2026 investment outlook: pausing for breath

 

As the end of another year draws into view, Head of Investments, Charlie Lloyd, and Senior Portfolio Manager, Wayne Nutland, managers of Shackleton’s VT Esprit fund range, share their thoughts on what might lie ahead for the global economy and for financial markets, while taking the opportunity candidly to revisit their forecasts from 12 months ago.

 

 

Recap of 2025

At the time of writing in mid-December, 2025 looks set to complete a hat-trick of positive calendar year returns for global equity markets, after double-digit returns in 2023 and 2024. As measured by the MSCI ACWI Index in sterling terms, global equities returned 14.0% in the year to 12th December, reflecting continued positive economic growth, the earnings boom in large technology stocks fuelled by continuing investments in artificial intelligence, weaker inflation, and looser monetary policy.

This year also marked a reasonable year for bonds, with US and UK government bond markets returning 5.7% and 4.2% respectively over the same period, despite ongoing concerns around fiscal deficits and the lack of political will to rein in public spending. Emerging market government bonds fared even better, returning 12.8% over the same period, boosted by US dollar weakness and positive investor inflows. Strong corporate earnings growth and low defaults saw high-yield bonds post another respectable performance, delivering 7.6%.

Unlike recent years, US equities lagged their UK, European and emerging market counterparts when measured in sterling terms, returning 9.8%, compared to 22.2% for the FTSE 100, 24.6% for Europe ex UK, and 23.9% for emerging markets.

The standout performer over the year to 12th December was gold, which rose 56.3%.
All data as at 12/12/2025. Source: LSEG Datastream, total return, in sterling terms, bonds hedged to sterling.

 

Revisiting previous predictions

When we made our end-of-year predictions 12 months ago, the outlook was dominated by Donald Trump’s victory in the US elections, which was surprising in its extent. We also noted the fall of the German government and political uncertainty in France.

In some respects, our central thesis was correct, anticipating that a backdrop of falling interest rates amid continued economic growth would be positive for risk assets. Broadly speaking, and viewing the year as a whole, this has occurred, with stock markets generating decent gains, despite the number of interest rate cuts delivered in 2025 being lower than had been expected at the start of the year. Similarly, credit spreads (meaning the additional yield over and above government bonds of equivalent maturity, reflecting the interest rate premium corporate borrowers pay relative to governments to borrow money in the bond market) narrowed.

One area in which we were perhaps wide of the mark when we made our predictions for the year ahead 12 months ago, particularly with respect the phasing of events, is the way Donald Trump’s agenda played out. Whilst we noted the risk of elevated policy uncertainty, ultimately our view was that the growth positive elements of Trump’s plans would outweigh the risks, thinking that it was unlikely that he would implement his tariff agenda in an extreme way. This turned out to be incorrect, as the US President surprised the world (and financial markets) with wide-ranging tariffs which arguably exceeded the market’s worst fears. This led to a very rapid and significant correction in stock markets during the spring. Ultimately, following pressure from bond markets, a series of negotiations eased the final tariff burden, and US economic data remained broadly resilient, despite the final tariffs being higher than the market had expected this time last year.

 

 

Valuation-led growth in European stock markets, perhaps in response to the US policy uncertainty, meant that these markets actually outperformed for the year in constant currency terms…

Elsewhere, our views were more mixed. We were broadly correct that, in terms of economic and corporate earnings growth, the US would continue to lead European markets. However, valuation-led growth in European stock markets, perhaps in response to the US policy uncertainty, meant that these markets actually outperformed for the year in constant currency terms, despite the US market performing better from a corporate profits perspective.

 

 

Is a market crash imminent?

As we outlined in a piece published in the Autumn, our view is that, overall, stock markets are not in a bubble, although there are pockets of the market and some individual stocks which demonstrate more bubble-like characteristics. Crucially for us, we continue to believe that the large US technology stocks (where investors are most exposed) are not in a bubble, with valuations reflecting the qualities of those companies, including strong earnings growth, high profit margins and, in many cases, entrenched business franchises. We also note that current valuations are below previous peaks.

