Capital Ideas^™ 
Investment insights from Capital Group

After three straight years of double-digit returns for the S&P 500 Index, investors are entering 2026 with equal parts confidence and caution.

Whether the rally will stretch into a fourth year is far from certain, but one theme has come to define the investment conversation: balance. With valuations still elevated and leadership broadening beyond the U.S. and technology stocks, the road ahead for investors may depend on how consumers and businesses navigate a more fractured economy. “That points toward what I call the “and market” — investing in U.S. and international stocks, growth and value, cyclical and secular trends, stocks and bonds,” says Martin Romo, chair and chief investment officer of Capital Group and a portfolio manager for Capital Group U.S. Equity Fund^TM (Canada).

Against that backdrop, our portfolio managers highlight five insights shaping the year ahead.

1. Bold stimulus could boost the global economy

The economic landscape is expected to improve in 2026, as governments worldwide roll out bold stimulus and infrastructure strategies in response to slowing growth and high trade barriers.

In the U.S., the Federal Reserve is cutting borrowing costs, a tailwind for housing and the broader economy, according to equity portfolio manager Cheryl Frank. Lower rates could lift demand for high-paying construction jobs, and materials such as lumber and paint, benefiting companies like Home Depot and Sherwin-Williams.

Deregulation could increase lending activity, supporting banks such as Wells Fargo and companies left out of the artificial intelligence boom. Meanwhile, the One Big Beautiful Bill Act incentivizes U.S. manufacturing, helping industrial and technology sectors.

In Canada, Prime Minister Mark Carney has placed international capital attraction at the centre of his government’s infrastructure strategy, using high level diplomatic outreach to secure foreign investment. Both Qatar and the UAE — major holders of deployable sovereign wealth — have now positioned themselves as long-term partners in Canada’s infrastructure renewal for nation-building projects such as pipelines, ports and energy corridors.

Across the Atlantic, Germany has shelved fiscal restraint, unveiling a €500 billion package for infrastructure and defence. The move could boost earnings potential for construction companies like Heidelberg Materials and arms maker Rheinmetall.

NATO allies are likewise pledging to raise defence spending, with Canada promising to allocate 5% of its gross domestic product on defence by 2025, of which $107 billion (CAD) is annual direct military spending. This may generate even greater demand for the systems and products made by Northrop Grumman and Rolls-Royce.

Meanwhile, Japan is pushing corporate reform to unlock shareholder value, impacting companies like insurance provider Tokio Marine. Korea and China are similarly following suit, with China also introducing stimulus measures aimed at stabilizing its economy.

These policies aren’t without risks. Missteps could contribute to rising government debt and add to inflationary pressures.

2. U.S. Fed interest rate cuts can be good for stocks and bonds

A dovish U.S. Fed is coming into focus.

Despite elevated inflation, interest rates are set to fall in 2026 as policymakers respond to sluggish job growth. “The U.S. Federal Reserve is worried about the labour market because, historically, a weak job market leads to an economic slowdown,” says portfolio manager  Pramod Atluri. “Meanwhile, more stable tariff policies should help ease inflationary pressures.”

The U.S. federal funds rate is expected to end 2026 near 3%, a level Atluri describes as neither stimulating nor restricting economic growth. The rate influences borrowing costs worldwide, and lower rates could support business and consumer spending. Historically, Fed easing cycles that occurred outside a recession have lifted stock and bond markets, while cash lagged.

The Fed is cutting as spending for AI ripples through the economy, alongside tariff concerns and labour market softness. “There’s healthy debate over whether U.S. economic growth will slow or accelerate because of these forces,” Atluri explains. “We may be entering an unusual scenario where U.S. gross domestic product accelerates beyond an expected range of 2% to 3%, even as job creation remains weak or turns negative. At the same time, unemployment could stay relatively low due to fewer layoffs and stricter immigration enforcement reducing the overall number of workers.”

3. Company profits are expected to rise worldwide

If 2025 was the year that tariff-induced uncertainty upended the outlook for corporate earnings, 2026 could be the year that the numbers come back into focus.

Consensus earnings estimates are looking brighter, largely due to declining interest rates, government stimulus and a string of trade deals that have reduced policy uncertainty. Financial markets have responded by rallying off the lows of last April, when the fear of sky-high tariffs reached its peak.

Another significant driver is the expansion of AI, which has spurred strong demand for computer chips, data centres, and high-tech and low-tech equipment to support the build-out of AI infrastructure.

Emerging markets are expected to enjoy the strongest earnings growth, rising 18.1%, while the United States comes in at 14.9% and Europe at 11.1%.

Powerful tailwinds could drive earnings growth and support market gains beyond the tech sector in the year ahead, according to equity portfolio manager Diana Wagner. She singles out industrials, financials and consumer staples, among others. “There is a lot of support from a macroeconomic perspective but, ultimately, what’s going to matter is corporate earnings growth.”

4. Artificial intelligence: Boom, bubble or both?

Are we in an AI bubble? Investors have been struggling with that question for more than two years. With AI-related stocks rallying like it’s 1999, comparisons to the days of “irrational exuberance” are everywhere. If there is a bubble in the making, it’s important to determine where we might be on that late 1990s timeline. Is the year 2000 the appropriate analogy, which would imply a bubble is about to pop, or is it 1998, indicating that AI stocks still have room to run?

“I think we are closer to 1998 than 2000,” says Chris Buchbinder portfolio manager for Capital Group U.S. Equity Fund^TM (Canada). As a former telecom analyst, he’s experienced dot-com euphoria. “It’s possible we will see an AI bubble at some point, but I don’t think we’re there yet.”

Today, stock prices for AI leaders are generally supported by solid earnings growth. What’s more, companies making aggressive AI-related investments — Alphabet, Amazon, Broadcom, Meta, Microsoft and NVIDIA, among others — can support their massive capital spending far better than the upstarts of the late 1990s.

“In my view,” Buchbinder adds, “it’s too early to let the risk of a bubble overcome the compelling opportunities presented by this formidable technology.”

5. There are always reasons not to invest

A pandemic, wars, inflation and high tariffs have sent shock waves through the global economy in recent years. For many investors, sitting on the sidelines as these events unfolded seemed like the most sensible response. Yet, time after time, financial markets pushed through turbulence and reached new highs.

Take the sweeping tariffs President Trump levied on nearly all major U.S. trading partners in the spring of 2025. The S&P 500 Index plunged as much as 18.7% from its peak in February as investors feared the global economy would enter a deep downturn. But trade deals and continued economic resilience helped calm those anxieties. By year’s end, the S&P 500 Index recovered and finished up 17.9%.

“Looking ahead in 2026, I’m both excited and uneasy,” Romo says. “We’re living through a tech revolution driven by artificial intelligence, and the world is undergoing structural shifts both in trade and the international order we’ve known for decades. But I’m reminded of what past Capital Group executive Graham Holloway said in 1981: ‘I have never known a good time to invest.’”

The lesson is not new. There have always been reasons to wait. It was true in 1981, 2020, and today. But markets have been resilient over time. History shows that investors who look beyond short-term uncertainty and remain committed to their long-term goals have often been rewarded, though there have been times when markets declined.