As a new year begins, CEO Ted Truscott shares his outlook on market opportunities and potential risks for investors.
In 2025, the global economy proved resilient as growth persisted and markets climbed. As we enter 2026, we are cautiously optimistic that markets will continue to grow, supported by easing inflation, anticipated interest rate cuts, and AI-driven innovation. Yet beneath the optimism, economic and geopolitical risks remind us to stay vigilant. This outlook highlights the key investment themes shaping markets and the asset management industry in the year ahead.
Earnings propel US market momentum
US corporate earnings will continue to power equity performance in 2026. Companies remain agile, adapting to tariffs while protecting profitability – fuelling a constructive outlook for US equities.
Declining short-term interest rates should provide a tailwind for equities, reinforcing positive investor sentiment. Despite headline inflation stabilising near 3%, localised spikes – particularly in consumer goods – signal lingering price pressures.
Tariffs remain a critical factor in assessing the inflation outlook. Often dismissed as one-time adjustments, they continue to ripple through supply chains, raising costs and challenging assumptions about long-term price stability. If inflation reaccelerates, the US Federal Reserve (Fed) may pause rate cuts, and the yield curve could steepen – reshaping and challenging valuations in both equity and fixed-income markets.
Earnings strength underpins optimism, yet high valuations and underpriced geopolitical risks require investors’ attention.
It’s time to embrace global opportunities
Expanding the equity opportunity set beyond the US should continue to be a key theme in 2026. Here are areas we find compelling.
- Japan: Structural transformation. Japan stands out as a compelling investment opportunity as the country evolves from a cash savings culture to an investing culture. For the first time in decades, investor optimism is high for Japanese equities. This is driven by investor-friendly corporate governance reforms and a meaningful shift for the Japanese consumer from a savings to an investing culture. Demographic and inflation trends are accelerating this cultural transition, creating opportunities for local businesses and global investors. We are bullish and expect stronger returns for Japanese equities.
- Europe: Potential under pressure. Easing interest rates and Germany’s relaxed debt brake boosted the prospects for European equities in 2025. Yet there is a great deal of pressure on Europe right now. Regulatory burdens and competition from China in the form of high-quality low-cost items such as electric vehicles are challenging the manufacturing dominance of Europe. Policy responses and deregulation will be critical if Europe is to further unlock its economic potential and take advantage of the single European market.
- UK: Signs of growth thawing amid challenges. The UK needs close consideration. We are starting to see signs of thawing, or an acceleration of economic growth in that market. The UK equity market’s recent rise to record highs has sparked debate about the prospects for UK stocks. Eight stocks have delivered more than half of the FTSE 200’s returns, echoing the concentration dynamics that have defined the US equity market. Underneath this concentration, however, lie some interesting opportunities: hundreds of companies trading at compelling valuations and with solid domestic fundamentals. However, inflation is persistent at 4%, and fiscal policy leans toward higher taxes. While valuations are attractive, structural reforms still lag other regions.
- Emerging markets: Gaining ground. Emerging markets (EM) look increasingly attractive. A weaker dollar and continued global growth typically support these markets, and we are far more positive on EM equities now than in the past.
Favourable backdrop for fixed income, but risks remain
Fixed-income markets enter 2026 with a striking sense of positivity. A stable economy, the Fed’s rate cutting and a healthy demand for bonds form the foundation for constructive returns. Investment grade credit fundamentals remain strong and public credit markets appear stable. We see growing investor interest in private credit; as an asset class it offers opportunities for differentiated returns but requires vigilance. Rigorous research and active management will be critical tools for investors to capture private credit’s evolving opportunities.
Soaring global government debt remains a longer-term concern for markets, especially with ballooning interest payments. The next three to five years could bring significant consequences if this structural issue is not resolved. We should keep a close eye on fiscal policy and assess what levels of debt are sustainable. High debt levels are not just a US problem – they are a global challenge, affecting multiple countries including Japan, Europe, and beyond. Solutions exist, but they require bold action in the face of difficult policy choices.
Geopolitical risks: Comfortably numb?
