The Pictet Asset Management Annual Outlook for 2026

Summary

Main convictions

• Global economic conditions will remain benign, with a deceleration in US GDP growth offset by a recovery in Europe and Japan
• The pace of monetary easing will slow but liquidity will nevertheless remain abundant
• Stocks' risk premia are low by historical standards but valuations are not in bubble territory

Investment implications

• Global equities should deliver a positive return of some 5% next year while government bond yields will likely edge higher
• Emerging market and European mid-cap stocks look set to outperform
• Emerging market bonds should also deliver strong returns as the US dollar resumes its descent

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 2026.¹ 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, 1974.² 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. 

Equities regions and sectors: emerging markets among leaders

Global equities have been on a stellar streak, and the conditions remain for further gains: steady, trend-like growth for most major economies, easier monetary policy and healthy corporate earnings growth.

But the pattern of returns across markets over the next 12 months will not be uniform.

We expect the following to outperform the MSCI World Index: mid-sized domestic companies and value-oriented stocks in Europe, growth stocks in the US and, above all, emerging markets. We also recommend adding exposure to shares in high-quality businesses – those with steady earnings growth and high profitability – as a hedge against any adverse macroeconomic or geopolitical surprises.

The medium-term case for emerging markets is clear: strong secular growth prospects and attractive valuations. The question is why now. And here, all the stars seem aligned.

On the macroeconomic front, emerging equities should benefit from a weaker dollar, lower real interest rates and higher commodity prices. Microeconomic conditions are good too: many firms in the emerging world are well-placed to cash in on the expansion of the artificial intelligence trade.

Emerging Asia, in particular, is at the forefront of the technology revolution with a growing pool of companies that already play an indispensable role in the global AI supply chain (such as advanced semiconductor manufacturers) and others that could pose a challenge to US leaders with better scaling and monetising of technology (such as Chinese hyperscalers).

Changes in geopolitics could provide the final trigger for emerging market equities’ outperformance, with continued uncertainty over global trade arrangements encouraging ever greater domestic investment as well as flows between the developing economies. In India, for example, domestic investors now own 18.5% of the equity market – the highest in over two decades and surpassing foreign portfolio investment (FPI).³ That means India is less reliant on potentially fickle foreign investment flows, which should lead to lower volatility.

In European markets, meanwhile, we see strong upside in domestically oriented stocks, especially mid-caps. Despite announcements of extensive fiscal spending plans – especially in Germany - European equities remain very cheap according to our models. Adjusting for sector composition differences, Europe continues to trade on a 25% discount to the US compared to the 10% that was typical before the Covid pandemic and the Ukraine conflict. That sets a low bar for positive surprises: even if some of the promised German public spending begins to flow, European stocks could see significant gains.

In the US, contrary to widespread fears of a stagflationary impulse from President Trump’s signature policies – a crackdown on immigration and higher tariffs – the economy remains resilient. While we are not entirely out of the woods, the outlook for corporate earnings in the US is now relatively positive.

In other developments, we believe the AI investment cycle still has further to run.

US Core AI stocks⁴ are currently trading at around 30 times earnings. Although this is elevated to the rest of the market (at 22 times), it looks modest when compared to over 100 times during the dot com bubble. This is at least in part justified by AI leaders’ results: their quarterly earnings are growing at around 25 percentage points faster than the rest of the S&P500 (see Fig. 2). The closing of that gap is clearly a key risk. But as long as the AI ecosystem remains on track to deliver earnings growth of around 20% over the next two years, current valuations can be justified, and we would expect these stocks to continue to outperform.

Another positive is that the AI capital spending boom has so far been funded mainly by operating cashflow rather than via equity or debt financing – although the latter is now on the rise.

But AI won’t be the only game town next year. Having suffered a period of protracted underperformance, quality stocks – those with a track record of steady earnings, high profitability and low leverage – are likely to resume their role of helping to protect portfolios from downside risks during phases of market volatility. Pharmaceutical companies look particularly promising as most of the bad news regarding drug pricing has already been discounted and both industry (increased M&A) and macro (moderating growth) factors are in play to unlock the significant value in this space.

