2026 Market outlook – themes, opportunities, concerns

What might be the dominant market themes in 2026?

Once again, AI looks set to dominate headlines into 2026 according to many of SJP's experts. This is despite recent concerns around valuations and the risks of an AI bubble forming.

Justin Onuekwusi, SJP’s chief investment officer, says: "AI will likely continue dominating much of the newsflow, but, in turn, investors will want to see how widely its benefits can extend across other market sectors."

This theme is also taken up by Carlota Estragues Lopez, SJP’s equity strategist, who agrees that a repeat performance of AI headlines looks likely into 2026.

However, Carlota thinks investors will “need to ask themselves whether these companies can keep growing fast enough to justify their already very high valuations.

"Then if they don’t and valuations cool, will this be the result of a sharp downward correction, or something that takes place more slowly as non-tech companies start delivering stronger returns? These are questions to consider."

Some investment uncertainties, such as on tariffs, could start to fade in 2026 according to SJP’s chief economist Hetal Mehta. “This will be supported by AI-related investment, and its effects on productivity and economic output (GDP). Stimulus measures in both the US and China could also provide a lift in the first half of 2026.”

However, Hetal highlights market worries about China’s weak property sector, as oversupply and falling prices are casting a pall over domestic consumer confidence.

Meanwhile SJP’s fixed income strategist, Greg Venizelos flags the ongoing tussle between the real-world applications of AI and the high valuations of some of these companies.

He adds: "I will also be keeping an eye on their debt issuance. While it is a relatively new part of the bond market, this will be an essential source of financing to deal with the sector’s high capital expenditure. It currently accounts for only a small portion of fixed income markets, but it could become much larger."

More broadly, bond investors are likely to remain alert to the economic fragilities of different governments, believes Greg. "Any imprudent budget policies or the undermining of the independence of key institutions like central banks is likely to be punished by investors, who are primed and ready."

According to the investment team, other themes likely to feature in 2026 include growing interest in the better performing markets beyond the US, as well as the weakening value of the US dollar.

However, SJP’s investment research director, Joe Wiggins advises caution in trying to isolate specific themes. He says: "While many investors are naturally drawn to recent and highly visible events or themes at any given moment, it’s more important to maintain the discipline and long-term focus necessary to meet one’s investment objectives. Yes, the AI growth theme will likely continue into 2026, but then so will others which nobody is currently focused on."

Where are the best investment opportunities?

Despite the dominance of AI, Carlota suggests a different perspective. “If company profitability spreads beyond the "Magnificent 7" tech giants, investors may start paying more attention to companies that use AI rather than only those that build it. This could create opportunities for emerging markets and smaller international companies. These have already been showing signs of strength during 2025.”

Similarly, Justin also believes emerging markets could prove particularly interesting and which, despite their strong returns this year, still look cheap relative to the US equity market. “Over time we know tilting portfolios towards cheaper asset classes gives the best chance of delivering stronger returns over time. In addition, a weaker US dollar helps emerging market economies by reducing the cost of paying back their US dollar loans and helping to strengthen both government and company balance sheets.”

The UK equity market also looks attractive relative to the rest of the world.  Not only are valuations appealing relative to other markets, but Justin points out the UK market also has a higher allocation to defensive market sectors such as consumer staples and healthcare. This means that when there is a market sell off, the UK could be more immunised to falls relative to other regions.  

In terms of opportunities, Justin also highlights the value of looking beyond the US tech sector and considering company valuations. He says: “Disciplined global diversification and attention to valuation remain central sources of opportunity. It is attractively priced global equities that could provide meaningful upside over 2026 if investors start focusing on a company’s long-term strengths and fundamental value.”  

Within fixed income, Greg believes there are opportunities for investors that could help them outperform. These include high quality company bonds, also known as investment grade corporate credit; and geographically diversified sovereign bonds, including local currency emerging market bonds. He argues that temporary market shocks could also offer selective investment opportunities as the prices of attractive bond will also weaken, irrespective of their fundamentals.  

Reasons to be wary in 2026?

Perhaps surprisingly, the answer could once again be bonds, according to Greg. He points to the fact that the additional returns (known as the credit spread) from corporate bonds over government ones are relatively low given the higher risks associated with corporate issuers.

To put it more simply, there is little room for error if a company runs into trouble, says Greg. “The higher rate of interest available from lending money to a company rather than a government is historically low, which is understandable given the economic backdrop, but it does create some vulnerabilities if the environment sours.”

Another area of potential focus is the private credit market. This covers loans made directly to companies from non-bank lenders, such as asset managers.  

The private credit market has grown rapidly in recent years, with around $16 trillion in assets under management globally, according to the Bank of England.¹ Yet Greg points out that the size of the market means that there will inevitably be some issues, and there have been some high-profile failures.  

“Private credit has grown very quickly over the past few years, with some of this money poorly invested. While this hasn't directly had a knock-on effect on the more traditional fixed income markets, there is always a risk. If a large, poor quality private credit loan goes wrong, investors might be forced to sell their quality bond holdings quickly to cover their losses. This sell-off can easily drive down the price of high-quality corporate bonds. The good news? Issues in this area so far have been isolated with no sign of broad weakness.”

For Hetal, the chances of reduced central bank independence are a concern. She points out that if the new US Federal Reserve chair cuts interest rates aggressively, this could undermine some of the hard-won results in driving inflation lower. 

Stock market disparities

Meanwhile Carlota highlights the contrast between how well stock markets have been behaving against the backdrop of tariffs and other concerns, and the gloomier economic outlook on both sides of the Atlantic. In other words, she warns the rise in markets may be due to investor enthusiasm and high valuations, rather than profit growth. If this divergence continues, the risks of a market correction could increase.

For Justin, there are a number of key risks investors need to prepare for. These include unpredictable changes in economic policy, such as a surprise hike in interest rates, or moves by governments to shift spending. The result could be investor uncertainty and market sell offs. He also points to the excessive market concentration (the dominance of US tech companies) and demanding valuations as reasons for investors to tread cautiously.

2026 could also bring renewed concerns around inflation and economic growth, neither of which have really gone away.  According to SJP’s experts, investors need to prepare for adverse outcomes by building portfolios able to withstand market shocks. This can be done by ensuring their holdings are suitably diversified, spread across different countries, currencies and asset classes.

Yet the importance of “not getting get distracted” is also one emphasised by Robin Ellis, SJP’s director of portfolio management. He points out that the events leaving the biggest footprint on financial markets are "those that were unexpected and/or unimaginable. We don’t know why these types of events happen, only that they will."

While market ups and downs are an unavoidable part of the cycle, they also create new opportunities for disciplined investors.

Adds Justin: “Our investment team remains vigilant in identifying these opportunities, and I encourage investors to stay attentive as well. It is often in uncertain periods where some of the most compelling opportunities emerge.”

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

Source

¹Bank of England launches system-wide exploratory scenario exercise focused on private markets | Bank of England – 4 December 2025