Despite worries about tariffs, government fiscal policy, geopolitics, and threats to central bank independence, financial markets have surged to fresh highs in 2025.
Investors have largely looked past the noise, encouraged by solid corporate earnings, loose financial conditions, and an apparently enduring belief in the potential of artificial intelligence.
The mood is unmistakably “risk on.” Yet beneath the surface, six key themes are emerging that could change that mood dramatically as we head into 2026. Let’s take a look at them:
1. Rising nationalism and fragmentation
The global rise in nationalism continues to reshape trade, policy, and investment flows. Countries are prioritising domestic resilience over global cooperation, and while this may strengthen supply-chain security, it comes at the cost of efficiency and growth.
This fragmentation is likely to place upward pressure on inflation and stifle productivity. The result – slower growth with persistent price pressures – raises the prospect of stagflation.
Central banks appear willing to tolerate inflation moderately above target. The emphasis has shifted from curbing inflation to supporting demand and employment.
2. Continuing tariff tension
Although trade tensions have eased since Liberation Day, the global trading environment is still fragile.
Revised trade deals have succeeded in softening the most punitive tariffs, but uncertainty remains. As inventories are depleted, supply chains shift, and companies attempt to pass through higher costs, inflation is likely to stay stubbornly sticky.
Firms are understandably cautious about committing to large-scale capital expenditure or hiring, and that could slow productivity and investment growth in 2026.
3. A fragile US labour market
The US labour market has been remarkably resilient, but the cracks are beginning to show. Many companies have paused their hiring while they see how economic conditions evolve.
If corporate profits come under renewed pressure, job growth may contract, and unemployment could rise, threatening household spending.
Any softening in consumption would heighten the risk of a mild recession, particularly if consumer confidence weakens or debt-servicing burdens rise in an elevated interest-rate environment.
4. The Fed's independence
Pressure and interference from the White House are threatening to undermine the Fed’s independence, and that’s a quality essential to market confidence.
If investors perceive that monetary policy is being guided by political rather than economic considerations and confidence in the Fed’s autonomy erodes, we could see a weaker dollar, with all the implications for global capital flows and asset allocation that brings.
5. Step forward, EU and China
As the US contends with political and economic noise, other major economies are stepping up. Both the European Union – led by Germany – and China are pursuing fiscal-stimulus programmes to drive domestic growth.
In Europe, rising defence and infrastructure spending is designed to boost productivity and economic self-reliance.
In China, policy is shifting toward consumer-focused incentives and re-industrialisation, with more advanced manufacturing investment aimed at raising total value add as well as long-term efficiency.
These efforts suggest a gradual convergence in global growth rates, which is expected to broaden investment opportunities.
6. AI goes global
While the US remains the clear leader in AI investment capex, the speed and scale of that investment are beginning to attract scrutiny. Investors are increasingly questioning whether returns can keep pace with expectations.
Meanwhile, the benefits of AI are spreading. China, in particular, is playing the long game. Its dominance in the supply of rare earth metals, essential for the production of advanced technologies, defence systems, and renewable infrastructure, means that the US doesn’t hold all the cards.
So what for investors?
In navigating the risks and opportunities of a fractious geopolitical landscape – slower global growth and a wider range of potential outcomes – the case for building portfolios around prudence, discipline, and diversification is stronger than ever.
Alternative assets, including infrastructure, real estate, and defensive strategies, can provide portfolio ballast against macro volatility. Maintaining a disciplined and balanced approach favouring quality will be critical.
For now, markets remain optimistic. Earnings have held up, liquidity is plentiful, and AI continues to inspire confidence in future productivity gains. Yet with nationalism rising, supply chains in flux, and policy risks mounting, investors would do well to temper optimism with a hint of caution.
2026 may still reward risk-taking – but only for those who stay diversified, disciplined, and prepared for volatility.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.