Global Strategy Outlook 2026: Carry On My Wayward Growth

Overview:

• Further decline expected in 10-year Treasury yields and weakened USD.
• The U.S. economy forecast to underperform but could still beat consensus expectations, with inflation remaining above target for a sixth consecutive year.
• U.S. Federal Reserve anticipated to ease rates more than expected in 2026.
• Amid easing, central banks including BoC and ECB could see hikes by the end of 2026.
• Foreign investors increasing holdings but hedging USD exposure; de-dollarization is more about hedging than divesting.
• Capital investment in AI is up, but the lagging gains in productivity limits U.S. growth potential.

For all the policy shocks and uncertainty in 2025, we are on track to end the year with 10-year Treasuries lower, the USD weaker and the S&P 500 higher. Our forecasts for 2026 see fewer shocks and ongoing risks, but we expect much the same outcome with a further decline in 10-year rates and depreciation in the USD. However, Central bank accommodation and ongoing fiscal support seems enough to keep the risks to more bark than bite.

Consensus expects the U.S. economy to run below potential through 2026 and underperform many other major economies, with U.S. inflation still running above target. That would typically be a confusing year for rates and FX, and not a great set up for risk assets.

While risks abound and the economy is stumbling through a fog of no data to end 2025, we expect U.S. growth to beat consensus expectations for 2026. However, it would remain just a hair below potential and expect a better disinflationary trend to take over in H2. This would still leave U.S. inflation above target for the sixth year in a row. This outlook is also supported by our expectation that the Federal Reserve (Fed), after remaining patient through tariff-induced inflation upsides in 2025, will be able to ease more than expected over the next year.

As inflation expectations decline, Fed rates can fall simply to keep pace, with soft data suggesting Fed rate cuts should outpace that process. The more complicating factor for the Fed is the dual two-speed economy:

• the "K-shaped" consumer split between well-supported higher income households and softer conditions for others and
• the AI-driven support into capital investment at a time when hiring demand is softening.

We think the following narratives will continue to impact the market into 2026.

De-dollarization

More Hedging than Changing Holdings: For all the talk of investors selling out of U.S. bonds, foreign official holdings of U.S. Treasuries increased by 4% in 2025 through July while other foreign ownership is up 8%. Rather than reducing holdings, we are seeing more investors hedge their USD exposure.

Y/Y Change in Foreign Holdings of USTs: Holdings of USTs Abroad Continue to Grow

Rising Term Premia

Enough Demand for the Supply: Another narrative says investors should be demanding rising compensation for the fiscal largesse. In fact, we see global government bond supply as fairly stable in 2026 and biased towards the short-end, which should be broadly supportive for rates and spread product. This level of government spending can't continue in perpetuity, but we see news as more of a short-term negative catalyst and unlikely to drive sustained market fears.

The AI Economy

It Won't Be Built in a Day: There is a decent share of AI-related investment growth, which means a sizable share of funding and financing. But that is not driving immediate productivity growth, nor is it happening in isolation. There is crowding out of other investment, capacity constraints in commodity sectors and a simultaneous slowdown in hiring. All this adds up to the U.S. economy still growing below potential.

AI-Related Investment Appears to Be Crowding Out Broader Equipment Investment

USD Decline

Not Renewed U.S. Exceptionalism: Investors can reflect some risk aversion from the USD. We are 3-6% below consensus and forwards on the USD for 2026. While we do see the U.S. economy outperforming consensus in 2026, there is enough global resilience and Fed easing to keep us from moving out the tails of the USD smile. We think 2026 is likely to bring a rotation from carry to value.

Federal Reserve Under Orders

How Do You Like Your Fed - Overeasing? There is market fear that the Fed will be under tremendous political pressure to overease. But our own proprietary tracking for what the Fed "should" be doing suggests it's exactly what we are seeing. We have also seen Secretary Bessent and others suggest Fed quantitative easing (QE) isn't seen as a viable policy tool. The Supreme Court's decision in the Lisa Cook case is a focal point, but we don't see this sentiment feeding into different Fed outcomes.

Monetary Tightening is Coming

Hiking Around the World: While the Fed and Bank of England (BoE) are still easing, we see the next move as higher for the Bank of Canada (BoC) and European Central Bank (ECB) with markets likely to start discussing Reserve Bank of Australia (RBA) hikes in 2026 too. We think the ECB can hike by the end of 2026. For the BoC, fiscal can do the heavy lifting now on supporting the economy, which should set up the BoC to hike in 2027. We also see energy markets likely finding a bottom and starting on an upward path in H2. That can support both opportunities in the front end of the curve, as well as more USD weakness through 2026.

Debt/GDP Ratios

New Gold Highs in the Cards

Worth Its Weight: Fundamentals are broadly supportive, and we see gold moving materially over the $4,400/oz mark into 2026. We see this happening once it becomes apparent that the Fed is continuing with the easing cycle amid a weaker economy, materially above-target inflation and an FOMC likely filled with doves. Silver, platinum and palladium also had an outstanding year, with more to come.