2026 Investment Markets Outlook

2025 proved to be a strong year for markets amidst uncertainty, as many asset classes delivered returns that far exceeded their long-term historical averages. This period stands out not only for the magnitude of the gains, but also for the pronounced differences in performance observed across various regions - the most notable dispersion since 2009. Unsurprisingly the journey itself was interesting. The critical drawdown periods were linked to US mega cap names coming under pressure from Chinese competition, and the actions of the new Trump administrations protectionist shift in trade policy. The release of the AI platform DeepSeek sent shockwaves through the industry, demonstrating how close the Chinese tech sector is to the technological frontier - and doing so at a fraction of the cost, using a collection of supposedly inferior chips.  

The market reaction to the ‘Liberation Day’ announcement on the 2nd April 2025 was sharp but short-lived, as a series of policy U-turns from the Trump administration quickly followed. Within equities, the US market experienced the largest drawdown, with the S&P 500 declining by nearly 18% in GBP terms. This episode also prompted a reassessment of how a more hawkish trade stance might affect US assets. As the narrative of US exceptionalism was challenged, 2025 saw a rotation out of US assets unfold over the year. Naturally this has led us to reflect on valuations – a theme explored in Section 1.

As we move into a new year, we consider some key questions and talking points:

(1) Valuations: What’s the message for markets?

Markets had a strong 2025, but much of the gains came from higher prices rather than improving fundamentals, suggesting more modest returns ahead. While positive momentum can continue for a while, expensive markets often lead to lower returns over the medium-term. It’s sensible to stay cautious given ongoing global uncertainties.  

Valuations remain central to our thinking: higher yields support bonds, but fading rate tailwinds and tight credit spreads limit upside, while expensive equities typically imply softer long-term returns. With our outlook slightly softer but still aligned to long-term averages, the priority is to stay diversified across regions and asset classes and avoid over-concentration in areas that look expensive, as fundamentals – not short-term momentum – will ultimately drive performance.    
 

(2) Technology: Is AI still powering markets?

Artificial Intelligence (AI) accelerated sharply in 2025, led by Hyperscalers and Nvidia, boosting productivity expectations and supporting equity valuations. But questions over energy capacity, regulation and US-China tensions highlight that the pace of adoption may not be sustainable.  

AI has made tech companies far more capital-intensive, and valuations now rely on continued rapid uptake across the ecosystem. Any slowdown could trigger a sharp repricing, affecting both public and private markets. While long-term productivity gains remain compelling, the investment required highlights both opportunity and risk, particularly around power and cooling capacity.   

We remain positive on AI’s long-term potential but are mindful of near-term pressures. Our portfolios maintain technology exposure while avoiding excessive concentration in US mega-caps. The aggregate exposure is in a similar ball park to peers, but we are significantly less concentrated in US Tech with a more diversified approach across regions such as China, Taiwan and South Korea.  
 

(3) Dollar Weakness: What happened and why it matters

The US dollar had its weakest year since 2017, falling nearly 10% in 2025 driven by tariff uncertainty, Federal Reserve political pressures and a prolonged government shutdown.  

A softer dollar boosted emerging-markets assets, with Emerging Market equities and bonds delivering strong USD-based gains, while commodity producers benefited from supportive pricing. Currency cycles tend to be long-lasting, and structural factors such as fiscal concerns and reserve diversification suggest weakness could extend into 2026.  

For investors, this environment reinforces the value of global diversification. Emerging Market exposures have been rewarded, though a weaker dollar also raises US inflation risks and could add policy-driven volatility ahead.  
 

(4) Inflation Risk: Why it’s back on the radar  

Inflation pressures persist. A more accommodative 2026 backdrop and new spending stimulus support markets - but risk fuelling prices. US and UK inflation remains sticky, slowing rate-cut plans versus Europe. Further Fed easing is possible, but rising debt and borrowing costs complicate inflation control.  

Tariffs, a weaker dollar and supply constraints add to price pressures, keeping US inflation risks elevated despite weaker growth. Inflation will stay a key driver of policy and market volatility.   

In recent years, the landscape of economic and capital market cycles has experienced notable changes, and in particular the movement away from an extended period of near zero interest rates towards a more 'normalised' interest rate environment.

The move away from historically low rates created distinct challenges for public markets, particularly in 2022, as investors and institutions adapted to the new dynamics. Subsequently, private markets have also experienced notable pain points, with the impact becoming especially pronounced from 2023 through to 2025.
 

What does this all mean for investors? 

As we enter 2026, whilst much of the impact of this adjustment to the interest rate environment appears to have been absorbed, we see a few key takeaways for investors.  

• Valuation aware - avoid concentration in expensive markets or single themes, and over the medium-term fundamentals will matter more than short-term momentum.
• Multi-Layered diversification - Diversification remains a core tenet, and this cuts across different regions, asset classes and also sectoral mixes. For example, whilst there is no ignoring the strength of US technology companies in recent years, however, there are companies in other parts of the world in the technology stack that also offer high growth but at a lower price per unit of expected growth and so we see benefit in maintaining that balance.
• Add resilience - consider strategies and assets that provide exposure to independent sources of returns, which would do well in environments where traditional asset classes struggle. Safe haven assets are important but even within developed market government bonds it will be important to be diversified. 

Our range of funds offer globally diversified portfolios, well placed to capture reward and manage risk for your clients in 2026. 

[Source: Long-Term Investment Strategy Team, M&G Life Investment Office – PruFund Growth Fund 2025 Strategic Asset Allocation]

PruFund Global Diversification

This content has been prepared by M&G Life Investment Office (LIO) for information purposes only and does not contain or constitute investment advice. Information provided herein has been obtained from sources that LIO believes to be reliable and accurate at the time of issue but no representation or warranty is made as to its fairness, accuracy, or completeness. The views expressed herein are subject to change without notice. Neither LIO, nor any of its associates, nor any director, or employee accepts any liability for any loss arising directly or indirectly from any use of this document. The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back less than the original amount invested and past performance information is not a guide to future performance.  

‘M&G Life Investment Office (LIO)’ includes the team formerly known as Prudential Portfolio Management Group (PPMG), Prudential Portfolio Management Group Limited, is registered in England and Wales, registered number 2448335. 

The Long Term Investment Strategy team, part of the Investment Office at M&G Plc, sets the Strategic Asset Allocation for internal client savings and investment products as well as providing various economic scenarios and modelling for M&G Plc. As part of this, we regularly review our asset class views and their sensitivity to economic and capital market developments, the philosophy and framework. This publication presents our outlook over the medium term and touches on some of the major themes that are currently influencing our asset allocation thinking.