In this part of our outlook, we review what could make 2026 more challenging than anticipated and identify the main risks to our relatively optimistic view for 2026.
A less supportive US Federal Reserve
The first event that could create a less favorable environment would be if the US Federal Reserve becomes significantly less supportive in its rate-cutting cycle. This could either be by pausing rate cuts or by initiating or even hinting at a rate-hiking cycle. The Federal Reserve’s decisions carry outsized importance versus other central banks due to the size of the US economy, the dominance of its equity market (accounting for over 60% of global equity market value) and the central role of the US dollar.
Only a substantial reversal in inflation, with prices starting to rise persistently, would likely prompt the Federal Reserve to change course. While the possibility of no further rate cuts in 2026 exists and the inflation outlook remains uncertain, it is notable that President Trump’s administration will nominate a new Federal Reserve chair in the coming weeks. President Trump is expected to favour a relatively ‘dovish’ candidate, likely supporting a low interest rate policy even in a slightly less favourable environment for rate cuts.
Other key risks
Other risks worth highlighting include:
- Lower-than-expected GDP growth
- US technological stocks reversing their artificial intelligence (AI) optimism
- A genuine fear of the US entering a recession, potentially driven by rising unemployment. Such a scenario would be negative for equities overall. However, at this stage, we consider this outcome unlikely.
An unexpected shock
But of course, the main risk could be an exogenous, unexpected shock in an overall expensive market.
Market valuations are difficult to quantify and are poor predictors of short-term performance. However, unpredictable shocks – such as the COVID-19 pandemic, the war in Ukraine, or distress at a major financial institution – cannot be anticipated and tend to have a greater impact when markets are elevated rather than undervalued. Although it is extremely difficult to foresee such events, we remain vigilant and would adjust our perspective if circumstances change.
For now, we believe the environment remains constructive for financial markets in 2026. While volatility is to be expected, we think that managing a balanced and well-diversified portfolio will be attractive in 2026. It is our view that staying invested, even during periods of volatility or negative news flow, remains the best strategy for generating attractive long-term returns.
About this update: This video was filmed on 8 December 2025.
Source for Outlook data: MacroBond, J.P. Morgan Personal Investing and Bloomberg.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance and forecasts are not a reliable indicator of future performance. We do not provide investment advice in this update. Always do your own research.