2026 Global Market Outlook

Reckoning, resilience and recalibration: preparing for a new regime

2026 shapes as a year of reckoning, resilience, and recalibration. Reckoning, in the sense that many of the structural forces that have shaped markets in recent years are approaching a pivotal moment. Resilience, in that well-constructed portfolios should be better positioned to withstand – or even benefit from – these shifts. And recalibration, as the market environment is likely to present meaningful opportunities to adjust portfolios in response to changing conditions. You can read our full report here.

Global market outlooks are a curious exercise. In many respects, the forecast horizon and its outcomes are neither here nor there. As long-term investors, we build portfolios that take a long-term view of markets and that are structured to remain invested through multiple market regimes – not just one cycle, much less one year.

Although we make dynamic adjustments to portfolios around this structural construct, these are typically guided by a view of what the next three- to six-months may bring for investors, and how to re-optimise allocations to invest in a risk‑controlled manner rather than trading directionally toward any point-in-time return expectation.

So, what purpose does this outlook serve? Particularly now, in a world where change is constant, forecast horizons are shorter and exogenous shocks more frequent. Rather than a prognostication on where markets will end the year, it should serve as an opportunity to pause, consider the factors likely to have the greatest bearing on markets in the year ahead, reassess whether existing assumptions require reconsideration, and judge whether your current investment framework will not only see you through the next 12 months, but whether it is prepared for the regime beyond.

An extraordinary period

Before looking ahead, it is worthwhile reflecting on the starting point from which further gains may be added. 2025 was another extraordinary year for risk assets; despite a roughly 20% drawdown following Liberation Day, the S&P 500 returned 18% for the year, and the MSCI World returned 20%.

Looking further in the rear-view mirror, 2025 was the third consecutive year of 20%+ gains for the MSCI World and 15%+ returns for the S&P 500. Such a strong, prolonged return environment is rare. Over the past 100 years, there have been only four instances where the US market delivered more than 15% for three consecutive years. While logic would suggest such a run is unlikely to continue, in three of the four preceding occasions (1945, 1952, and 1998) a fourth year of 15%+ returns was ultimately delivered, with 2022 the outlier. 

Figure 1: The S&P 500 has had a stellar run

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Source: S&P Global, CBOE, Bloomberg, Macrobond, ANZ CIO

As 2026 commences, we are not at this stage expecting such a banner year for US equities, but equally we would not consider high single-digit returns to be an outrageous outcome, particularly given many of the conditions that would underpin such an environment remain intact. US corporate profits are still showing double-digit growth, operating margins have climbed to 19% for the first time, credit spreads appear contained, and the jobs market – while softer – remains solid.

Rather than asking whether the market can deliver another year of strong returns, the more pertinent question – and the first point of reckoning – is whether US exceptionalism is truly at an end.

Indeed, it was the outperformance of global peers relative to the US market that was perhaps the more exceptional story from last year.

American exceptionalism: secular rotation underway

For the first time in nearly a decade, the S&P 500 underperformed the MSCI World Index in 2025 – beating only the Australian share market in local currency terms. While some may dismiss this as an anomaly, the tailwinds that have long powered US dominance – tech supremacy, dollar strength and superior profit margins – are showing clear signs of fatigue.

Figure 2: The US underperformed global share markets in 2025

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Source: S&P Global, STOXX, Tokyo Stock Exchange, SSE, MSCI, Bloomberg, Macrobond, ANZ CIO

Valuations underscore this imbalance, with US equities trading at roughly 23x forward earnings versus 13x to 15x for emerging markets and developed markets ex-US. This premium has persisted even as non-US regions harness the same secular forces that once favoured America. China is aggressively scaling AI, electric vehicles and robotics; Europe is pursuing industrial and defence revitalisation; and emerging markets are leveraging demographic and commodity advantages.

The catalysts reversing US preference are structural, with persistent fiscal deficits and tariff risks threatening relative growth. Moreover, they appear to be accelerating under the second Trump administration, as heightened policy uncertainty and a marked step back from the rules-based system the US once championed lead to greater global fragmentation and an acceleration in multipolarity.

