2026 has thus far seen geopolitical events, from Venezuela and Iran to Greenland, attracting attention. Headlines about tariffs and questions over the independence of the US Federal Reserve have continued. Still, financial markets remain resilient.
Solid economic data and strong earnings have provided support and the outlook for growth is improving, aided by fiscal stimulus. Monetary policy also appears favourable. Reflecting this backdrop, we have moved to further increase our overweight position in equities. Despite the prominence of geopolitical developments, these events have not altered the fundamentally supportive environment underpinning our positive outlook.
We remain constructive on the outlook for the global economy. After showing resilience in 2025, we expect 2026 to focus on extending the growth cycle. Global growth should be solid and from a regional perspective Germany is set for a notable rebound, driven by fiscal stimulus. China aims to meet its 5% growth target and US growth will likely match that of 2025, with scope for improvement if further stimulus is introduced. The UK is expected to grow modestly, though still below trend. Overall, the environment supports steady economic expansion and positive corporate earnings.
Looking ahead, we are optimistic for 2026. That said, we are mindful that much optimism is already priced in. This makes markets potentially more sensitive to policy changes, geopolitical events and disappointing earnings results, especially in sectors linked to transformative themes such as artificial intelligence (AI).
At a glance – equities and fixed income
Equities
We remain positive on equities. Our expectation is anchored around strong earnings growth in 2026, with US equities seeing broader gains, Japan delivering robust performance, and emerging markets showing improvement. While we recognise that valuations in certain regions and sectors are high, ongoing earnings momentum and supportive fiscal and monetary policies should help keep valuations elevated. Unless fundamentals or investor sentiment shift significantly, we believe equities remain the best way to express our positive outlook. As a result, we have upgraded our stance from ‘mildly favour’ to ‘favour’.
Fixed income
We retain a neutral view on bonds. Government bonds are volatile, driven by worries about debt and fiscal deficits. Monetary policy is supportive, with interest rates slowly falling, but Japan is raising rates, which brings some risk. Valuations in investment grade and high yield bonds are not overly compelling, and emerging market bonds offer historically low spreads.
Recent asset class changes and views
Japanese equities
We have upgraded our view on Japan to mildly favour. Both the economy and corporate earnings are gaining momentum, helped by a more stable political environment. Earnings growth is broadening and exporters are performing well. Fiscal policy remains supportive, with a new stimulus package announced. Although Japanese bond markets have been volatile due to the Bank of Japan raising rates and concerns about an expansionary fiscal policy, equities have not been significantly impacted. The upcoming election in early February could strengthen Prime Minister Sanae Takaichi’s position, easing the path for further reforms.
US equities
Given our more positive views on Japan and continued preference for emerging markets we have downgraded US equities to neutral. We see solid earnings and economic momentum, but valuations among the large cap companies are not compelling. Within the US, and reflecting our conviction in a US cyclical upswing, we are favouring small cap names over their large cap counterparts. Small caps offer greater value following recent relative underperformance and there is scope for outperformance against an improving economic backdrop.
Asset Allocation Matrix
Indicator guide
Use one of the following per cell:
- o = coloured circle
- u = up arrow
- d = down arrow
- ou = coloured circle with up arrow
- od = coloured circle with down arrow
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| STRONGLY DISLIKE | DISLIKE | MILDLY DISLIKE | NEUTRAL | MILDLY POSITIVE | POSITIVE | STRONGLY POSITIVE | ||
|---|---|---|---|---|---|---|---|---|
| Asset Allocation | Equity | o | ||||||
| Rates | o | |||||||
| Credit | o | |||||||
| Property | o | |||||||
| Commodities | o | |||||||
| Gold | o | |||||||
| Cash | o | |||||||
| Equity Regions | US | od | ||||||
| Europe ex UK | o | |||||||
| UK | o | |||||||
| Japan | ou | |||||||
| APAC ex | o | |||||||
| EM | o | |||||||
| Equity Styles | Growth | o | ||||||
| Value | o | |||||||
| Quality | o | |||||||
| Small Caps | ou | |||||||
| Fixed Income (*=Spreads) | Nominal | o | ||||||
| Real Rates | o | |||||||
| EM Local | o | |||||||
| IG* | o | |||||||
| HY* | o | |||||||
| EM Hard* | o | |||||||
| Currency | USD | o | ||||||
| EUR | o | |||||||
| GBP | o | |||||||
| JPY | o | |||||||
| EM FX | o |
Source: Columbia Threadneedle Investments, as at 20 January 2026. Change from last month
