Outlook 2026: Core investment implications
KEY POINTS
While the global economy demonstrated remarkable resilience in 2025, the true impact of US tariffs – one of the year’s dominant stories - remains uncertain. However, the International Monetary Fund has raised its 2025 global growth forecast to 3.2% from the 3.0% it projected in July and has kept its 2026 estimate at 3.1%.1
From a markets perspective we expect spending on artificial intelligence (AI) will continue to support US GDP and technology sector stocks. Bonds should benefit from continued central bank easing in 2026. A resilient global economy and monetary policy measures should keep fiscal concerns in check while the core scenario is positive for credit markets.
- {https://www.imf.org/en/Blogs/Articles/2025/10/14/global-economic-outlook-shows-modest-change-amid-policy-shifts-and-complex-forces;IMF - Global Economic Outlook Shows Modest Change Amid Policy Shifts and Complex Forces}
Central investment scenarios
Despite risks, growth remains resilient, powered by AI
The US economy remains resilient. Spending on AI; an equity market-led wealth effect; and a strong credit environment, helped by expectations of lower interest rates, are supporting growth. AI is the primary potential disruptor given its promise of rapid improvements in productivity. The technology has the potential to disrupt legacy business models, optimise value chains, and generate significant advances in fields such as medicine and agriculture. To achieve this, huge investment is taking place in infrastructure and the AI value chain - data centres, cloud computing capabilities and securing increased energy supply. Rising stock prices of key players in the AI race are contributing to a wealth effect underpinning consumer spending, investment, and US economic leadership, despite concerns about international trade and other policies.
Implementation idea - Disruptive technologies in US and emerging markets Rationale: The AI boom has the power to transform business operations and employment, while delivering innovative, beneficial new products and services across the world economy. As more powerful applications are developed, investment opportunities in AI infrastructure, the value chain and in downstream applications will be abundant. The unrealised potential of the technology should underpin continued strong capital expenditure and potentially profitable investment opportunities. |
Time for Europe to step up
Europe faces trade, geopolitical and competitiveness challenges. The good news is that the region has recognised this - as outlined in 2024’s Draghi Report on European economic competitiveness. The challenges are made more urgent by the changing relationship with the US; the need to increase defence spending; and the desire to invest more in the green transition and technology. Some positive tailwinds are developing – growth has been resilient in recent quarters, and the European Central Bank should maintain low, or possibly even lower, interest rates, while Germany’s fiscal plans have the scope to bolster growth throughout the Eurozone. Fiscal issues, a still fragmented capital market, and domestic politics may conspire to act as a drag on growth, but 2026 should also see the bloc make progress on developing better economic policies to address adverse global developments.
Implementation idea - European equities Rationale: Strategic areas of focus related to achieving more economic autonomy will underpin investment opportunities in European equities in 2026. Spending on defence, digital infrastructure and green technologies are prioritised across Europe and will be supported by both national and European Union-wide initiatives over many years. There will be multiplier effects from this across numerous sectors, and with European equities trading on lower valuations than in the US or Japan, in our view the potential opportunities in European equities are clear. |
Bond markets – credit in focus
Fixed income returns were healthy in 2025, and bond yield levels suggest that income-based returns will be positive going forward in the absence of any interest rate or credit shock. Our core view is that rates will fall further in 2026, supporting bond markets in general. However, there are risks that could generate periodic bouts of volatility in fixed income. High levels of public borrowing could create issues in some government bond markets; there is a risk that US inflation may stay elevated; and there are concerns that tight credit spreads – differences in bond yields - will limit continued positive excess returns in investment grade and high yield bonds. Convergence of US and Eurozone interest rates could also have implications in the foreign exchange markets.
Implementation idea - Flexible fixed income Rationale: There could be some volatility in credit markets if corporate earnings slow or there are concerns about credit quality. For active fixed income strategies there are likely to be many opportunities to exploit this potential interest rate and credit risk volatility in the context of continued positive market returns for fixed income. |
Sustainable investing: Getting back on track
By AXA IM, Head of Sustainability, Core Products & Clients, Jane Wadia and BNP Paribas Asset Management, Global Head of Sustainability, Jane Ambachtsheer
It has been a turbulent period for environmental, social and governance (ESG) portfolios, which endured net outflows early in 2025. However, the second quarter (Q2) enjoyed a strong rebound, with $4.9bn in net inflows globally, driven by European investors who added $8.6bn after redeeming $7.3bn the previous quarter. Despite some outflows in Q3, total sustainable fund assets climbed to $3.7trn, an increase of around 4%, supported by stock market appreciation.2
European investors remain firmly committed to sustainability, and climate remains their top priority.
One recent survey shows 58% of UK and European asset managers plan to increase impact allocations in the next year, with none intending to reduce them.3
In Asia Pacific, we have seen continued progress on several sustainability priorities - for example, the region is set for a record year for sustainable bond issuance in 2025. In addition, 80% of asset owners in the region expect assets under management in sustainable funds to grow over the next two years.4
For us three climate-related investment strategies stood out in 2025, which we expect to remain in focus in 2026.
