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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is chief market strategist for Europe, Middle East and Africa at JPMorgan Asset Management
After another strong year and with stocks sitting on fairly lofty valuations, some investors are starting to worry about what 2026 might have in store. While Wall Street strategists may be expecting double-digit gains for US stocks in 2026, more bearish forecasters flag concerns about various risks from the bursting of an AI bubble to problems in private credit to a new round of geopolitical tensions.
But the main thing investors have to worry about in 2026 is inflation. To understand why, we need to reflect on 2025. This year has already brought all manner of bad headlines, from tariff wars to conflicts. And yet here we are, with most major equity indices close to all-time highs and corporate bond yields at near-record tight spreads over government debt, indicating confidence in the outlook for companies.
The reason markets have remained so buoyant is because it’s increasingly clear that governments will spend their way out of all political predicaments. Having generated geopolitical tensions with his tariffs, President Donald Trump quickly turned his attention to tax cuts, which will shortly benefit US households as they claim rebates early in the new year. This should put paid to any talk of US slowdown, since the one rule of thumb economic forecasters can rely on is that when American consumers receive money, they almost immediately spend it. And if these rebates don’t lift Trump’s popularity, expect new stimulus ahead of the midterm elections next November.
Even Germany has joined the fiscal party, embarking on a plan to spend €500bn, equivalent to 12 per cent of its GDP. Countries in the south of Europe also are benefiting from the money handed out by the EU’s Recovery Fund, originally created following the Covid pandemic. France and the UK don’t have the fiscal space to embark on new stimulus programmes, but both are struggling to rein in spending or raise major taxes because the politics are simply too difficult.
Alongside the heady cocktail of government stimulus, markets are also enjoying monetary easing. The US Federal Reserve is under tremendous pressure to be a “national champion” and bring interest rates down. Markets have rightly factored in an asymmetry in Fed policy: there are very few circumstances in which the Fed will raise rates in 2026, but it will be quick and aggressive to cut rates should any downside risks in the economy materialise.
This behaviour at the Fed will force other central banks to follow suit. Any country in which the central bank keeps interest rates high to counter the risk of rising inflation will become a haven for depositors looking for high interest rates and a commitment to preserving the value of a currency.
Deposit inflows may sound good, but in fact they are likely to be accompanied by a punishing appreciation of the currency, leading to problems for export-oriented manufacturers. Thus, the Fed’s bias to cut creates a global bias to cut.
This central bank option could be exercised quickly if geopolitical tensions, or a wobble in tech euphoria, send stocks lower. The upside for investors is that as interest rates fall, bond prices will rise. This would benefit the multi-asset investors that have sought asset-class diversification as a cushion. Plus there is the likelihood that falling interest rates would at some point encourage investors back into riskier markets like equities.
Inflation, however, can truly spoil the fun. Neither governments nor central banks can respond to inflation with more stimulus, not least because the bond market will not allow them to. If global bond investors suspect inflation will erode the value of their holdings, they will demand higher interest rates, stunting the ability of governments to borrow or central banks’ ability to ease policy.
Investors should bear in mind this inflation risk when structuring a portfolio for 2026. In most scenarios, policy excess should lead to a good backdrop for riskier assets such as stocks. However, protection is needed against inflation risk. The year 2022 taught us that there aren’t many places to hide in public markets when inflation rears its head, as both stocks and bonds fall. The best options are found in private markets, such as transportation assets like aircraft and ships, core infrastructure and timber.
Vehicles that offer exposure to such assets for retail investors are illiquid, but this may be a price worth paying for diversification against inflation risk. Investors could then truly enjoy the party induced by policy excess without fear of the hangover.