Among other sectors, we also like technology, financials and industrials, all three of which are on track to deliver strong earnings growth. In addition to these pockets of strength, the UK market offers inexpensive protection against stagflation risks and an attractive dividend yield.

Fixed income and currencies: head to EM for inflation-beating returns

The case for increasing allocations to developed market bonds isn’t particularly strong. Interest rates are likely to fall by less than the market expects as inflation will largely remain above central bank targets next year and economic growth will remain resilient, our analysis shows.

We expect yields on most developed market sovereign bonds to rise moderately in 2026, with markets likely to be volatile as the Fed looks set to deliver fewer cuts than anticipated. President Trump’s signature policies are stagflationary in nature, which should keep US inflation above targets at 3.3 per cent next year.

US benchmark 10-year yields are likely to end the year at around 4.25%, slightly higher than current levels but roughly in line with potential nominal GDP growth.

The key risk for global bond market is a significant steepening of yield curves, which could increase the inflation risk premium – or the extra compensation investors demand for the risk that inflation could prove higher or more volatile than anticipated. Currently, curves are still flatter than usual in almost all markets, but long-dated yields could rise much more than the short end of the curve if governments persistently fail to meet their fiscal rules. As budget deficits rise further, the supply of government bonds is set to increase, putting upward pressure on yields.

In the US, we believe there is a risk that the Trump administration undermines the Fed’s independence by picking a chairman who is perceived to be too compliant in the face of political pressure to cut interest rates. On the positive side, Treasuries could find support from two sources: an expected return to quantitative easing by the Fed in the first quarter of 2026 and a potential relaxation of the Supplementary Leverage Ratio (SLR) – a bank capital requirement that applies the same capital to all bank assets, whatever their risk. These factors will increase demand for Treasuries – putting downside pressure on yields.

In this environment, we think Treasury Inflation-Protected Securities (TIPS) will continue to outperform.

Elsewhere, UK gilts also look attractive as the Bank of England could cut interest rates by more than what’s currently priced in the market in the event of a further economic slowdown. Attractive yields and a clear shift in the direction of fiscal austerity will be clearly supportive.

Conditions will be more positive for emerging market bonds, in which we expect to maintain an overweight allocation over the medium term.

We expect the asset class to outperform other developed counterparts, supported by favourable fundamentals – namely lower inflation, higher economic growth and the prospect of further central bank rate cuts and currency appreciation.

Further monetary stimulus from emerging world central banks will be especially supportive. We expect policy rates to decline by up to 150 basis points on average next year from the current aggregate rate of around 5.5% – with Brazil among those making the steepest cuts.

We see the greatest potential in Brazilian and South African bonds, where real rates remain well above 5%, and in frontier markets, including Egypt and Nigeria. While we prefer local currency to US dollar denominated debt, we are also optimistic on emerging market dollar corporate bonds given record high credit quality and relatively low duration.

Outside sovereign bond markets we are also positive on investment grade bonds which have attractive valuations at a time when issuers have the capacity to withstand potential economic shocks thanks to their strong balance sheets and robust earnings. The outlook for US high yield bonds is mixed, however, as they trade at yield spreads that are among the tightest seen in previous business cycles - we expect spreads to widen to around 350 basis points, although remaining well below the long-term average of above 500 basis points.

Gold remains a strategic safe-haven asset, and we have consequently chosen to keep an overweight position in the precious metal of up to 5% in our multi-asset portfolios. That said, after a stellar 2025, any further gains in will likely be more muted as US inflation is likely to peak in the first half and growth should pick up towards the latter half of 2026.

