Elections, earnings, and global stimulus driving returns

Overview

In a feat not seen since 2019, global equities, bonds, and commodities all delivered positive returns in 2025, thanks to waning tariff concerns, central bank easing, AI-driven growth, and the many splendors of gold. So, can the good times keep rolling in 2026, amid questions about valuations, an AI bubble, US-China relations, and other risks? We think four factors are likely to drive positive results on balance but could cause choppiness along the way:

1. Earnings growth — The AI picture is complicated by increased competition and blowout spending. But we expect earnings strength to broaden beyond mega-cap tech and show up across regions, sectors, and market caps. Companies’ ability to maintain and even expand margins despite tariffs has given us confidence that earnings improvements will translate to positive equity returns. 
2. Global fiscal stimulus — Every developed market (DM) region has fiscal stimulus coming through to support nominal growth, consumer sentiment, and business investment (Figure 1), even if government debt is becoming a longer-term threat.
3. Global interest rates — A cooling US labor market is driving Fed easing expectations and supports our long duration stance. However, percolating inflation in the US and elsewhere could shift the landscape dramatically. Japan’s tighter monetary policy could be the first shoe to drop.
4. Political winds — Voters and markets could register their dissatisfaction with inflation and policy. Populist shifts in elections in the US, Europe, or Latin America could create volatility.

Figure 1

These themes lead us to a constructive view on equities, though only slightly overweight relative to other asset classes. Within equities, we like Japan the most given strong nominal GDP growth and positive earnings. We like US equities too and expect earnings breadth to improve thanks to fiscal stimulus and some cyclical acceleration in traditional industries. We are less sanguine on the eurozone, the UK, and emerging markets (EM), all of which enjoyed multiples expansion in 2025 but lackluster earnings growth. 

In fixed income, steeper government yield curves, tight credit spreads, and concerns about AI-related debt supply leave us favoring government bonds over credit. Divergence in the pricing of bonds relative to fundamentals and policy is a theme we express in a regional preference for the UK over the eurozone and Japan. 

Within commodities, we maintain our underweight stance on oil, with supply expected to exceed demand, and our neutral view on gold, while waiting for opportunities to add exposure at less extreme price levels.

Equities: Staying constructive but with a note of caution

We maintain our moderately overweight view on global equities, given the positive monetary and fiscal policy backdrop and well-supported runway for earnings growth (Figure 2). After a year in which most markets (other than the US) generated more return through valuation expansion than earnings growth, we expect all major regions to post earnings growth of 6% – 11% over the next 12 months. One of the biggest and most surprising factors driving earnings growth is margin strength. Despite uncertainties such as tariffs, large-cap companies have been able to expand margins — a testament to their agility and to efficiency gains from innovation, including AI.

Figure 2

The modest level of our overweight view on equities stems partly from caution related to tight equity risk premiums, which reflect a skew toward optimistic economic scenarios. Given risks around AI, momentum-driven rallies, and valuations, we expect a somewhat choppy market environment at times. 

We think Japanese equities will outperform other regions over the next 12 months. Strong nominal growth is a tailwind and, notwithstanding likely Bank of Japan rate hikes, monetary conditions remain loose and real yields deeply negative. Fiscal stimulus is about to turn even more positive, helping domestic sectors. 

We also expect US equities to outperform, based not just on mega-caps and AI, but also a broadening EPS recovery. Even small caps are experiencing positive earnings revisions, ending a multiyear downgrade cycle. We are watching for signs that AI growth is relying on too much leverage, but fundamentals are still strong for spending, including AI demand/supply, and we think high free-cash-flow margins represent a good buffer.

Turning to the largest index weights in EM, we are constructive on Korea and Taiwan but think India and China are more challenged. The global backdrop (lower US rates, a weaker US dollar) is supportive, but our lack of conviction on China and India makes it hard to be more constructive on the asset class overall. The anti-involution campaign in China entails a rebalancing toward efficiency — and therefore profitability — over production growth; however, this is likely to take some time and meanwhile the market has experienced a sentiment- and liquidity-driven surge without much backing from earnings or a macro recovery. 

We have a moderately underweight view on Europe ex-UK and the UK. The eurozone macro outlook is improving but is being held back by the lack of clear progress on structural reform and by direct competition from China on key profit pools in industries such as autos and clean technology. Fiscal uncertainty in France and other countries and the potential for new elections further cloud the outlook. We expect high single-digit earnings growth here, though the region has consistently disappointed versus consensus estimates. The UK is still the market with our lowest earnings expectations. It suffers from a lack of tech sector exposure and from policy uncertainty, which is impacting investment and spending. 

Fixed income: Favoring government bonds over credit

Comparing credit to government bonds, we prefer the “carry” in higher-quality government bonds: Term premia are attractive and steeper yield curves are providing return from “rolling down the curve.” 

Divergence is the story in government bond markets, where cycles are less linked to the US. In fact, US 10-year rates rallied around 40 bps year to date in 2025, while other DM regions’ yields sold off 5 to 90 bps, a highly unusual break in direction and magnitude from the past 10 years. Another sign of the divergence is in central bank policy expectations, with the market pricing rate cuts by the Fed in 2026 and rate hikes by other DM central banks. These conditions are ripe for relative value opportunities, reflected in our overweight view on UK rates and underweight view on eurozone and Japanese rates.

Having been overweight credit in various sectors during 2025, we think the overall market’s return profile is more balanced now and have moved to a neutral stance. The backdrop remains positive for risk assets, but spreads are extremely tight, leaving little upside potential beyond carry. While we think the tech sector as a whole has room for leverage, as noted in the equities section, we are keeping a close eye on growing AI capex funding in the credit markets, with the risk that some tech companies will allow their balance sheets to deteriorate. 

Commodities: What’s ahead for oil and gold?

We have an underweight view on oil. While we think demand will be well supported, including by sustained stockpiling by China, we expect supply to exceed demand beginning in the first quarter and continuing throughout 2026 as OPEC+ pares back its supply cuts. Risks to our views include military action in Venezuela (short-term downside risk to supply) and a ceasefire in Ukraine resulting in sanctions being lifted on Russia (upside risk to supply). 

We continue to hold a neutral view on gold. Financial demand drivers remain solid, including central bank buying and digital asset (stablecoin) demand. Speculative positioning (futures) is back to high levels while exchange-traded product flows have been supportive. Structural tailwinds remain, as well, including fiscal deterioration and concerns about central bank independence. However, valuations are extreme, at their highest level since 1980 relative to financial wealth.

Investment implications

Maintain a positive stance on equities — The earnings and policy setup for equities is positive. At lofty valuations, however, markets will face questions about AI, fiscal largesse, and great power competition. We think volatility could create opportunities to add risk. We also think better earnings breadth will make a case for diversifying across regions, sectors, and market caps.

Consider global government bonds as a play on attractive carry and regional divergence — The combination of tight credit spreads and attractive yields in some parts of the government bond market tilts us toward holding a slightly long duration view while focusing on the attractive term premium in the UK. 

Consider taking profits in credit — We think historically tight spreads and concerns about balance sheet erosion and AI capex-induced supply warrant reducing exposure to a neutral weight. Since most total return during 2025 was captured after spreads widened, waiting for more attractive levels to add exposure may be prudent.