2026 to grapple with tensions ‘lurking beneath the surface’: Fidelity

The latest investment outlook for the year ahead from Fidelity International has warned investors to remain weary of “deep structural shifts” and “tensions lurking beneath the surface” despite a “constructive” backdrop to drive the performance of risk assets.

Matthew Quaife, global head of multi asset at Fidelity International, said several of the challenges plaguing global markets have eased, including underlying inflation and the potential for a tariff-driven downturn, generating favourable conditions for risk assets.

“While we see positive drivers heading into 2026, the longer-term backdrop is more complex. Beyond the medium-term stability is a creeping global fragmentation, following years of progressive globalisation and debt accumulation. The US’ Liberation Day was itself a manifestation of these structural shifts and has since accelerated a global splintering into regional blocs,” he said.

“Accompanying that fragmentation will be further intentional weakening of the US dollar. The value of the dollar is now a strategic policy tool, and as a result we expect its value to depress over the coming years, especially as debates around Fed independence intensify.

“These macro changes will require investors to adopt new thinking around holding US dollar risk. There will undoubtedly be more geopolitical volatility in 2026; gold should provide some protection in this environment. The euro is also looking more attractive, especially as the Fed comes under pressure to cut interest rates further than may be warranted. Fiscal easing and greater defence spending in Germany should support the euro.”

On the outlook for equities, Niamh Brodie-Machura, chief investment officer, equities at Fidelity International, singled out artificial intelligence (AI) as a macrotrend that “cannot be ignored” and with growth expected to continue into 2026.

“The changes brought about by new technology will be as dramatic as those of the internet in the 1990s, and in the US tech leaders we have companies with the ammunition necessary to deliver the scale of investment required. In a time of major industrial and technological upheaval, investors sense the opportunity for outsized gains. These can be made from backing the first movers, the leaders of the new or revolutionised industry, as well as the companies that provide this generation’s picks-and-shovels,” she said.

“However, the high levels of uncertainty about how the future will actually pan out put a premium on pinpointing the real winners. Many ideas, projects, and companies get funded and valuations have been bid up broadly, and not every company will end up generating the earnings and cashflow to justify it.

“If AI is beginning to work as a business model for more companies – as our analysts and the market valuations suggest – it will do so by delivering productivity gains. It is difficult to see that happening without some movement on corporate layoffs, of which there are already signs. More profits and more stock market gains are a positive story for the economy, but job cuts less so. In addition, consumer staples and discretionary may be only 21% of the S&P compared to 46% for tech and communications – but American consumers themselves account for nearly 70% of US GDP, so weakness in the US consumer would have multiple effects.”

Brodie-Machura also highlighted the importance of diversification heading into the new year, urging investors to consider untapped opportunities in real assets, currencies, and absolute return strategies.

“Heading into 2026, we see real substance and optimism in the fundamentals underpinning the market. We expect the mid-to-high single digit earnings growth of 2025 to strengthen into double digits across all of the major regions we look at in 2026. That includes IT sector profit growth of more than 20%. However, there is a need to diversify risk where many investors have examined their geographical allocations in light of geopolitical events in the past year. Any hiccups in the current generous growth expectations or from politics and policy, would support actual moves in capital,” she said.

“The case for Europe has strengthened considerably. Falling inflation, lower interest rates, and fiscal support all provide a supportive backdrop for corporate investment and consumer confidence. Aerospace and defence stocks are benefitting from the re-arm Europe trade. But European companies should not be seen as proxies for the region’s economy. They are global businesses with resilient balance sheets and proven growth profiles.

“China presents a compelling case for investors to take a fresh look, with an attractive combination of cutting-edge innovation, robust policy support and appealing valuations. China increasingly looks reminiscent of the US market in terms of its companies’ progress on technology and innovation – and the gap between the two is rapidly reducing.

“Yet the positioning is not crowded, valuations are low, and we expect to see the rising adoption of technology and artificial intelligence start to benefit the economy more broadly. Worries about the trade conflict with the US have also cooled and it’s clear that the government understands the importance of fiscal spending as a tool to reboot the market and the economy. Furthermore, the increased focus on ending blistering price wars can help corporate earnings inflect back to meaningful growth. Indicators of a broader bull market are clear to see.”

“Japan and Korea also stand out as sources of optimism. Japan is emerging from the staid years of low inflation and low interest rates. Wages are improving and consumer spending power is growing. Corporate governance reforms have fed the market too and helped spur a copycat process in Korea that is upending years of discount valuations and low dividend payments.”