That is not to say that these companies cannot experience corrections, as we saw in the spring and, to a lesser extent, in November. When companies exhibit elevated valuations, reflecting forecasts of very strong growth, they are vulnerable to corrections in those valuations, particularly if growth forecasts are questioned. However, we do not anticipate the sort of market crash large technology stocks exhibited in the early 2000s when the Nasdaq fell 80% from its peak. In our view, given the qualities of the large US technology stocks, they should continue to be well represented within investment portfolios but, given valuation and concentration risks, at a lower weighting than would be obtained through holding a global equity tracker fund.

 

 

UK and European equity markets have enjoyed a good year but, as referenced above, this has largely been driven by valuations, with growth in companies’ earnings once again disappointing expectations in Europe. To justify the upwards move in valuations throughout 2025, investors will expect to see stronger profit growth next year, which should be helped by increased German fiscal spending, whilst a negotiated peace between Ukraine and Russia would also help.

Emerging market equity markets also delivered strong returns in 2025, helped by a more benign attitude to private sector activities from the Chinese government, a weaker US dollar, and exposure to the technology theme; semiconductor stocks, in particular, delivered notably strong returns.

 

A bit more on bonds

2025 has seen reasonable returns from government bonds, despite well-publicised concerns over the state of public finances in many countries. Japan has been the exception to these reasonable returns, where government bond yields continue to rise from a prolonged period at very low levels. Given the inverse relationship between bond yields and prices, this was generally negative for the Japanese bond market.

Corporate bonds delivered stronger returns than government bonds, reflecting higher starting yields and a narrowing in the additional yields required to lend to those companies compared to government bonds.

It was a particularly strong year for emerging market bonds, helped by continued economic growth and a weaker US dollar which is often beneficial for emerging economies and their ability to purchase US dollars.

Also, in many cases emerging market economic fundamentals appear favourable in the context of fiscally challenged developed markets. Emerging market bonds have also been helped by changes in the country composition of the indices (which has arguably made them less risky than in years past) and diversification by investors, who reconsidered their allocations to different markets amid US policy uncertainty.

 

 

Alternatives: a vintage year for gold, less so for crypto

Gold enjoyed a very strong year in 2025, in the main driven by continuing demand following the sanctioning of Russian assets earlier in the Ukraine war and, related to this, investment diversification following high levels of US policy uncertainty, particularly among emerging market buyers. Furthermore, traditional factors that support the gold price, such as lower interest rates and a weaker US dollar have also been supportive of the “yellow metal” over the year as a whole. Whilst the rally in the spring tied in with the US tariff episode, the strong rally in the late summer and early autumn is perhaps harder to explain. Comfortingly for “gold bugs,” despite a modest decline from its recent highs, the price has broadly stabilised above $4,000 per ounce.

The contrast with crypto assets such as Bitcoin is interesting, although we have some reservations about describing crypto tokens as “assets.” In a well-publicised move, the UK financial regulator this year allowed retail investors access to crypto ETPs (similar to ETFs), albeit with a number of additional checks in place. Bitcoin has again demonstrated its volatility, with a 30% drop from early October to late November.

 

 

 

Looking ahead: balancing optimism and risk

We expect global GDP growth (one of the principal measures of the performance of an economy) to be led by the US, although it’s possible that European growth could surprise to the upside, supported by the progress seen on taming high levels of inflation and German fiscal stimulus.

However, an obvious risk to stronger growth is that inflation remains above governments’ targets in some regions, most notably in the UK and US, which may prompt central banks to bring the global monetary easing cycle to an end. This will be further complicated by the appointment of a new Federal Reserve Chair, nominated by President Trump, who is likely to face accusations of political bias should the central bank adopt a more “dovish” stance to encourage economic growth, at the risk once again of stoking inflation.

The best that can be said for the UK Budget is that a bond market riot was avoided, as fiscal headroom was increased and short-term pain deferred, with markets also taking some comfort from the fact that Gilt issuance would be lower than expected next year. This “backloading” of the tax headwind, with most of the announced tax measures taking effect from 2028 onwards, seems like a case of kicking the can down the road. Labour’s position in the polls suggests a more painful fiscal consolidation will be left to future governments.

Politically, the Budget has probably appeased Labour backbenchers sufficiently to keep a leadership challenge at bay, at least until after May’s local elections, but it further undermines confidence in the Government’s will to rein in spending or implement pro-growth policies. A dismal showing by Labour in what some are calling the UK’s version of the US “mid-terms” may trigger a Labour leadership contest, which could lead to pressure on UK government bonds and sterling.

