The investor’s guide to 2026

Guy Foster
Chief Strategist
RBC Brewin Dolphin

It’s been quite a year for markets. Now, as 2026 looms, minds naturally turn to what’s next.

The good news? Historical trends suggest stock markets may continue to rise, helping to deliver positive returns for investors, but it’s important to acknowledge that outcomes are inherently uncertain. After years of above-average gains, sustaining this momentum gets tougher. Still, history has shown that bull markets like this can endure.

The economic backdrop remains supportive. However, while erratic U.S. policymaking may steady by the end of the year, the first half of 2026 could provide us with plenty of potential triggers for volatility.

Uncle Sam holds the key

The size, strength and dynamism of the U.S. economy means global equity performance really hinges on the country’s economic trajectory. A recession, on the other hand, is usually associated with market declines – yet current indicators show few signs of an impending slowdown. Instead, the economy is enjoying self-sustaining growth and has several tailwinds ahead. Absent an economic shock, the prognosis seems to be good.

Beyond recession risks, valuations and modest growth forecasts call for tempered expectations for the coming year. It’s important to retain an appropriate degree of market exposure though: markets naturally trend upwards and there are a number of helpful tailwinds, such as:

Post-shutdown momentum

The economic rebound following the recent government shutdown should provide momentum entering the first quarter of 2026, assuming prolonged closure episodes don’t recur. Consumer sentiment, which deteriorated during the shutdown, should recover as policy uncertainty diminishes and furloughed workers receive retroactive back pay. The anticipated $50 billion increase in tax refunds from recently passed budget measures should further stimulate early-year spending.

Business confidence rising

Business confidence indicators offer encouraging signals. U.S. CEO surveys show growing proportions of companies planning to hire, increase wages, and invest.[1] Importantly, small businesses – which account for approximately 80% of new job creation in the U.S. – have maintained optimism, with increasing numbers planning workforce expansion and capital expenditure.

Interest rate tailwinds

Interest rate cuts from late 2024 are still fuelling the economy today owing to the lagged effects of monetary easing. These benefits should persist through the first half of 2026, while more recent rate reductions should manifest as improved activity in the latter half of the year. Meanwhile, the majority of U.S. banks are lending more freely to consumers – which should boost spending and growth.[2]

Tax breaks stimulating investment

New tax policies allow businesses to claim faster tax deductions on property and immediate tax breaks for research and development and equipment. This should accelerate investment, helping the economy grow a solid 2.2% in GDP terms (above the critical 2% threshold) before subsiding to 1.8% in 2027 and 2028.[3]

Risks to watch out for in 2026

Despite economic momentum taking us into the new year, there are several unresolved issues in the U.S. that seem set to keep the early part of 2026 interesting:

Shutdown sequel?

This year’s government shutdown was ended by a deal which funds the government through to 30 January 2026. After that? The potential return of a partial government shutdown. This brings volatility to sectors which rely on government funding, such as defence contractors and government services firms.

However, it seems likely that a return to shutdown will be avoided because of the damage it does to politicians’ popularity. If it does recur, expect volatility and attractive buying opportunities.

Tariff tremors

Watch for the Supreme Court’s decision in Learning Resources v. Trump, expected in June 2026. This case tests President Trump’s power to impose tariffs – a role reserved for Congress. Justices appear sceptical of claims the president can impose the measures to combat an emergency. A government loss could trigger a large tax refund, which would initially need to be funded by more government borrowing.

Shake up at the Fed

President Trump’s desire to reshape the Federal Reserve and lower interest rates suggests further upheaval may be imminent. He’s already installed an adviser on the Federal Open Markets Committee (FOMC) and is poised to replace Chair Jay Powell with another ally. His influence could expand further if the Supreme Court rules that President Trump has due cause to fire existing Governor, Lisa Cook, creating another vacancy. With two sitting governors known to be sympathetic to rate cuts, President Trump may soon control a significant bloc of the FOMC’s 12 voting members. There’s even a scenario in which he attempts to block the renomination of some regional Fed chairs to widen his grip, but this remains speculative.