When it comes to currencies, our main call is that we expect the dollar to fall some 5% in 2026. This reflects the prospect of a narrowing in the yield gap between US and non-US developed market government bonds (Fig.3) and is also line with our expectations for a secular decline in the currency. But the greenback could lose even more if the Fed yields to political pressure and provides more stimulus than is necessary. In the worst-case scenario, such a dovish shift in the Fed’s policy could trigger a double-digit loss in the dollar.

We expect the euro and the yen to be major beneficiaries of the dollar’s weakness. Both currencies are undervalued and their economies’ growth gap with the US economy is expected to narrow in the coming year, providing a further boost to both currencies.

The Swiss franc remains on a long-term appreciation trend thanks to its defensive characteristics, though we expect the franc to be marginally weaker against the euro in the coming year with the bloc’s economy growing faster than that of Switzerland.

We remain cautious on sterling because of persistent economic weakness and easier monetary policy from the BoE – at a time when sterling is back on a trade-weighted basis to pre-Brexit levels. 

Global markets overview: Booming AI, robust EM and glittering gold

Global equity markets are on track to end the year with double-digit gains as the excitement over the AI spending boom encouraged investors to snap up tech and communication stocks. In contrast, bonds delivered a meagre gain of less than 3%, which is below inflation.

Emerging markets top the equity league table with Korea, China, Mexico, Brazil and South Africa among the winners. Korea was standout, with its stocks rising more than 70 per cent in the year in dollar terms as it attracted inflows from investors seeking exposure to the global AI supply chain.

Despite the market’s high exposure to tech stocks, the US lagged most markets, making it the worst performing developed equity market after Switzerland – in a sign that the AI trade is broadening out.

UK stocks outperformed their US counterparts, rising over 20% in local currency terms as their attractive valuation and sectors such as financials and utilities attracted capital. Japanese stocks rose over 20%, with the market’s strong AI and tech exposure and corporate governance reforms drawing both domestic and foreign investors.

In sectors, communication services rose some almost 30%, adding to a 30%-plus rally in 2024 as expectations for AI-related capital spending boom raised earnings prospects. IT stocks – more than half of which are already part of the AI ecosystem according to our calculations – rose 20%. Utilities, which gained more than 20%, benefiting from higher power demand from AI data centres as well as its defensive characteristics.

US Treasuries were up some 8%, ahead of other develop sovereign bonds as the Fed cut interest rates and the market continued to attract safe-haven flows in the face of tariff-induced volatility in risky assets.

UK gilts rose over 4% in local currency terms as the BoE cut interest rates to support growth. Japanese government bonds fell over 3% as the Bank of Japan became less supportive by reducing bond purchases increasing term premiums.

In credit, emerging market corporate bonds gained nearly 9 per cent as the asset class benefited from improving credit quality and central bank monetary stimulus. US investment grade and high-yield bonds were the second best performing with gains of 7%.

Oil fell some 16% as supply contribution from non-OPEC countries including the US added to production hikes from the cartel, at a time when economies in big consumers like China struggled to grow.

Gold rose over 50%, extending a 2024 rally to hit all-time highs as
concerns over inflation and geopolitical shocks persisted.

Bitcoin remained volatile. The cryptocurrency hit an all-time high above USD120,000 in October only to fall sharply and wipe out almost all the gains made in the year as falling liquidity in the crypto market and macroeconomic uncertainty accelerated a sell-off in what’s considered to be a proxy risk asset (see Fig. 4).

The dollar heads into December down more than 7%, cancelling out all the gains made last year as investors grew concerned about its public sector deficits and the Trump administration’s attacks on US institutions, including the Fed.

The safe-haven Swiss franc gained the most in developed currencies, rising as much as 12% during the year. Benefiting from the dollar’s demise were Latam currencies, including the Brazilian real and Mexican peso which both rose over 10%, while the euro also enjoyed a 10%-plus gain. The yen ended the year nearly flat after a 10% decline in the previous year.

Tactical asset allocation stance

Our annual outlook also informs our tactical asset allocation stance, which is set out below.