View From The Top: Keep on keeping on – for now

View from the very top: Fade the rally and keep on diversifying. This approach makes sense – for 2026 is likely to be another year of unforeseen events. Furthermore, positioning at the start of the new year is highly consensual. We concur that a recession looks unlikely over the next 12 months and that equities will continue to benefit from accelerating earnings upgrades. However, expect volatility along the way. Corrections are inevitable. Beyond concentration concerns around the AI theme, investors should be mindful of overheating risks in the economy and the possibility of a policy miscalculation on the part of the Federal Reserve. High valuation starting points in many asset classes inevitably imply lower future returns. If we accept that timing markets is almost impossible, then the most defensible strategy is to pursue active and judicious diversification both across and within asset classes.

Asset Allocation:

• Equities: Global equities have enjoyed three consecutive years of double-digit gains. A fourth is historically very rare. Consensus, however, does assume accelerating earnings growth over 2026, with the MSCI World Index set to see a 13% year-on-year rise, up from 9% in 2025 (per Bloomberg). While the US mega-cap tech stocks have been largely responsible for driving both recent market returns and earnings momentum, we expect the rally to broaden over the coming year. Active equity management should reassert itself. Value may outperform growth; small caps could gain relative to their larger peers and emerging markets may continue to outperform developed ones.
• Fixed income/ Credit: 2025 was a good year for debt investors, with government bond yields declining and Investment Grade/ High Yield spreads remaining tight. However, it seems hard to believe that spreads will tighten further, while yields may start to rise. The fate of ten-year US Treasurys may be contingent on the Federal Reserve’s evolving policy stance. However, even if the Fed does lower rates further, other central banks are moving towards a tightening phase, which may see global yields moving higher. Private credit risks also remain important to monitor.
• Currencies: The Dollar Index reached a trough in June 2025, and the currency has stabilised since, even if its annual performance has been the worst since 2017. How the Dollar moves in 2026 may be contingent on Fed policy action, especially relative to other central banks. Over time, we believe the default is for currencies to mean revert.
• Gold: Even after the strong run witnessed by the precious metal over the past year (hitting a record on 26 December), we expect further gains in the gold price over the coming 12 months. Gold remains a crucial asset within portfolios. It serves as a hedge against political dysfunction, the weaponisation of currencies and potential financial repression. Central banks also continue to add to their reserves.
• Alternative assets: Allocations to this asset class can increasingly serve as a form of replacement for fixed income, offering both portfolio diversification and income-generating characteristics. Hard assets should also exhibit resilience in the face of macroeconomic volatility and political ambiguity. We favour selective investments, particularly in uncorrelated strategies.

2025 was a good year for most investors, even if one filled with contradictions. There was a slow embrace of the growing bubble, and markets once again demonstrated their remarkable ability to climb metaphorical walls of worry. Both mega-cap tech stocks and gold generated significant returns. Equities globally ended the year just 1% away from an all-time nominal high. At the same, assets in money market funds crossed $8tr for the first time ever in December, according to Bloomberg.

Entering 2026, positioning is highly consensual. Not a single Wall Street investment bank is calling for a recession. Fund Managers are at their most bullish in almost five years with the lowest cash levels on record this decade (per Bank of America). If there is a debate, then it centres around for how long the ‘Goldilocks scenario’ of optimal growth and inflation can endure.

However, consensus is almost always wrong. Consider how events as diverse as the COVID-19 pandemic, the inflation surge, subsequent record pace of rate hiking and the Liberation Day furore (and volte face) confounded forecasters. Bloomberg also points out that the last time equity strategists were this bullish at a year-end – in 2017, prospecting for 2018 – the subsequent 12 months proved then to be the worst year for equities since the Global Financial Crisis in 2008.

At the very least, we should assume 2026 won’t be a low volatility year. To our mind, it would be more surprising if there were not an equity market correction in the next 12 months. Nonetheless, it is important to keep in mind that there is almost zero correlation between the magnitude (and timing) of intra-year drawdowns and where stock markets end the year. In order best to manage through this landscape our counsel is to fade the rally and keep on diversifying.

The bull case for the year ahead is a simple one: there won’t be a recession in 2026, and corporate earnings will keep on expanding. There are multiple reasons to support this view but arguably the simplest is that President Trump will do his hardest to ensure that there won’t be any deterioration in growth in the year that marks the 250^th anniversary of America’s Declaration of Independence, at the same time that the US hosts the world’s largest sporting tournament, the football World Cup.

