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Outlook Five keys to investing in 2026

Martin Romo Cheryl Frank Pramod Atluri Diana Wagner Chris Buchbinder

16 January 2026

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 US 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 the US and non-US stocks, growth and value, cyclical and secular trends, stocks and bonds,” says Chief Investment Officer Martin Romo.

 

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

 

1. Bold stimulus could boost the global economy

Sources: Capital Group. As of 31 December 2025. QT, or quantitative tightening, refers to policies that reduce the size of the Fed Reserve’s balance sheet.

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

 

In the US, the Federal Reserve is cutting borrowing costs, a tailwind for housing and the broader economy, according to Cheryl Frank, equity portfolio manager.  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 incentivises US manufacturing, helping industrial and technology sectors.

 

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

 

NATO allies are likewise pledging to raise defence spending, generating 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 following suit, with China also introducing stimulus measures aimed at stabilising its economy.

 

These policies are not without risks: Missteps could contribute to rising government debt and add to inflationary pressures.

 

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

Average annualised returns across past seven Fed easing cycles

Sources: Capital Group, Bloomberg, Morningstar, Standard & Poor's. Returns reflect annualised total returns from the peak federal funds rate target to the lowest federal funds rate target for each cycle. Specific non-recessionary cutting cycles include August 1984 to August 1986, February 1995 to January 1996, and March 1997 to November 1998. Recessionary cutting cycles include May 1989 to September 1992, May 2000 to June 2003, June 2006 to December 2008, and December 2018 to March 2020. Benchmarks used are the S&P 500 Index (US stocks), MSCI World ex USA Index (non-US stocks), Bloomberg US Aggregate Index (US bonds) and 3-month US Treasury Bills (cash). As of 31 December 2025.

A dovish Fed is coming into focus.

 

Despite elevated inflation, interest rates are set to fall in 2026 as policymakers focus on sluggish job growth. “The Federal Reserve is worried about the labour market because, historically, a weak job market leads to an economic slowdown,” says Pramod Atluri, fixed income portfolio manager.

 

“Meanwhile, more stable tariff policies should help ease inflationary pressures.” The US 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 US economic growth will slow or accelerate because of these forces,” Atluri explains. “We may be entering an unusual scenario where US 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

Estimated annual earnings growth across select benchmarks

Sources: Capital Group, FactSet, MSCI, Standard & Poor's. Estimated annual earnings growth is represented by the mean consensus earnings per share estimates for the years ending December 2025 and 2026, respectfully, across the S&P 500 Index (US), the MSCI Europe Index (Europe), the MSCI Japan Index (Japan), the MSCI Emerging Markets Index (Emerging markets) and MSCI China Index (China). Estimates are as of 31 December 2025.

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 17.1%, while the United States comes in at 14.2% and Europe at 11%.

 

Powerful tailwinds could drive earnings growth and support market gains beyond the tech sector in the year ahead, according to Diana Wagner, equity portfolio manager.

 

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?

Dot-com era: Price vs. earnings (1998-2001)

Sources: Capital Group, Bloomberg. Data aggregates forward 12-month net income (“forward earnings”) and market capitalisation (“market cap”) for Microsoft, Cisco, Intel and Dell, four of the largest and best performing companies of that period. Data indexed to 100 on 1 January 1998.

AI era: Price vs. earnings (2020-present)

Sources: Capital Group, Bloomberg. Data aggregates forward 12-month net income (“forward earnings”) and market capitalisation (“market cap”) for NVIDIA, Microsoft, Apple, Amazon, Meta, Broadcom and Alphabet, seven of the largest AI-exposed companies. Data indexed to 100 on 1 January 2020. As of 31 December 2025.

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, equity portfolio manager.

 

As a former telecom analyst, he has experienced the 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 bubble trouble 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 US 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 lurch toward 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 2025 up 17.9%.

 

“Looking out over the next year, I’m both excited and uneasy,” says Chief Investment Officer Martin Romo.

 

“We’re living through a tech revolution driven by artificial intelligence, and the world is undergoing structural shifts in trade and the international order we’ve known for decades. But I’m reminded of what our past American Funds Distributors President and Chairman 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.

The stock market has climbed past several crises

Sources: Capital Group, Standard & Poor's. As of 31 December 2025. Data is indexed to 100 as of 1 January 1987, based on cumulative total returns for the S&P 500 Index. Shown on a logarithmic scale.

Martin Romo is chair and chief investment officer of Capital Group. He is also an equity portfolio manager with 33 years of investment industry experience (as of 12/31/2025). He holds an MBA from Stanford and a bachelor's degree in architecture from the University of California, Berkeley.

Cheryl Frank is an equity portfolio manager with 28 years of investment industry experience (as of 12/31/2025). She holds an MBA from Stanford and a bachelor’s degree from Harvard.

Pramod Atluri is a fixed income portfolio manager with 22 years of investment industry experience (as of 12/31/2025). He holds an MBA from Harvard and a bachelor's degree in biological chemistry from the University of Chicago. He is a CFA charterholder.

Diana Wagner is an equity portfolio manager with 31 years of investment industry experience (as of 12/31/2025). She holds an MBA from Columbia and a bachelor’s degree in art history from Yale University.

Chris Buchbinder is an equity portfolio manager with 30 years of investment industry experience (as of 12/31/2025). He holds a bachelor’s degree in economics and international relations from Brown University.

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