Key takeaways
Market outlook
2025 was marked by uncertainty, yet markets and economies displayed a lot of resilience. As we look ahead to 2026, we believe the conditions are in place for stocks to potentially advance.
Economic reacceleration
We believe lower US interest rates and greater government spending in Europe, Japan, and China should help lift the global economy out of a mid-cycle slowdown.
Investment implications
A pickup in global economic activity could unlock value across a wider range of areas, including non-US markets, smaller-cap stocks, and cyclical areas in the US.
2025 was a year marked by uncertainty, yet economies displayed a lot of resilience and markets delivered strong returns.1 As we look ahead to 2026, we believe the conditions are in place for global stocks to rise further. Our 2026 annual investment outlook: Resilience and rebalancing, reflects two key themes:
- Resilience: Businesses have demonstrated a strong ability to absorb economic shocks. We expect this resilience to be further bolstered by interest rate cuts in the US and fiscal support, such as government spending, across Europe, Japan, and China. We believe these measures should help lift the global economy out of its slowdown.
- Rebalancing: US stock markets, particularly the AI-driven tech sector, are seen as expensive, but we see compelling opportunities elsewhere. We believe non-US market, smaller-capitalization, and US cyclical sector stocks (ones that tend to do well when the economy grows) are attractively priced.2
We’re optimistic about the economy in 2026
We enter 2026 with optimism, confident in the durability of businesses, encouraged by the direction of central banks and fiscal support, and mindful of the need for diversification as the market evolves.
Key economic and investment insights for 2026
Diversification: Managing exposure to AI-driven companies
Investors are questioning whether the artificial intelligence (AI) investment boom is becoming overdone, and whether we’re in a bubble. At this stage, we think the artificial intelligence investment theme plays out further and think some of the parallels being drawn with previous bubbles don’t fully hold up. However, we favor rebalancing portfolios to navigate growing risks.
We believe there are AI opportunities that are more attractively priced, Chinese technology stocks, for example. The AI theme can play out along other angles. For example, companies that adopt AI may see cost efficiencies or new product offerings. Finally, strategies that broaden exposure beyond traditional market-cap-weighted approaches may be a prudent way to reduce the risk of overexposure to a few of the largest AI-driven stocks.
Europe: Policy is turning positive for the region
Eurozone growth has been disappointing for several years. However, we think that’s changing now with Germany embarking on a period of higher military and infrastructure spending. We expect this to be supported across the region by higher military spending in many countries, continued growth in purchasing power, and recent interest rate cuts.
Pessimism toward the UK is too high in our view. We believe the Bank of England now has more scope to cut rates, and retail sales appear to be on an uptrend. Economic growth could surprise positively in 2026 and support UK markets.
Japan: Fiscal support, inflation may lift nominal growth
Japan is experiencing a structural return of inflation that has helped ignite a virtuous cycle where consumption is climbing alongside nominal wages. The labor market remains tight, and capital investment has been consistently stronger than most economies.
We expect Japanese growth will continue to improve and move above trend in 2026, helped by meaningful fiscal stimulus. We expect the Bank of Japan to hike rates slowly, keeping rates well in accommodative territory, which should help support growth and investment.
India: Outlook improves amid geopolitical challenges
India should see ongoing reforms and potential in 2026 alongside an improvement in US-India relations. That can help lift Indian stocks higher. We expect India to remain the world’s fastest-growing large economy, with growth modestly accelerating on Reserve Bank of India rate cuts. Domestic economic reforms remain crucial for future growth and resilience, in our view, and we expect gradual progress given political constraints.
Emerging markets: Signs of continued strength
Emerging market (EM) stocks posted outsized returns in 2025,3 and we believe there are continued reasons for that outperformance to potentially continue in 2026.
- Chief among them is the anticipated weakening of the US dollar, which we expect would potentially benefit EM stocks.
- Rate cuts in the US also create room for EM central banks to continue lowering rates, supporting domestic demand and stock markets, in our opinion.
- Many EM economies are expected to outpace developed markets in gross domestic product growth (GDP), driven by favorable demographics, rising consumption, and investment flows.
- Moreover, EMs are poised to potentially benefit from the global buildout of AI infrastructure. China is investing heavily in AI and related technologies, which could serve as a powerful engine for stock market performance.
—
Originally Posted on December 1, 2025
2026 annual investment outlook: Resilience and rebalancing by Invesco US
Footnotes
- Source: Bloomberg L.P., as of Nov. 17, 2025. Fed funds rate is 4.0% and was 1.75% pre-pandemic, the UK base rate is 4.0% and was 0.75% pre-pandemic, and the European Central Bank (ECB) deposit facility is 2.0% and was -0.5% pre-pandemic. The World Health Organization officially declared a pandemic on March 11, 2020.
- Sources: International Monetary Fund (IMF) and Bloomberg L.P., Nov. 12, 2025. Global economic growth is projected to rise 3.2% in 2025 based on IMF estimates. The MSCI All-Cap World Index returned 21.98% year-to-date on a total return basis in US dollars.
- Source: Bloomberg L.P., Nov. 12, 2025. Based on the forward 12-month price-to-earnings ratio of the Bloomberg Magnificent 7 Total Return Index (33.2x), MSCI All-cap World ex. US Index (15.2x), S&P 400 Midcap Index (15.7x), and the S&P 500 Value Index (18.5x) compared to the price-to-earnings (P/E) ratio of the S&P 500 Index (22.7x).
- Source: Bloomberg L.P., Nov. 12, 2025. The MSCI Emerging Market Index returned 33.72% year-to-date on a total return basis in US dollars.
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