It is worth remembering that the unipolar moment that followed the end of the Cold War was an anomaly, rather than the norm. Indeed, prior to the end of WWII, the globe was largely defined by periods of multipolarity. We are now emerging from a brief period of bipolarity and unipolarity into a multipolar environment once more.

For investors, this matters. Prior periods of multipolarity were often defined by increased kinetic conflict; already we are seeing the need for diversified supply chains and, if the first weeks of 2026 are any indication, a heightened potential for resource conflicts. Indeed, while it appears Trump is intent on controlling the Western hemisphere, we are not convinced he will allow rivals to command similar spheres of influence.

The world has long relied on American hegemony and the safe assumptions it brought. But the US dollar cycle appears to be peaking alongside a structural shift in the US’s exorbitant privilege. 2025 brought periods where the dollar and US equities declined in tandem, and US Treasuries failed to provide the expected hedge. For investors, this may present a potentially generational opportunity to reallocate from US to international and emerging market equities should mean reversion play out over the coming years; it also argues for reconsidering currency hedging.

This outlook informs our decision to start the year with overweights to both Japanese and European equities across developed markets, while we remain overweight emerging markets on valuation grounds, a supportive backdrop for commodities, and an expectation of further dollar weakness.

Europe appears to be emerging from a prolonged period of stagnation, enabling increased spending on defence and infrastructure and improving earnings visibility across cyclical sectors. Here, valuations remain attractive both relative to history and peers.

Japan continues to stand out despite its strong run in recent years. Balance sheets are healthy, cash flows are resilient, and structural reforms are steadily improving capital discipline, supported by a policy environment that remains accommodative.

Australia, however, offers fewer positive catalysts in the near term. Economic conditions are stable, but elevated equity valuations, subdued earnings growth, and relatively tight monetary settings limit upside. With financial conditions likely to remain restrictive compared with global peers, we retain an underweight stance toward Australian equities as the year commences.

From a currency perspective, we are currently reviewing our strategic hedge ratio. Having increased emerging market equities during our last strategic asset allocation review, we continue to assess the appropriate regional equity construct to navigate the new world we are entering.

Elsewhere in portfolios, gold is likely to continue benefiting from the erosion of US exceptionalism, the fragmented geopolitical order, and weaker safe-haven dynamics across other assets. Having introduced a strategic position in portfolios several years ago, we maintain an overweight as the year commences and currently see little reason for this to be cut materially in the period ahead. 

Figure 3: The earnings outlook and valuations are mixed

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Source: Bloomberg, Marcobond, ANZ CIO

AI – a changing of the guard?

In 2026, it is unlikely to be just a story of the US versus the world. The other major reckoning is likely to centre on AI and whether the next phase of adoption can accelerate, whether tech can continue to lead, or whether the rally can broaden to other sectors.

The pace of advancement in the AI sector since the launch of ChatGPT in late 2022 has been staggering. From GPT-4 in early 2023 to reasoning systems in 2025 that achieve better than 90% on PhD-level benchmarks, compute scaled 10–20x annually while cost per token fell ~90% per year. AI has shifted from a narrow tool to a general‑purpose reasoning engine, already delivering measurable productivity gains in software engineering and scientific discovery such as AlphaFold by DeepMind.

Over this time, the market has been dominated by infrastructure ‘enablers’ – semiconductors, hyperscalers, and data centre build-outs. The next phase, however, is likely to emphasise ‘adopters’: enterprises deploying AI at scale to drive productivity and revenue. This is already occurring, but according to data from Stanford’s AI Index Report, the cost and revenue benefits have so far been small, with the most common level of revenue increases less than 5%.

Still, there are promising signs that the transition from enablers to adopters can occur. Hyperscaler capital expenditure (capex), which supported a large share of US GDP growth in 2025, is normalising as power constraints and GPU lead times ease. Earlier this month, Nvidia announced its next-generation chip, Rubin, reported to be able to train AI models with one-quarter as many chips as its predecessor, while providing information for chatbots and other AI solutions at roughly 10% of the cost. Meanwhile, enterprise software and industrial firms are reporting pilots converting into multi‑year contracts.

