Interview
Will US Stocks Outperform in 2026?
- U.S. equities are projected to return 7% in the base case for 2027, underperforming emerging markets (excluding China) at 8% while outperforming non-U.S. developed markets at 6%; long-term U.S. equity returns are estimated at 6% over the subsequent five years, with earnings growth expected to significantly outpace non-U.S. developed peers.
- Global economic trends forecast U.S. trend GDP growth reaching 2.4% by 2035, driven by AI contributing 0.4%, contrasting with China's projected decline to 2%; conversely, rapid price increases in non-U.S. developed and Chinese equity markets are deemed unsustainable due to earnings divergences.
- Portfolio strategy recommends a tactical tilt toward emerging markets excluding China, with specific interest in South Africa, India, and Mexico, while broad S&P 500 exposure is preferred over a concentration in the "Magnificent Seven" for 2026.
- AI-related risks include "enormous" short-term productivity impacts and job losses, alongside hype and bubble-like features in private markets such as vendor financing and easy credit, though these are not expected to statistically hinder S&P 500 returns due to natural index rebalancing.
- Asset allocation outlooks suggest U.S. Treasuries remain the most reliable hedge for U.S. assets, U.K. treasuries outperform gold in deflation, and neither gold nor Bitcoin serve as effective long-term strategic hedges due to lack of cash flow generation and incomplete inflation hedging.
- Market fundamentals support sustained valuations with expected recession incidence dropping to 8% post-1992, allowing for higher multiples; high equity valuations are not expected to trigger mean reversion within one to five-year horizons, and private asset returns are projected to trail mid-teens, settling only slightly above the S&P 500.
- Currency depreciation in emerging markets is not anticipated to persist as a significant headwind, and a price floor for gold is expected to exist as long as Chinese central bank buying continues, despite valuation concerns.