2026 market outlook:
what can we expect?

The macro backdrop

We anticipate that global growth in gross domestic product (GDP) in 2026 will come in just above 3%, broadly in line with the past two years. China and India will likely continue to drive global momentum, while the US is set to outperform other developed economies. Global inflation should ease modestly, although it is expected to remain above the 2% target in the US.

In equity markets, AI-related investment and adoption will remain a key driver of sentiment, although we see signs of a broadening rally. The current environment is reminiscent of the late 1990s – while valuations are elevated, markets may still become even more expensive. Historically, equity markets tend not to decline when rates are falling and corporate earnings are rising. However, the current mix of technological efficiency gains and a rate-cutting cycle sets the stage for potential bubble formation.

We’re likely to see less macro uncertainty in 2026 compared to 2025, which was marked by erratic trade policy under President Trump. A reduction in trade tensions should support US consumption growth. Meanwhile, the earnings outlook is improving as AI-driven productivity benefits begin to show up in real-economy companies.

Many US businesses outside of mega-cap tech have endured a difficult few years. As a result, cost structures are lean, positioning them for operating leverage as revenue growth returns. This recovery will be supported by more accommodative monetary, fiscal and regulatory conditions.

Taken together, the combination of reduced uncertainty, broad-based earnings growth and limited inflationary pressure is constructive for equities. Accordingly, we expect US profit growth to expand beyond the tech leaders to a wider set of companies.

On the commodity front, oil appears headed for oversupply. That said, with consensus leaning towards a glut, producers may respond by reining in production growth, keeping prices more stable. Contained energy prices are positive not just for South Africa, but for global growth in general.

Key events to watch

From a global macro perspective, these are the key developments we’ll be monitoring in 2026:

1. US midterm elections (November 2026). Republicans are well aware of the typical anti-incumbent swing in midterms. To avoid it, they’ll need the average American voter to feel that inflation is more contained than it is currently.
2. Supreme Court ruling on tariffs. The US Supreme Court is expected to rule on the legality of President Trump’s tariffs. We anticipate a mild reduction in overall US tariff levels following the decision.
3. US Federal Reserve leadership transition. Jerome Powell’s term as Fed Chair ends in May. Any doubts around his successor’s credibility could create volatility in both bond and currency markets.

Beyond these events, we continue to keep a close eye on the ‘known unknowns’: the war in Ukraine, US-China tensions, and oil prices. In all three cases, we believe risks are skewed modestly to the upside.

On currencies, consensus expectations are for further US dollar weakness in 2026. However, such widely held views are often already priced in. With US trade uncertainty receding and growth accelerating, we expect the dollar to remain broadly flat over the year.

There’s also a strong market consensus that US bond yields are unlikely to move lower. But if inflation surprises to the downside – a realistic possibility given productivity is deflationary – yields could fall further.

AI and bubbles

What should we make of the constant talk of speculative bubbles by market commentators?

In the US, the rapid adoption of AI has effectively created a labour supply shock – putting downward pressure on inflation and supporting corporate profitability. Market optimism around sustained future profit growth from productivity gains could inflate a potential bubble.

Through 2025, we’ve seen several market pullbacks, which we view as healthy. Markets are still discriminating between substance and hype – as seen in Meta’s sharp share price drop following its announcement to spend aggressively (and somewhat indiscriminately) on AI.

Some market watchers argue that we’re already in an AI-driven bubble. Our view? We may be in the early stages, but there’s still too much rational behaviour in pricing and capital allocation for this to be close to bursting. That said, it’s worth assessing the signs.

The four classic conditions for a bubble are:

1. Initial displacement. AI’s rise has clearly created winners and losers.
2. Valuation ambiguity. New paradigms drive alternative valuation methodologies – remember when stocks were valued based on eyeballs in the late 1990s? Such behaviour is still limited in today’s market.
3. Speculative excess. Retail investors chase the theme indiscriminately (think dot-com in the 90s). This is not yet widespread.
4. Abundant liquidity. Still present, but not as extreme as in past manias.