Beneath the confidence of markets lies an undercurrent of geopolitical risk. Markets largely shrugged off these risks in 2025, perhaps to the point of complacency. Geopolitical events have jumped to the forefront as the year opened with the removal of Venezuela’s President, Nicolás Maduro, by a US military operation and evolving US policy toward Latin America. The Russia-Ukraine war remains unresolved, while China-Taiwan tensions continue to be a concern. Plus, evolving US policy towards Europe and the risks of conflict in the Middle East add complexity to the geopolitical picture. With valuations high, particularly in US equities, the margin for error is thin. There is an old saying in the investment world that confidence equals liquidity and liquidity equals confidence. A major disruption can erode market confidence quickly and liquidity can evaporate in an instant in today’s fast-moving markets. We could be one incident away from markets erasing complacency and negatively reacting to destabilising world events.
AI and transformation
Artificial intelligence (AI) is a major investment theme for 2026, with corporate spending on AI focused on cost reduction and productivity improvement. While immediate benefits are tangible, long-term return on investment (ROI) remains uncertain. This raises the question, what does 2027 and beyond look like? We are keeping a close eye on what the AI build-out means for markets and the circularity of some AI investment.
Beyond its significance as an investment theme, Columbia Threadneedle views AI as a central lever to its transformation strategy, enhancing research productivity, portfolio construction, and client reporting. We are very optimistic that we can improve the client experience and enhance operational efficiency with the intelligent use of AI and other transformational tools.
Diversification is non-negotiable
While US equities have delivered strong returns, history shows that leadership positions shift. Further, the tremendous concentration of returns in essentially seven stocks underscores the argument for diversification. A broadly diversified portfolio – spanning large and small caps, US and international equities, fixed income, and alternatives – is key to long-term success.
Small caps are gaining interest driven by falling interest rates and favourable economic growth. International exposure benefits from a weaker US dollar and significant reforms in markets such as Japan. Municipal bonds, often overlooked, offer attractive taxable-equivalent yields and should play a greater role in investor portfolios. Investment-grade bonds, which are in excellent shape fundamentally, provide important stability; core/core-plus allocations should remain foundational. High yield bonds, while showing tight spreads, are offering suitable returns. Alternatives add diversification benefits but require greater investor education as access broadens. Broad exposure is always a good idea, but in today’s environment, diversification matters.
Investors are winning as the industry evolves
Asset management remains competitive, fragmented and fast-moving. Fee pressure remains a significant challenge for the industry while operational efficiency merits greater attention. Consolidation may accelerate, particularly in down markets, while competition for talent stays intense. Innovation in vehicles, strategies, and technology continues to be focused on addressing investors’ evolving needs as market conditions change.
Active ETFs, separately managed accounts, model portfolios, and expanded access to alternatives are reshaping the investment landscape, offering investors greater choice in how they access investment solutions. Mutual funds remain relevant, especially in retirement plans, but pricing pressure and innovation favour newer vehicles. In short, vehicle innovation is empowering investors with lower costs, greater flexibility, and more solutions.
Demand for alternative investments is rising as investors seek diversification and differentiated returns, but we need to be thoughtful about portfolio allocation. Balancing those benefits with the semi-liquid or illiquid nature of alternative assets remains critical. Success depends on planning and education – advisors and clients must understand the trade-offs and be prepared to commit capital for the long term. Democratising access is positive, but informed decisions are essential.
Growing relevance of active management
In 2026, active management remains vital. As passive investing grows, inefficiencies across equities and fixed income create opportunities for skilled managers to uncover mispriced securities and deliver alpha through rigorous research and portfolio construction.
At Columbia Threadneedle Investments, we focus on the pillars of research intensity, global perspective, and continuous improvement. Deep, data-driven research underpins strong portfolio performance, helping us identify opportunities and manage risk in a complex world. Our global reach provides insights across markets, and our commitment to innovation keeps us moving forward. Our goal is clear: to help clients achieve better outcomes through informed, disciplined, and forward-looking investment strategies.
The bottom line
The year ahead presents a landscape rich with opportunity – but not without risk. Markets are buoyant, liquidity is strong, and optimism prevails. Yet, confidence can be fragile. Inflation surprises, geopolitical shocks, or credit market stress could quickly alter the investment landscape. Vigilance is essential to navigating 2026’s opportunities and risks.
