Introduction to the 2026 Market Outlook
The global market in 2026 is expected to present a complex environment, characterized by steady growth, easing inflation, and Federal Reserve rate cuts. However, already "overheated" asset valuations, such as AI-related valuations significantly outpacing fundamentals, may lead to heightened volatility. Investors should focus on valuation risks within the AI theme, the appreciation trend of the renminbi, downward pressure on the US dollar, and hedge using tools such as interest rates, foreign exchange, and gold.
Cyclical Tailwinds and Macroeconomic Backdrop
Goldman Sachs believes that the global economy will exhibit a pattern of "steady growth, employment stagnation, and price stability." The bank forecasts that robust global growth combined with the Federal Reserve’s ‘non-recessionary’ rate cuts will create a friendly backdrop for global equities and emerging market assets. However, markets have moved ahead of the macroeconomic situation in many respects, with equity and credit markets showing ‘fiery valuations,’ creating tension with the macro cycle.
Key Risks and Opportunities
The AI boom will remain a focal point for markets in 2026, with productivity benefits and capital expenditure boom expected to continue. However, market valuations have already significantly outpaced macroeconomic fundamentals, which could lead to increased stock market volatility and wider credit spreads. Other key risks include latent cracks in the US labor market, lurking fiscal concerns, and a potential pullback in the AI theme.
Central Bank Divergence and Interest Rates
The path of rate cuts in 2026 will show significant divergence, with the Federal Reserve, the Bank of England, and Norges Bank having more room for rate cuts. Many high-interest-rate emerging market economies are also expected to significantly lower policy rates. However, Japan is a notable exception, with Goldman Sachs forecasting it will continue its gradual rate hikes.
Currency Markets and Cycles
Goldman Sachs expects the foreign exchange market in 2026 to exhibit more "pro-cyclical" characteristics, with high-beta G10 currencies and some emerging market cyclical currencies benefiting from stronger-than-expected growth. The US dollar may continue to depreciate, but the pace will be "shallow and gradual." The report suggests that EUR/USD is increasingly approaching its fair value around 1.22, leaving limited room for further significant appreciation.
Emerging Markets and Investment Strategy
2025 was one of the strongest years for emerging market assets in a decade, with emerging market equities achieving approximately a 30% increase. Consequently, entering 2026, their valuation attractiveness has diminished compared to before. Goldman Sachs recommends risk rotation, shifting some positions from tech-sensitive markets to markets driven more by domestic demand, such as South Africa, India, and Brazil, to achieve better balance.
Late-Cycle Risks and Hedging
The key downside risk is a deterioration in the US labor market triggering recession concerns; the upside risk, on the other hand, is economic overheating challenging market expectations for interest rate cuts. Additionally, a reversal of the AI theme represents the biggest micro risk facing the US stock market. Goldman Sachs recommends that, in addition to diversified investments, investors can also seek protection through interest rate, foreign exchange, gold, and equity volatility products.
Conclusion
In conclusion, the 2026 market outlook presents a complex environment with both opportunities and risks. Investors should focus on valuation risks, the appreciation trend of the renminbi, and downward pressure on the US dollar, while hedging using various tools. By understanding the cyclical tailwinds, key risks, and opportunities, investors can navigate the market and make informed decisions to achieve their investment goals.
