JANUARY 2026
The chart below contains some of the most important variables to watch in 2026.
It shows the market-derived figures for US inflation expectations for the next 2, 5 and 10 years.
These are essentially the consensus views on where inflation is heading over the medium and longer-term.
And they have a huge influence on how the Federal Reserve sets monetary policy.
Providing inflation expectations are not surging higher (like in 2021), the Central Bank typically adopts an accommodative stance and risk assets tend to fare well.
Simply put, if the measures stay broadly where they are, markets should remain well bid this year.
However, a “risk off” phase becomes far more likely if inflation concerns resurface.
Historically there has been a tight correlation between the annual change in US gasoline prices (red line, right axis) and 10yr inflation expectations (blue line, left axis).
Which means all eyes should be on energy costs as we head into 2026.
If US forecourt prices stay around current levels, inflation expectations should remain in check. That would encourage the Federal Reserve to keep easing and, in such a scenario, the risk of a major stock market upset would be relatively low.
The good news is that, all things equal, a significant increase in energy prices appears unlikely; demand is sluggish and supplies are plentiful.
Although a host of factors could foster rising energy costs (and higher inflation expectations), including another geopolitical flare-up and/or a strong acceleration in economic growth.
It’s safe to assume that the three year equity bull market would likely end if a US recession emerges in 2026.
As things stand, that is not a core scenario.
The ISM recession indicator combines various forward-looking components of the monthly purchasing manager survey to project how the US economy is likely to fare over the coming months.
The indicator is currently (just) rising, which argues against there being a near-term recession.
The metric is heading higher because manufacturing orders are inching up and inventories are grinding down. In other words, the fundamental backdrop is gradually improving.
Providing demand holds up, industrial firms will be encouraged to employ more workers and boost production levels; trends that typically emerge before an acceleration in GDP growth.
2025 proved to be a good year for many emerging market (EM) equities with the principal Brazilian and Chinese indices comfortably outperforming their developed market peers.
India was the notable exception with local stocks struggling the face of valuation concerns and persistent foreign investor outflows.
For all the talk of US equity dominance, it is encouraging to see the bull market broadening out and the chart below suggests the trend could persist.
The red line shows US stocks are now trading at more than 20x future earnings; not necessarily a signal for an imminent bear market, but punchy by historical standards and a warning that the best of the gains may be behind us.
Conversely, Brazilian (light blue) and Chinese (dark blue) stocks are trading at less than half of those multiples, suggesting strong absolute and relative returns may still lie ahead.
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