Nonetheless, the capex to date has been eye‑watering. Since Q4 2022, the four hyperscalers have spent more than a trillion dollars on capital, and research and development, much of it related to generative AI.

This year, we will likely need to see greater return on investment and broader productivity benefits for technology stocks to continue leading, or we risk an ‘AI winter’ – similar to the dot-com overhang or the Metaverse moment of 2022 – with the potential for valuations to compress 30–50% across enabler cohorts.

Figure 4: Magnificent 7 stocks fell by 50% in 2022

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Source: S&P Global, Bloomberg, Macrobond, ANZ CIO

While there are signs the contribution of AI investment to GDP growth appears to be slowing, it is unlikely to disappear overnight. Given the strategic sovereign importance of AI technology and the fortress balance sheets of hyperscalers, it would be premature to call an end to this cycle after only 18 months. The internet build-out lasted more than a decade, and the race for AI supremacy has taken on Manhattan Project-like characteristics. Sovereign investment from the US into corporations such as Intel and chip start-up xLight signal the urgency and priority placed on this technology. 

Figure 5: The AI capex story is unlikely to end after just 18 months

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Source: BEA BCA Research, Bloomberg, Macrobond, ANZ CIO

*Includes software and information processing equipment. Both series shown as a 2-quarter moving average.

Consensus is currently for US market breadth to broaden in 2026, with strong fiscal tailwinds in the US through the first half of the year as the One Big Beautiful Bill (OBBB) delivers $150bn of tax refunds to consumers and the Fed continues its easing cycle. While we see scope for such a move to materialise, we are not yet convinced of its sustainability. In December last year, market expectations were for the EPS growth rate of the Magnificent Seven to be overtaken by the remainder of the index in Q2; a month later, this has now been pushed to Q4.

Indeed, Technology is forecast to again deliver the strongest earnings growth – nearly 30% this year – while accounting for almost half of total earnings growth in dollar terms. While this leaves the index vulnerable to downgrades, we start the year overweight mega-cap tech (a position we have held for several years) and underweight the broader US market index, maintaining conviction that AI tailwinds can propel the sector higher in 2026 as adopters take the baton from enablers.

Looking further ahead, technology – like emerging markets and gold more recently – may soon warrant a strategic allocation in investor portfolios given the structural dynamics that will define the regime ahead.

Elsewhere within portfolios, we position overweight to infrastructure, given positive tailwinds stemming from the AI build-out and the multipolar geopolitical environment, including large fiscal programs across the US and Europe. In a similar vein, we have recently implemented an off-benchmark exposure to China tech, given relative valuations compared with US tech and the aforementioned ‘Manhattan Project’.

Resilience through reckoning

While we commence the year with a constructive outlook for risk assets, we acknowledge there will be increasing periods of volatility and the potential for significant drawdowns that may be met with even sharper rebounds.

For investors, there are obvious risks on the horizon – the AI story faces a possible reckoning, inflation could re-emerge as a Trump-influenced Fed cuts into an economy running hot ahead of the mid‑terms, and of course the potential for geopolitical risks to spike further. These are just some of the risks that are visible over the period ahead.

Accordingly, we position overweight to duration. Yields remain attractive, providing strong carry to portfolios, and – assuming correlations remain in check – the position should provide protection if global growth stalls.

Of course, as in prior years when pandemics, war and banking crises unexpectedly upended markets, we must assume some risks are simply unforeseeable.

Indeed, we are operating in a world undergoing rapid change across multiple fronts, with the pace of disruption itself accelerating. Recent US actions in Venezuela – and the prospect of further unilateral interventions – are emblematic of a broader shift towards a more volatile, fragmented global order. Geopolitical, economic, and policy regimes that once evolved gradually are now changing abruptly, often with limited warning.

Against this backdrop, our focus remains firmly on building resilience into portfolios. The objective is not only to prepare for the changes we can already identify, but to withstand – and ideally benefit from – the volatility generated by shocks that are not yet visible but increasingly inevitable. In a world where uncertainty is structural rather than cyclical, resilience is not a defensive posture; it is a prerequisite for compounding returns through disruption.