On the other side of the Atlantic, it is traditionally the case that incumbent Presidents do not usually perform well in mid-term elections, and the surprise victory of Zohran Mamdani in the race to become the new Mayor of New York City suggests that inflation remains a core issue for many US voters, with the Democrats favoured to win control of the House of Representatives in the next mid-term elections, according to betting markets.

 

Equities

Despite another good year for US stocks and an almost consensus view that US equities are overvalued, we are reluctant to write-off US stocks next year. US corporate earnings growth is expected to remain in double digits and the US economy is at the nexus of the artificial intelligence revolution, with substantial infrastructure investment seen as a potential pre-cursor to the widespread adoption of artificial intelligence technologies across multiple industries, potentially delivering a major productivity boost to an economy already boasting world-leading profit margins.

In addition, with the Federal Reserve becoming increasingly concerned about weakness in the US labour market, lower interest rates would further lower the cost of debt, helping consumers and companies alike. A more dovish Fed, at least relative to other major developed market central banks, would likely create an environment for the US dollar to weaken, easing global financial conditions and providing a boost to equity markets outside of the US, particularly emerging markets, which are also well placed to continue to benefit from exposure to technology. Within the US, this may encourage earnings growth to broaden out beyond the very largest technology stocks.

 

 

Meanwhile, UK equities remain good value relative to their international counterparts, and a useful diversifier to the technology-dominated US market.

We believe there is scope for interest rates to fall: the most recent Budget is less inflationary than the previous one, meaning that a major tail risk is now behind us. Furthermore, there are at last signs that politicians are beginning to grasp that UK capital markets are falling behind the competition.

The immediate impact of the Budget on household finances is likely to be small, so we’d expect some improvement in consumer confidence, particularly if mortgage rates continue to trend lower.

Emerging markets should benefit from further weakening in the US dollar, if the US Federal Reserve does continue to cut interest rates, as well as exposure to semiconductors and the broader technology theme.

 

Bonds

Government bond yields remain attractive versus their averages over the last 10 years and, as shown in 2025, a decent yield is a useful starting point, with bonds able to generate reasonable returns despite ongoing fears about fiscal sustainability. A return to higher levels of inflation is a risk though, particularly with US economic growth still broadly resilient – higher inflation puts central banks under greater pressure to increase their “policy” interest rates, which is usually a negative factor for bonds.

The additional yields over government bonds offered by corporate and emerging market bonds are small historically, but with ongoing economic expansion, the prospect of further interest rate cuts and robust company earnings, “spreads” can remain tight and perhaps move somewhat tighter still but it’s reasonable to expect investment returns from corporate bonds over government bonds to be more modest moving forward.

 

 

Alternatives

Assets which don’t generate any cash flow are necessarily hard to value, but for gold, the change in the United States’ role in the geopolitical landscape may well be a fundamental turning point, giving gold useful diversification properties in portfolios. Nevertheless, we believe gains are likely to be more muted from here and gold could be vulnerable in a period of reduced geopolitical tensions, given its role as a “safe-haven” asset. In contrast, despite claims of being a store of value or an inflation hedge, Bitcoin has moved in similar ways to global equities at times through the year, undermining its claim to being a diversifying asset. We continue to view crypto assets as essentially speculative, and largely driven by market momentum.

 

Conclusion

In a view similar to that of 12 months ago, we expect economic growth, resilient corporate earnings and looser monetary policy to provide an accommodating backdrop for investors.  Assuming this backdrop does emerge, equities should deliver positive returns, although elevated valuations could make stock markets vulnerable to periodic corrections should assumptions about economic growth, interest rates or sector specific issues like artificial intelligence be questioned.

Bond yields are such that a reasonable return is likely, provided that inflation doesn’t rear its head with a vengeance. We believe that corporate, high-yield and emerging market bonds are likely once again to deliver stronger returns than developed market government bonds. That being said, and in a similar spirit to what might occur to company shares, narrow credit spreads (that additional premium corporate borrowers bay over governments) mean that market corrections could occur if economic assumptions are questioned.

 

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Written by:

Charlie Lloyd
Head of Investment, Shackleton

Wayne Nutland
Senior Investment Manager, Shackleton

 

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