The data seem supportive. America’s economy grew at 4.3% in the third quarter of 2025 and current estimates for fourth quarter growth are running at 3.0% (per the Atlanta Fed). Such a pace is well above the long-term rate of 2.0% at which the US economy should sustainably grow, according to the Congressional Budget Office. Retail sales are expanding, businesses are spending (albeit primarily on AI-related investments), corporate CEO sentiment has risen for three consecutive quarters (per Business Roundtable) and wage growth remains ahead of inflation. Zooming out for a moment, the OECD is calling for 2.9% GDP growth globally in 2026, an upward revision relative to its forecast of three months prior.

It is easy to imagine a scenario where the US experiences a pro-cyclical rally boosted by a trifecta of rate cuts, fiscal stimulus and potential deregulation. Two further 25 basis point interest rate cuts are assumed in 2026 (after the three which occurred last year), based on Fed Funds Futures assumptions. However, with the most recent inflation print below expectations and the US unemployment rate at a four-year high, there is scope for more. Although there is nothing to suggest an imminent collapse of the labour market – the trend is more one of post-pandemic normalisation – it would be logical for the Fed to seek to stay ahead of events.

When the Federal Reserve cuts rates in the absence of a recession, this tends to be very positive for equity markets, at least based on historic precedent. Add into the mix the fact that recent legislation acts as a de facto tax cut and may bring forward planned capex (the One Big Beautiful Bill Act reinstates 100% bonus depreciation permanently). Further stimulus may come in the form of cheques planned by the Trump administration that will be sent to low-income households and veterans.

In this positive scenario, US economic strength spreads to the rest of the world. The global economy receives a further boost with reduced trade and political uncertainty relative to a year prior. A pro-cyclical policy mix would free up markets to shift focus from global macro concerns – which dominated the early part of 2025 – to micro narratives. Bottom-up consensus estimates assume an acceleration in earnings growth in 2026. Bloomberg calls for a 13% year-on-year expansion for the MSCI World Index (versus 9% in 2025) and an even faster rate for the S&P 500 Index. More deals and a swathe of initial public offerings (including potentially SpaceX, Databricks and Anthropic) would be additional sources of upside.

Narratives, of course, never develop quite as simply as the one just depicted. The first factor investors may want to consider is that high starting points typically imply lower future returns. It is very rare for equity markets to experience three consecutive positive years of gains and even rarer for this to extend to four. The last time this occurred was the period 2003 to 2007. The Great Financial Crisis followed immediately after.

More starkly, there is no escaping the fact that the AI narrative remains central to markets. Ten companies make up c40% of the S&P 500 Index and c20% of the MSCI World Index. Should these businesses underperform, then a clear ripple effect would be felt through markets. The OECD warns in its latest report of AI being the “biggest downside risk” to its growth projections. What if animal spirits were to run too hot, or the AI investment cycle to end abruptly?

From our perspective, AI excesses are accumulating, but it is important to differentiate between optimism and hype. Most concerns centre on the risks of potential over-investment, especially if businesses are resorting to debt funding to finance capital expenditure. At this stage, there is still enormous uncertainty about which companies will emerge as the long-term winners and how profits will be distributed. However, AI is already helping to bring about genuine structural change (and enhanced productivity), while the investment community appears to be drawing a distinction between those companies with sustainable cash-generating abilities and their inverse.

Investors should also monitor the risk of the US economy overheating. Do not forget that inflation is running well above its 2.0% target (2.7% last reported) and that dual monetary and fiscal stimulus scenarios have typically only exacerbated inflationary pressures. The New York Fed’s most recent survey sees inflation one year out at 3.2%. Do not under-estimate the possibility that the Fed ends up misreading the current policy environment. Were the US central bank to cut rates and inflation then to take off, it could be forced into a more hawkish volte face. Should rates rise, then equities would probably sell off.

Then there are three ‘grey swans’ to consider: a change in the Fed Chair, the US mid-terms and geopolitics. We are relatively sanguine on all the above at present. Begin with the Fed. We do not believe that a change in Fed leadership would be bad unless monetary policy were to become irresponsible, and any future Fed Chair would surely be aware of the ramifications from undermining central bank credibility. The mid-terms may well see the House return to the Democrats, but political gridlock can be seen as a relative positive if it does serve to limit the scope for more disruptive policy shifts. Finally, there remains the possibility of geopolitical miscalculation between the US and both China and Russia. Periods of tension may accompany those of détente.

Our best counsel for how to navigate through the next twelve months is to continue diversifying. Such an approach makes sense, especially given such a concentrated equity market. Although there is a very real chance that the economy does overheat in the second half of the year, timing markets is almost impossible. Consider pauses and resets as healthy. At the least, 2026 could see a bull market in diversification. Good luck investing.

Alexander Gunz, January 2026