Ultimately, these changes could make the FOMC more willing to risk inflation to support growth – a stance normally supportive of the equity market.

For investors, dramatic policymaking from an activist government has been one of the hallmarks of 2025. This has challenged the economic consensus, forcing investors to rethink assumptions about free trade, central bank independence, and the need for governments to keep their debt in check. Yet we’ve tended to see these big changes as secondary to the more seismic force of artificial intelligence.

Are we in an AI bubble?

Perhaps the trending question of the year… let’s look at an answer.

Today, eight of the top ten S&P 500 companies are AI powerhouses. Together, they account for over 40% of the index’s value and generate 35% of its profits. Valuations reflect this dominance: averaging 27x earnings (vs. the 18x long-term average).

Concerning? Yes – but they should be seen in context. Never have some of the largest companies been growing so fast and so profitably.

Yet bubble warnings persist. Some companies, specifically those which have yet to make a profit, trade on valuations which seem very difficult to justify, which echoes the infamous technology bubble of the late 1990s and early 2000s. Unlike then, these seem to be outliers, not systemic mania.

Other concerns do exist, however. Of those announced, capital expenditure budgets for major AI developers exceed $400 billion next year. While profits have justified costs to date, critical constraints are emerging, most notably in the provision of electric power. Estimates suggest U.S. grids need a 20% capacity jump over five years – an ambitious (and unlikely) target. As a result, utilities facing capacity constraints are seeking substantial rate increases, which could squeeze corporate margins and household budgets, potentially sparking political backlash.

Where does the UK stand?

The UK market doesn’t have the same tailwinds of growth and tax largesse as the U.S. But it’s not all gloom and doom as we head into a new year.

Growth trundles along

Tax increases imposed on businesses and households in 2025 are expected to constrain economic growth to just 1.2% in 2026, according to Bloomberg consensus forecasts – disappointing performance for a country that averaged 2% annual growth in the pre-pandemic decade. Although this is comparable to other G7 economies facing their own structural challenges.

Political headwinds

Politically the UK is stable, but underlying fragility persists. The Labour government, elected by a landslide in 2024, has seen poll ratings collapse from 40% at the election, to just 21%. The biggest winner has been the Reform party. But with no election until 2029, any instability would likely come from within the Labour Party.

Markets reward prudence

Some of that fragility was on show in the lead up to November’s Autumn Budget. But despite criticism, it was well received by financial markets: bond yields fell (lowering borrowing costs) and the pound rallied.

Tax hikes are never good news, but the government did increase the “headroom” against its fiscal rules, reducing the chance of a third tax-hiking budget in a row. The inevitability of tax increases has weighed on optimism and economic activity this year. Not that the increases will be landing any time soon – with the majority due to hit between 2029 and 2031.

UK equities – the great forgotten

A weak dollar and equity market volatility allowed the UK market to outperform the U.S. this year, despite it lacking the tech exposure of U.S. and Asian markets. The contrast underscores the value of regional diversification.

Even after strong returns this year, UK valuations remain attractive. The FTSE All-Share Index trades significantly below its long-term median valuation relative to global developed markets. This discount provides both a margin of safety and the potential for repeated outperformance.

UK bonds continue to deliver

Similarly, UK bonds continue to offer some of the highest yields amongst developed economies. As future tax hikes loom and regulatory costs stay put, there’s scope for interest rates to fall, further boosting returns. A handful of UK bonds even deliver tax-free capital gains.

Opportunities remain

The UK and U.S. offer distinct advantages and we believe there are opportunities in both countries’ stock and bond markets. Although they have many differences, these have recently been helping to diversify portfolios rather than diluting returns. As George Bernard Shaw said…

“The British and Americans are two people separated by a common language.”

― George Bernard Shaw

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[1] National Federation of Independent Business (NFIB) survey

[2] Senior Loan Officer Opinion Survey, Federal Reserve, September 2025

[3] Congressional Budget Office’s Current View of the Economy From 2025 to 2028, September 2025

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Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.rbcwealthmanagement.com/en-uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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