Historically, bubbles often emerge around innovation and fixed capital formation. A productivity boom can produce the rare – and ideal – combination of faster real growth and lower inflation – the kind of outcome that fuels speculative thinking.

Currently, IT accounts for a disproportionately large share of US fixed investment, while non-tech investment remains subdued. If the tech boom were to slow, overall US investment could fall sharply. It’s telling that capital expenditure by the ‘Magnificent Seven’ tech stocks now exceeds US government research and development spend compared with less than half that amount five years ago. The risks are building.

Manias and bubbles are, by nature, unpredictable. The best approach is to monitor a checklist of warning signs. Right now, the signals are more yellow than red. Excesses are accumulating in AI-related capital spending, but the top doesn’t appear imminent.

We expect markets to continue swinging sharply between boom-and-bust narratives through 2026. This may test investor conviction – but also presents opportunities for those with the discipline to act independently of the crowd.

High valuations

Overall, the equity cycle still looks constructive. While valuations at the index level are elevated, history shows that this is a poor timing tool. High stock prices alone tell us little about short-term market direction – though extreme valuations do say a lot about potential returns over the next decade.

Importantly, we don’t believe valuation metrics must necessarily revert to historical averages. Today’s large-cap global businesses are structurally stronger than in the past: they are less cyclical and deliver higher margins. Economic cycles have also lengthened over time, and developed-market economies are increasingly dominated by knowledge work rather than cyclical industries.

These shifts support the case for higher valuations. Still, investors would do well to remember that history tends not to reward complacency.

On the local front

Over the past 50 years, South African and US equities have both delivered average real returns of around 8% per annum, outperforming the 6-7% average from developed markets as a whole. Over the same period, South African government bonds delivered a real return of 3.4%, placing them near the middle of the global pack.

As noted earlier, valuations offer little useful guidance as to short-term returns – but they do matter over a 10-year horizon. Based on current valuation levels, we expect South African equities, along with emerging markets more broadly, to deliver superior real returns compared to developed markets over the coming decade.

Locally, the virtuous cycle of external tailwinds continues to work in our favour. High precious metal prices and lower oil prices are positive for South Africa’s trade balance, the rand and government revenues. Improved tax receipts – particularly from mining royalties and corporate taxes – support the fiscus, helping to ease interest rates, which in turn support inflation dynamics. This improving macro environment also bolsters confidence in the government of national unity (GNU), while GNU stability feeds back into improved sentiment.

Given this backdrop, we expect the rand to strengthen modestly, spending most of 2026 at or below R17/US$. GDP growth should improve slightly to about 2%.

Inflation is expected to average between 3.5% and 4% in 2026. Over the longer term, we believe the Reserve Bank’s new 3% inflation target is achievable. As with the previous 3-6% range, it may take time for the wider economy and labour unions in particular to buy into this, but we expect the target to gain traction.

For investors, where a 5% real return previously required a 10% nominal return, lower inflation means similar real returns should be achieved with around 8.5% nominal.

The JSE remains an unbalanced market. As of writing, gold and platinum miners make up roughly a quarter of the local index. These stocks will continue to be driven by precious metal prices, which are inherently volatile and difficult to forecast.

On the more rational side of the market, we expect the so-called SA Inc stocks to perform well in 2026, supported by the positive macro cycle outlined earlier and by relatively undemanding valuations. Our broader expectation for emerging markets to outperform also supports the local case.

South African bonds have performed excellently in 2025, with 10-year yields coming down to 8.5%. We see scope for a little more, but most of the return from local bonds in 2026 will come from yield, with a total return of around 10% expected.

Portfolio construction

It’s always enjoyable to lay out expectations for the global economy and markets, and these naturally impact our views on asset allocation. But when it comes to the selection of the individual assets in our client portfolios, our core focus remains unchanged: deep, bottom-up research to identify high-quality businesses with durable competitive advantages, bought at sensible prices.

Whatever 2026 may bring, we will continue to construct portfolios designed to be resilient across a range of potential outcomes.