Guest opinion piece from Aviva
No one can predict the future. But Aviva’s House View sets out the collective wisdom of their investment teams on the current state of global markets – and where they might be heading.
The big picture
- Global growth is expected to rebound in 2026 as tariff headwinds give way to fiscal, monetary and investment tailwinds
- AI-driven capex is set to surge, boosting growth but adding volatility and risks to equity and credit markets
- Inflation should converge to target in 2026, but upside risks remain for 2027, leaving us neutral on duration
- Diversification ideas include modest dollar underweights and long gold
Cross-asset returns have been remarkably solid in 2025. The market disruption caused by US tariffs and other global geopolitical events this year proved to be short-lived. And while much of the hype has been on the growing AI theme, returns have been even better in previously less-loved corners of the market, such as European banks. Meanwhile, the more speculative behaviour has been seen in assets like gold, which has had its best year since the 1970s. Looking ahead to 2026, we think the macro backdrop should improve over the year. We expect the headwinds to US and global growth coming from tariffs are likely to be at their worst around the end of 2025 or early 2026. There are then a host of tailwinds that should support a revival in growth through the year. These include: lagged impact of easier monetary policy; modest global fiscal boost; rising business investment from both tech and more traditional cyclical sectors; rising disposable real incomes for households. We think that ought to provide a constructive backdrop for risk assets as we head into 2026 and prefer to be overweight equities.
Monetary policy easing cycle nearing an end…but AI-thematic still has room to run
As we look further ahead through 2026, we expect most central banks to end their easing cycles by mid-year, with rates around neutral and underlying inflation converging to target. With little spare capacity likely to have been created, our growth view for H2 2026 could see some markets move to price in a modest move higher in rates. So long as that is driven by stronger demand, we don’t think that derails risk asset performance. However, the market’s patience around vast AI-related capex spend might start to be tested later in 2026, as visibility improves on earnings and return on investment. The increasing shift to financing AI capex spend via capital markets, rather than retained earnings, could also bring some indigestion to the corporate bond market.
Near-term downside labour market risks remain
In the near term, we wait for the data vacuum left by the US government shutdown to be filled, albeit only partially at first. In our last House View we discussed at some length the downside risk from a more rapid deterioration in the US labour market. While some private indicators have suggested that layoffs may have picked up, other private survey-based measures have not deteriorated further. The employment situation in September gave a mixed picture, with payrolls recovering, but unemployment rising. We will need to see more official labour market data to be confident that the downside risk has either passed or been realised. If the risk has indeed abated, then the scope for further rate cuts from the Federal Reserve will be limited. However, if it has been realised, we would expect to see more delivered than the market currently has priced. The distribution of outcomes remains quite wide.
Growth recovery expected, with AI‑related capex set to expand further
Looking out to 2026 and 2027, we expect global growth of around 3 per cent in each year, a little lower than in 2025. However, the calendar-year averages mask the extent of the recovery we expect in global growth, with quarterly growth compared to a year earlier in both advanced and emerging market economies expected to bottom in Q4-2025 and rise through to Q4-2026. We think AI-related capex spending could become an increasingly important global driver of business investment. The major US “hyperscalers” are expected by analysts to increase their capex to around $500bn in 2026, over three times their level of annual capex prior to the arrival of ChatGPT and other Large Language Models (LLMs). While the hyperscalers are expected to represent the bulk of AI-related investment over the coming years, we also expect investment across the major adopter industries (e.g. financial and business services) and supporting sectors (e.g. utilities and industrials) to rise as business practices are transformed and as demand increases.
Overweight US equities, underweight US corporate credit
That said, the AI thematic carries its own set of risks to the market outlook. As we have already highlighted, the return on investment will need to become clearer, with the adoption and embedding of AI into business practices key to delivering on that expected return. While initial data suggests robust returns by adopting firms, this is largely based on anecdotal evidence and visibility remains low. Hence, risks to return on capital are likely to add to equity and credit market volatility in the year ahead. We look to hedge out some of our equity overweight with an underweight in corporate credit, in particular in US investment grade. We also see potentially growing pockets of risk in private credit. The rapid growth in recent years has potentially led to weaker underwriting standards in some segments. Recent defaults in private debt funds that have engaged in inventory financing have raised questions of opacity, in particular given the growth in US bank lending to Non-bank Financial Institutions (NBFIs). At this time, we do not think there are material systemic risks, but we are closely monitoring the space for connections back to the banking and insurance sector in the US.
Inflation converges to target, but upside risks in 2027
We expect slightly different inflation dynamics across major economies in 2026. In the US, the full impact of tariffs should pass through into inflation by early 2026 and keep measured inflation above target throughout the year. As tariff-related effects start to drop out towards the end of 2026, we may start to see some underlying inflationary pressures start to emerge as growth picks up. In the Eurozone, we expect core inflation to remain around the 2 per cent target, while in the UK the current elevated inflation rate is expected to slow more markedly through 2026 to end the year around 2 per cent. While that represents a relatively benign global inflation outlook, we see potential upside risks emerging as spare capacity is eroded with pressures potentially re-emerging in both goods and services inflation.
The growth and inflation backdrop leaves us with a neutral view overall on duration.
Equity-bond correlation to remain unreliable
A feature of post-Covid market dynamics has been the breakdown in the correlation between short-term returns on equities and bonds. For much of the prior 20 years, there had been a consistent negative correlation, with government bonds acting as a helpful diversifier during periods of equity market sell-offs. However, with the emergence of supply-side shocks and rising bond market volatility, the correlation moved decisively positive. The Fed cutting cycle has seen somewhat of a reversal again in the correlation, but we expect it will be unreliable other than in the more serious downside market stress environments. That heightens the need for alternative diversifiers, and in previous episodes of market stress long US dollar positions might have benefited. However, we also see that as unreliable in the current set-up, with the cyclical downside risks in the near-term most acute in the US and the structural drivers of the dollar weakening (as discussed in the previous House View). As such, we prefer to be modestly underweight the dollar against a mix of euro and Emerging Market currencies. While not part of our formal asset allocation process, for those who can access it, we also like to be long gold as a diversifier.
Learn more
Download a copy of Aviva’s House View report here
