Balanced growth, balanced returns in 2026

Following a tumultuous 2025 marked by trade tensions, inflation concerns and rapid AI-driven investment, the global economy is expected to normalise in 2026. Our base case anticipates growth and inflation returning to sustainable levels: around 1.5% growth and 2% inflation in developed markets and 3.5% growth in emerging economies. 

This shift should create a more balanced environment for markets, improving prospects for fixed income from carry and stabilising earnings for equities. Diversification and convexity strategies remain key as balanced growth calls for balanced performance.

Monetary policy and structural drivers

Central banks are expected to maintain a dovish stance, with the Federal Reserve and Bank of England likely to deliver two rate cuts each in 2026. This easing is critical for manufacturing-heavy economies, as lower funding costs historically boost industrial growth. 

Meanwhile, AI-related capital expenditure continues to reshape the US economy, expanding productive capacity and enabling growth without fuelling inflation – a dynamic reminiscent of China’s supply-side expansion over the past decade. Europe’s infrastructure initiatives also point to supply-side driven growth, reducing inflationary risks.

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global fixed income.

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regional fixed income.

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Key risks

Two scenarios could disrupt this outlook.

1. Hawkish status quo. If inflation proves stickier than consensus expects – driven by a resilient US labour market – the Fed may delay or cancel rate cuts. This would pressure bonds, while equities could remain resilient on stronger earnings, though emerging markets and commodities would become critical hedges. Market expectations currently assume low inflation; any surprise could trigger volatility
    
2. Tech valuation derating. US equity valuations, particularly in AI-related sectors, are historically elevated. While not yet at tech bubble extremes, metrics such as the Buffett ratio signal vulnerability. A scenario combining persistent inflation and Fed tightening could catalyse a sharp correction in tech multiples, with spillovers across global equities. Fixed income and convertibles would likely outperform in such an environment.

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Global Convertible Bonds

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Liquid Global High Yield

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Investment implications

Our base case scenario sees growth returning to normal levels amid elevated valuations, central banks adopting a somewhat dovish status quo and inflation reverting to 2% in major economies. How does this scenario translate into expected performance across asset classes? Figure 2 illustrates our expected returns across asset classes.

Fig 2. Expected 2026 returns in a ‘back to potential growth’ period²

What we expect in 2026:

• Moderate but positive returns across asset classes. 2026 could deliver approximately 5% returns across many asset classes, achieved through price appreciation – particularly in US and European equities – or through carry in global fixed income when measured in USD terms. In short, balanced economic growth appears to call for balanced investment performance
   
• Fixed income: carry remains attractive, but a valuation reversion is possible. Higher carry in investment grade and high yield bonds could be partially offset by a potential valuation mean reversion as yields normalise. Convertible bonds stand out as appealing, alongside emerging market bonds, where carry aligns with long-term trends
   
• Equities: earnings growth as the key driver. US equities could continue to lead in price appreciation (regime return), but European and emerging market equities may post comparable returns given current earnings yields. In 2025, US markets advanced primarily through earnings growth rather than multiple expansion, while Europe and Hong Kong benefited from both earnings growth and P/E re-rating
  
  For 2026, earnings growth is expected to drive markets globally, with consensus forecasting double-digit growth across developed and emerging markets. Market concentration remains extreme, particularly in the US. However, with earnings growth broadening across sectors, we anticipate rotation into previously overlooked areas, including emerging markets, small caps, real estate, consumer discretionary and defensive sectors such as healthcare and consumer staples
   
• Commodities: a hedge against sticky inflation. Decent global growth – combined with central banks refraining from aggressive tightening – could support a rise in commodity prices, offering an interesting hedge should inflation prove stickier than expected


• Multi asset: beyond the traditional 50/50 portfolio. Investors should consider combining assets with price trend potential and those with strong carry characteristics to navigate this phase of growth normalisation effectively. Strategies incorporating leveraged exposure to bonds alongside equities and commodities appear well-positioned to outperform the traditional 50/50 portfolio, which is expected to deliver returns below 5% in USD terms
   
• Swiss market: equities favoured over bonds. Swiss assets should also see positive performance during this period, with equities expected to outperform bonds. The anticipated return on Swiss bonds remains low, likely prompting investors to seek solutions that include either longer-dated bonds or lower-rated bonds to enhance carry.

2026 appears set to reward balanced, diversified investment strategies as the global economy gradually returns to its potential after years of disruption and volatility. This outlook represents a continuation of the balanced returns seen in 2025 – albeit at a slightly scaled-down level. In short: balanced growth equates to balanced returns.

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Asia High Conviction equities strategy

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Swiss Equities

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