Green bonds
Green bonds finance projects like renewable energy, green buildings, and low carbon transport, offering similar risk profiles to conventional bonds but with added transparency and impact reporting. The market has grown from €30bn a decade ago to €1.9trn today. It has grown into a global universe, with breadth and depth in terms of sectors and issuers. Although 2025 issuance may be slightly lower than 2024’s record of some €420bn, innovation continues, notably with European green bonds gaining traction. The broader green, social, and sustainability bond market now rivals the euro investment-grade credit sector at €3trn, with green bonds as its cornerstone.5 The state of the market should come as little surprise given that today, green bonds are entrenched in the mainstream – and have been for some time – typically offering a comparable yield to conventional bonds.
Decarbonisation
Asset owners are moving from pledges to action, adopting frameworks like the Net Zero Investment Framework and the Task Force on Climate-related Financial Disclosures (TCFD). Decarbonisation strategies focus on seeking opportunities associated with the transition to a low-carbon economy and reducing exposure to carbon emissions and are gaining traction across equities and fixed income. Climate and Paris-Aligned Benchmark exchange-traded funds are also seeing increased interest.
Climate and nature solutions
Investors are allocating capital to solutions that address climate and biodiversity challenges. These include clean energy, sustainable agriculture, resilient infrastructure and water management. The goal is to invest in financially sound and scalable companies delivering measurable environmental outcomes - such as carbon emissions avoided - or restoring ecosystems. Climate change and biodiversity loss are a systemic issue and addressing them demands solutions that match their considerable scale. These environmental strategies not only help manage physical climate risks but also open new investment opportunities in underserved markets.
Looking ahead
Despite policy shifts in the US, Europe continues to lead in sustainable investing, offering a strong pipeline of opportunities with attractive risk-return profiles - and European governments, corporates, and investors are staying the course. For European investors, sustainability is not a trend—it’s a strategic imperative. And with Asia’s growing role in driving the energy transition, we have two clear regions driving this focus.
- {https://www.morningstar.com/business/insights/research/global-esg-flows;Source: Morningstar}
- {https://www.pensionsforpurpose.com/knowledge-centre/press/2025/01/20/Nearly-all-(93)-of-UK-and-European-institutional-investors-%E2%80%98concerned%E2%80%99-about-sustainability-under-a-Trump-presidency-press-release/;Pensions for Purpose}
- Morgan Stanley, July 2025
- All Green Bond / GSS data source: Bloomberg as of 6 October 2025
Asset Class Summary Views
Views expressed reflect expectations on asset class returns and risks. Traffic lights indicate expected return over a three-to-six-month period relative to long-term observed trends.
| Positive | Neutral | Negative |
|---|
Views are not intended as asset allocation advice.
Rates | Lower US and UK interest rates priced in - long-end well anchored for now | |
|---|---|---|
US Treasuries | Clearer path for Federal Reserve is allowing for lower yields but inflation needs to be watched | |
Euro – Core Govt. | Yields expected to be stable with European Central Bank on hold until New Year | |
Euro – Govt Spread | Income opportunities likely to persist across Spanish, Italian and Portuguese bonds | |
UK Gilts | Sentiment improving around the November Budget and Bank of England rate cuts | |
JGBs | Market awaits new Prime Minister Sanae Takaichi’s policies, central bank on hold for now | |
Inflation | Short-duration inflation bonds still preferred as US inflation remains around 3.0% |
Credit | Challenges to sentiment amid continued spread tightness | |
|---|---|---|
USD Investment Grade | Fundamentals continue to be supportive but valuations less so | |
Euro Investment Grade | Stable short rates suggest longer duration credit for higher income | |
GBP Investment Grade | Credible budget would help longer duration yields move potentially below 5% | |
USD High Yield | Macro and corporate news remain supportive despite some modest credit concerns | |
Euro High Yield | Recent rise in spreads and yields relative to investment grade creates income opportunities | |
EM Hard Currency | Macro backdrop and idiosyncratic stories sustain return opportunities |
Equities | Resilient global economy and technology spend support further positive returns | |
|---|---|---|
US | Strong third quarter earnings support positive momentum despite valuations | |
Europe | Bullish case for Europe continues to build but exporters face tough price competition | |
UK | Lower rates and more stable fiscal outlook should underpin value opportunities | |
Japan | Markets betting on positive impact from Takaichi to sustain solid equity performance | |
China | Strive for technological self-sufficiency driving stock returns despite weak macro backdrop | |
Investment Themes* | Long-term positive on artificial intelligence and carbon transition strategies |
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
Disclaimer
This website is published by AXA Investment Managers Australia Ltd (ABN 47 107 346 841 AFSL 273320) (“AXA IM Australia”) and is intended only for professional investors, sophisticated investors and wholesale clients as defined in the Corporations Act 2001 (Cth).
This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Market commentary on the website has been prepared for general informational purposes by the authors, who are part of AXA Investment Managers. This market commentary reflects the views of the authors, and statements in it may differ from the views of others in AXA Investment Managers.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
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