2025 Q4 investment insights: 2026 market outlook

Five forces shaping the year ahead

As we look toward 2026, the investment backdrop continues to evolve around five powerful forces. The economic benefits of artificial intelligence (AI), the persistence of low growth in China, the durability of global trade tensions, the shift toward monetary easing, and rising fiscal pressures will all shape market behaviour. Each theme carries its own set of risks, but also opportunities for investors who remain disciplined and diversified.

AI will continue to deliver economic benefits while the market bubble continues to inflate

The link between AI and economic growth strengthened significantly through 2025. Investment in data centres, semiconductors, software and research expanded at double-digit rates. These trends are now visible in national accounts. Productivity gains became more evident in industries adopting AI, even as employment in those sectors softened. These developments point to a genuine economic transformation that is still in its early stages.

However, the market expression of this transformation remains uneven. Equity leadership is concentrated in a narrow cohort of firms and valuations continue to stretch historical limits. Investors are more attuned to the AI signal than to broader macro developments, a pattern typical of late-cycle environments. Market pricing now reflects the expectation that earnings growth will continue in a straight line, increasing the fragility of this phase of the cycle.

It’s important to recognise that a sharp equity-market correction on its own isn’t usually a recessionary event. Historically, even a 10% decline in share prices has only a modest impact on economic activity. What matters is whether weakness in equity markets spills into credit markets and tightens financial conditions more broadly.

The risk is that markets begin to extrapolate early productivity gains too aggressively. Even so, real investment linked to AI is likely to remain resilient. Transformative technologies often experience valuation resets. Yet the underlying investment cycle tends to recover quickly because capital deepening and efficiency gains continue even when prices adjust.

China will remain stuck in low growth and deflation

China enters 2026 constrained by structural headwinds. Economic momentum is slow, household demand remains subdued and the country continues to grapple with excess supply and persistent deflationary pressure. At the same time, policy continues to prioritise technological self-sufficiency, manufacturing scale and industrial upgrading over measures that would support households or rebalance the economy toward consumption.

This policy mix is unlikely to shift meaningfully in 2026. There’s little indication of a coordinated effort to raise household incomes or address excess capacity. As a result, China’s growth path will remain modest and driven by supply-side initiatives rather than domestic demand. Deflationary impulses from excess capacity will continue to weigh on global goods prices, supporting disinflation trends in advanced economies.

China will continue to contribute to global growth, but its influence is now more likely to be felt through prices than demand. Bond yields in China are expected to remain near historic lows, reflecting weak domestic conditions and a growing preference among households for fixed income over housing.

The trade war isn’t over

Global trade remains in a period of gradual fragmentation. The policy environment has shifted from multilateral partnerships toward industrial policy, investment controls, and regionally oriented supply chains. This trend will likely persist in 2026. Countries are restructuring trade and investment flows to strengthen national resilience, protect strategic industries and manage geopolitical risk.

The temporary calm between major trading partners in 2025 didn’t resolve deeper areas of strategic competition. Tensions remain elevated across advanced technologies, industrial capacity, critical minerals and energy-transition supply chains. Countries continue to use subsidies, tax incentive, and regulatory measures to secure domestic production. Supply chains are adjusting accordingly, creating new opportunities and challenges across sectors and regions.

For Canada, this environment carries particular importance. Our limited leverage in trade negotiations and our dependence on the United States make us sensitive to shifts in U.S. policy. The upcoming review of the North American trade framework may introduce stricter rules of origin or additional compliance requirements. Even without headline-driven tariff actions, trade will remain politicised and unpredictable.

This backdrop reinforces the value of exposure to sectors and strategies that are less reliant on global trade flows and more aligned with domestic demand, innovation, and structural growth themes.

Central banks will continue to ease, but not as aggressively as markets hope

The global monetary policy cycle has turned. Inflation has moderated and economic conditions have softened, giving central banks room to lower policy rates. However, the pace and extent of easing will differ across regions.

In the United States, inflation remains near 3% and labour markets, while cooling, remain resilient. These conditions limit the scope for meaningful easing. Only modest rate reductions appear likely in 2026. In contrast, weaker growth and more subdued inflation in Europe and the United Kingdom create room for a more sustained easing cycle. Japan remains an outlier, with rising wages and firmer domestic demand suggesting that gradual policy tightening may continue.

An important risk to the outlook is the possibility of an inflation surprise. Stronger-than-expected demand, renewed supply disruptions or wage dynamics that keep core inflation persistently elevated would limit the pace of monetary easing. While not the central expectation, such a development could shift the policy environment in ways markets may underestimate.

Investors should also expect monetary authorities to intervene more frequently to stabilise bond markets when financial conditions become disorderly. Subtle forms of intervention, such as liquidity operations, regulatory adjustments or a slower pace of balance-sheet reduction, may be used to limit abrupt increases in yields. These tools can help anchor volatility, although political considerations will increasingly influence policy decisions.

Fiscal pressures will continue to weigh on markets

The most persistent source of market risk in 2026 will be fiscal fragility. Many advanced economies face rising debt-servicing costs, slower nominal growth and ongoing spending pressures. What matters most now isn’t the level of debt itself, but the credibility of fiscal policy and investors’ confidence in the sustainability of public finances.

Fiscal stress often emerges from political rather than economic events. Markets respond when leadership changes, fiscal frameworks are challenged, or policy signals become inconsistent. In an environment of high public debt and rising interest costs, political clarity and credible fiscal anchors become essential. Abrupt shifts in policy direction or perceived politicisation of monetary institutions can trigger sudden increases in bond yields, tightening financial conditions and amplifying concerns over fiscal sustainability.

This is especially important for countries facing large refinancing needs where political uncertainty intersects with elevated debt levels. Markets in 2026 will pay close attention to fiscal signals, institutional stability and the credibility of medium-term policy commitments.

Governments may rely more heavily on tools that contain borrowing costs, such as regulatory adjustments that support domestic bond demand, slower reductions in central-bank balance sheets or enhanced liquidity measures during periods of market stress. While these measures can stabilise financial conditions, they don’t eliminate the need for credible long-term fiscal strategies.

A balanced view: upside potential

While many of the dominant themes for 2026 point to risk, it’s important to recognise that upside outcomes are also possible. Economies often perform better than expected. One meaningful upside scenario is that recent productivity gains in the United States prove to be an early signal of a broader and more durable upswing driven by the continued rollout of AI technologies. If these gains begin to diffuse across service industries and extend into other major economies, the benefits could be significant. A genuine productivity-led expansion would ease inflation pressures, support real incomes, improve fiscal dynamics, and strengthen the foundation for long-term growth.

This isn’t the base case for 2026, but it remains a constructive possibility. Productivity booms have a history of reshaping the economic landscape in positive and lasting ways.

Conclusion

• The forces shaping the 2026 investment landscape are structural and persistent.
• AI continues to reshape economic activity while stretching valuations.
• China is locked into a slow-growth and deflationary path.
• Global trade remains fragmented. Central banks are easing cautiously.
• Fiscal pressures are building and will continue to test policy credibility.
• Financial vulnerabilities, particularly in the fast-growing private-credit ecosystem, warrant close attention.

In this environment, portfolios benefit from broad diversification, thoughtful risk management, and maintaining exposure to long-term innovation while balancing areas that provide resilience during periods of market stress. Volatility will create opportunities, but a disciplined, forward-looking approach remains essential.