Outlook 2026 | Allianz Global Investors

A tale of two realities

“To prepare for any potential swings in stock prices, we will continue to take a robust approach to stock selection and overall AI exposure – built on the combined strength of our fundamental and quantitative analysis.“

Gregor MA Hirt

CIO Multi Asset

As we look ahead to 2026, the global investment landscape continues to be shaped by a complex interplay of geopolitical tensions, economic readjustments and technological disruption. The year promises to be one of contrasts – where optimism and caution coexist, and where markets may dance between resilience and recalibration.

The geopolitical environment remains fraught with uncertainty. But markets have grown accustomed to the rhythm of confrontation and compromise – particularly in the ongoing tango between President Donald Trump and his global counterparts. The balance of power, especially in trade and strategic resources like rare earths, has shifted. China, having this time anticipated and prepared for renewed tensions, has forced a reassessment of US policy, leading to a more balanced global dynamic.

Surprising resilience – for now

But despite the tax burdens and protectionist policies of the Trump administration, the global economy has shown surprising resilience. Traditional industrial growth metrics in the US remain subdued, but technology and AI continue to be powerful engines of expansion. However, the question is how long this momentum can be sustained.

Especially in an environment like this, an agile approach can be an effective way to negotiate the uncertainty. That means drawing on the strengths of a well-diversified investment mix and placing greater emphasis on active portfolio management.

Monetary policy is already acting as a tailwind for global liquidity. We anticipate further rate cuts from both the US Federal Reserve (Fed) and the European Central Bank (ECB), particularly in the first quarter. In Europe, inflation data could surprise to the downside, prompting an even more dovish stance from the ECB. Meanwhile, fiscal policy in the US is expected to be most impactful in the early part of the year, though its long-term effectiveness remains less clear.

Correction risks amid US stock market strength

US equity valuations remain elevated, but strong earnings growth, especially in the tech sector, provides a rationale for continued market strength. Importantly, investor positioning is not yet overstretched, suggesting room for further upside. We expect many market participants to take advantage of short-term pullbacks to re-enter the market, particularly over the next three to six months. Looking further ahead, the picture becomes more nuanced. We do not foresee a “Minsky moment” driven by financial overleverage – a key difference from 2008. Still, there is a growing risk of a correction if earnings were to disappoint.

As markets begin to recognise that valuations of AI and related technologies may already reflect their true earnings potential, a normalisation phase could follow.

To prepare for any potential swings in stock prices, we will continue to take a robust approach to stock selection and overall AI exposure – built on the combined strength of our fundamental and quantitative analysis.

We maintain a constructive view on emerging markets as a complex. Despite significant differences between countries, the asset class remains under-owned, attractively valued, and supported by a weaker dollar. China continues to stimulate its economy and favour the AI/tech segment, adding to the appeal of the world’s second-biggest economy.

Strategically, we remain a touch more cautious on US equities due to market concentration, high valuations and underestimated stagflation risks – particularly in the latter half of 2026. Europe presents a more favourable outlook. Earnings momentum is improving, and Germany’s fiscal support should provide a meaningful boost. However, France is likely to remain in a holding pattern until the 2027 presidential elections – a source of uncertainty to watch closely in the coming quarters.

Emerging market debt set to benefit

In fixed income, we favour euro zone bonds – especially German Bunds – where inflation is under control and fiscal stimulus is set to expand market breadth. Our top pick remains emerging market debt, which benefits from a weaker dollar, growing domestic demand, and relatively disciplined fiscal and monetary policies compared to developed markets.

We continue to like investment grade credits and crossovers (bonds rated between investment grade and high yield), though see limited potential in further spread tightening, so it becomes pretty much a carry story. High yield spreads are expensively priced in our view, but absolute yield may remain attractive for retail clients. But we stay neutral and, as multi asset investors, prefer equities, which are easier to exit in times of crisis.

Opportunity to reconsider US dollar exposure in portfolios

Currency markets are set to play a pivotal role again in 2026. We expect renewed weakness in the US dollar – though likely on a more moderate trajectory than in 2025 – driven by inflation differentials favouring Europe and political pressure on the Fed. This environment calls for a reassessment of large US dollar exposures in portfolios. In equities, investors rarely hedge their dollar positions, even though US-listed stocks typically represent more than 70% of major indices. Similarly, bond allocations often lean heavily towards US issuers, with some indices exhibiting significant dollar concentration.

We think a more measured level of US exposure may be warranted, complemented by the benefits offered by other currencies and regional bonds. The Japanese yen, for instance, could further consolidate its safe-haven status – supported by political stability and the Bank of Japan’s shift in response to higher core inflation – especially if confidence in the dollar erodes further.

Gold remains a key diversification tool for us, though it may have reached near-term peak levels. We continue to hold positions but are also exploring alternatives such as silver and gold miners. The latter remain attractively priced relative to the rise in the yellow metal and benefit from lower interest rates, which ease the burden of their capital-intensive operations.

Elevated single-security volatility

Volatility remains a central theme in our investment strategy – we consider it as a separate asset class. Indeed, the past two years have seen below-average index volatility punctuated by sharp spikes during market corrections. This environment has allowed us to stay invested in equities even after phases of strong upside swings, while tactically taking profits during periods of disruption. However, beneath the surface, single-security volatility is elevated, and low correlations between securities are masking broader risks. This fragile dynamic could act as a catalyst for a more sustained correction if market breadth narrows or macro shocks emerge.