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Good morning. Below are my first batch of 2026 predictions. As I say every year, when it comes to markets, I’m not proud of my own powers of prognostication nor particularly impressed by anyone else’s. But I think predictions are a great tool for provoking debate about where we are right now, and for holding ourselves accountable for what we think we know. If you think I am wrong about the below, or have an unrelated prediction of your own, email me: unhedged@ft.com. 

Five big questions and five reckless predictions for 2026

Which is sending the right signal about the US economy: sturdy GDP growth or the wobbly labour market? GDP. The only theory that reconciles soggy job creation with strong real GDP growth (more than 4 per cent in the third quarter) is that ageing demographics and lower immigration have combined to constrain labour supply and decrease the break-even rate of job creation. Low initial jobless claims and a high and steady prime-age employment/population ratio both reinforce the theory. Profit growth is strong. Business investment is robust. Household balance sheets are healthy. The US economy is fine, and barring an accident (such as a bursting bubble or a leap in inflation, see below), fiscal and monetary accommodation will keep things rolling for the rest of the year.  

Will US stocks trail stocks in the rest of the developed world, as they did in 2025? No. Even setting aside the weakening dollar, Europe and Japan both whipped the US in 2025. It won’t happen again. The historically large valuation discounts enjoyed by those markets have narrowed to near their historical range:

A US sceptic might look at that chart and note that the Europe and Japan discounts are still wider than they were before 2021. But there is good reason for the gap to be wider now: tremendous earnings growth in the US, driven by its world-beating big tech companies. If you compare valuations in Europe and Japan to the equal-weighted S&P 500, which helps adjust for this earnings growth differential, the discounts look historically normal, even a shade low:

(Yes, I know, the correct comparison would use the equal-weight version of all three indices, but I don’t have equal-weight valuations for Japan and Europe, and the above is close enough, I think). Assuming there will be no more catch-up on valuations, the race comes down to earnings growth, and the US will win.  

Are we in a US stock market bubble and is it likely to burst? Yes, we are and no, it’s not. I can do no better than John Plender did recently in the pages of the Financial Times at explaining why we know we are in a bubble. And the valuations of stocks tell the tale pretty well on their own. Using my favourite broad metric, Robert Shiller’s cyclically adjusted earnings yield, we are well into the territory of 2006 and the late 1990s. I believe US stock market returns over the next 10 years will be below average, and that the below-averageness of those returns will arrive in the form of one or more big nasty drops.

(And by the way: the bubble is not restricted to artificial intelligence or tech. Think Microsoft is expensive at 28 times forward earnings, with 23 per cent expected earnings growth in 2026? Well, try Walmart at 40 and 13 per cent, Costco at 42 and 11 per cent or Mastercard at 31 and 16 per cent. Everything is expensive.)

But (as everyone knows) you can’t exit the market and wait for the crash, because you can’t time it, and the returns lost by refusing to participate can easily be greater than the losses avoided by being high and dry when the storm hits. All you can do is diversify with cash and bonds, to a degree determined by your return requirements and risk tolerance, and hang on (I’m quite conservative; I have about 10 per cent of my savings in cash and another 20 per cent in diversified bonds). Could the bubble burst this year? Sure. Is the probability greater than, say, one in five or six? I would bet not. 

Will AI euphoria cool? Yes. This is my favourite kind of prediction: the kind that “predicts” something that is already happening. The market is already applying discipline to Big Tech stocks according to whether their AI investments can be financed with cash flow rather than debt, and whether they are backed by sensible business models. Witness the poor recent performance of Oracle and Meta. Meanwhile, shares in AI hardware darlings Nvidia and Broadcom have been heading broadly sideways for months. That doesn’t mean an AI meltdown is coming, but there is a faint but astringent smell of realism in the air. 

What’s the biggest risk? Inflation, by a mile. A big step higher in inflation is probably unlikely — inflation seems to be moderating slowly now, and we will soon lap the “liberation day” tariffs — but could be devastating. It would take the universally anticipated rate cuts off the table and make debt harder to bear, hastening the inevitable washout in the private credit industry. It would make fiscal accommodation dangerous. If the 10-year yield, despite the best efforts of Scott Bessent, rises above 5 per cent for more than a few weeks this year, all of these predictions are in the bin and I’m turning bearish. 

One good read

Just lucky, I guess.

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