate hikes by the Bank of Japan would provide additional upward momentum for the currency.
Source: www.bendura.li
Aleksei Andrievskii is the founder of the ANDRIEVSKII SEA WEALTH family office in Cyprus, a member of the advisory board at Bendura Bank AG, Liechtenstein