The stock market outlook for 2026 is finely balanced. On the one hand, the global economy appears to be growing steadily, interest rates are likely to come down, and some of the tariff uncertainty that weighed on markets in 2025 is over. However, the ongoing geopolitical risks cannot be ignored, nor can some ambitious valuations in parts of the US market. Market leadership has already diversified and may continue to do so in the year ahead. This is a time for careful selection.
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The big winners of 2025 were – once again – anything AI-related, though this trend was starting to fade by the end of the year. There has been a growing sense of unease as investors worry about the level of capital spending and cross-company deals. China and emerging markets were also strong, while precious metals also saw strong gains.
On AI, Dr Ian Mortimer, manager of the WS Guinness Global Equity Income fund, says that a bubble will normally be characterised by excessive capex, leverage and overvaluation. Capital spending has certainly increased: “The five hyperscalers have ramped up spending from $133bn in 2021 to an estimated $609bn in 2027. These are huge increases.” However, many have not had to borrow to fund this and where they have – in the case of Oracle, for example – their share prices have been hit. In general, leverage is under control. His view is that valuations also do not suggest a bubble – “valuations don’t look comparable to other periods where we’ve seen bubbles.”
That said, this is not quite the same as saying that this looks like a good investment for 2026. The AI trade may have further to run, and there may be no immediate reason to sell out, but there may be better growth opportunities elsewhere.
Read more about the AI story in our recent fund manager interview
It is a similar case with precious metals. These companies have seen huge gains on the back of rising commodities prices – the WS Amati Strategic Metals fund is up 147% year-to-date, while the Jupiter Gold & Silver fund is up 156%*.
There are reasons to believe that precious metals could rise further. The silver price continues to hit new highs, demand is high and supply is scarce. The gold price is supported by ongoing political tensions and central bank buying.
Ned Naylor-Leyland, manager of the Jupiter Gold & Silver fund, says: “Despite the price gains for silver and gold this year, mainstream investors haven’t participated in the rally to the extent they have previously. Bullion exchange-traded fund holdings are below the peak levels reached in 2020 (gold) and 2021 (silver). More sophisticated investors including hedge funds and investors in the futures market have been behind most of the trading activity this year. We expect this to change.” However, a second year of triple digit gains would be unusual.
China’s strength could continue. It suffered three years of weakness prior to its strength in 2025 and valuations still look appealing. The government appears likely to announce further fiscal support and the corporate sector appears to be in good shape. Andrew Mattock, portfolio manager of the Matthews Pacific Tiger fund, says: “We see significant value in China’s equity market. In the MSCI China index, consensus estimates project earnings growth to recover significantly, while valuations in many sectors remain compelling.
“We anticipate continued strong performance in financials, materials and industrials and in supply chains for exports sectors. We also expect gradual stabilisation in the property market and with it improvements in consumer sectors. Meanwhile, the Chinese equity landscape also features modern, innovative companies—including digital platforms and e-commerce leaders and companies in the AI infrastructure and biotech space.”
Bargain-hunting
However, investors may find better opportunities in areas that have been unloved in 2025. Top of the list has to be smaller companies, which have been weak in the UK, Europe and the US. They now look cheap relative to large-caps and to their own history. The UK market has been particularly unloved and is now trading at bargain basement valuations.
Gregor Paterson, manager of the WS Amati UK Listed Smaller Companies fund says some calm following the recent budget would be helpful. He adds: “The budget was less inflationary, there was no big NI increase. That definitely clears the way for the Bank of England to cut interest rates. When rates in the UK go down, small and mid-cap equities go up.” This is particularly true for sectors such as real estate or housebuilders.
“There’s now a 98% chance that the next rate decision will be a cut, and there should be plenty more after that. That should really help restore confidence in the UK equity market,” he says. He points out that the market is on a valuation roughly half that of small and mid caps in the US, despite the UK government’s more fiscally prudent approach. “I don’t think it will take too much more before people start to reassess the UK stock market as a potential safe haven.”
Rate cut beneficiaries
It may also be worth looking at some of the other areas that could benefit from lower interest rates. Property and infrastructure funds have had a reasonable, if unexciting, year in 2025, but over three years they still lag bond and equity markets**. In particular, Gravis views 2026 as a pivotal year for UK infrastructure, moving from ambitious government visions to tangible execution.
Philip Kent, CEO at the group, which manages the TM Gravis UK Infrastructure Income fund, says: “Following a phase where policymakers articulated critical needs, the coming year should see the delivery of key legislation which should bring forward capital expenditure programmes and evolving procurement models”. The government’s 10-year infrastructure strategy highlights the need for substantial private sector investment, amounting to £500 billion over the next decade, in addition to the government’s promised £725 billion.”
Europe was the dog that didn’t bark this year. It failed to build on its early rally in the second half of the year. However, Ben Leyland, manager of the JOHCM Global Opportunities fund, sees a brighter 2026: “We remain confident that the outlook for earnings growth, and by implication equity returns, outside the US tech sector is as good as it has been for many years, and this is far from being reflected in valuations.
“German fiscal stimulus is a major policy shift and, although it hasn’t yet been seen in company reported earnings, the leading indicators seen over summer are encouraging, for example, the €631bn private sector ‘Made for Germany’ initiative and the Bundestag’s approval of public sector fiscal stimulus. Meanwhile, the normalisation of inflation and interest rates in Japan has very important implications for consumer behaviour and corporate profitability, and we continued to build out our exposure to domestic inflation beneficiaries.”
A final area to consider in the year ahead would be India. The long-term growth story for India is well understood – rapid economic development, strong, well-managed companies and a demographic tailwind. The problem is that it has been very expensive. However, after a weak year that saw it languish at the bottom of the performance tables, it now looks less expensive. This may prove an opportunity to buy into a long-term story during a moment of weakness.
In the final weeks of 2025, the talk has been about potential bubbles, but this should not deter investors. Outside the expensive US market, there are plenty of opportunities elsewhere.
