At the start of the year the market was buoyant on the hope that a Trump presidency would lead to more market friendly policies that would turbocharge the economy. However, Trump 2.0 appeared to be a different beast to his first incarnation with a more ideological streak that was intent on taking revenge on any country or person that he perceived had slighted the US. This ramping up of rhetoric increasingly concerned the market as the year wore on before culminating in ‘Liberation Day’ in early April where Trump announced sweeping tariffs across the globe that were both broader and larger than the market anticipated.
However, from that point markets then set off on what has been quite an extraordinary run driven by the boom in AI and the Magnificent 7 (M7) while the Trump Always Chickens Out (TACO) mantra continued to hold with most tariffs negotiated down to more manageable levels (or was this possibly the aim all along?). Geopolitics was a feature throughout the year with conflicts raging in Ukraine, the Middle East and other parts of Africa and Asia with Venezuela the most recent place to join this ignominious list. Despite this, and Trump’s penchant for policy by social media, markets have remained remarkably resilient and continued to move ever higher as the year progressed.
So what does all this mean for 2026? AI and the M7 are clearly the elephant in the room with valuations that are undoubtedly high, but they have been high for a long time and divesting from them purely on this basis would have been incredibly harmful to one’s performance. It is important to note that the M7’s earnings have kept pace with their share prices and they are, in our opinion, exceptional companies. Perhaps a bigger concern is whether they will generate a return on invested capital in AI but that is something that only time will tell. While we are conscious that an AI bubble may be inflating, we are inclined to think that we are still on the journey.
Looking at economies, we broadly see them in good shape with most developed markets cutting rates and the fiscal backdrop is also broadly supportive, particularly in the US. Geopolitics is always more difficult to call. The main upcoming event in 2026 is the replacement of Jay Powell as Federal Reserve chair. Any move by Trump to appoint a sycophant or erode the bank’s independence will likely unnerve investors and possibly crystallise a selloff. A longer term risk is a dovish Fed chair who cuts rates too much and too fast which eventually leads to a classic boom and bust style recession. However, the bust seems more of a 2027 risk at the moment.
We continue to be fully invested going into 2026 while continuing to see the benefits of diversification in portfolios. As an active manager we are naturally underweight the M7 albeit are not inclined to lean out further at this juncture. However, diversification by country, style and asset class are all increasingly important. Japan, emerging markets and Asia are now looking more attractive and we note that outside the US value outperformed growth this year. In our diversifying portfolio we have shifted more towards the carry trade and fixed income as real returns have become more attractive. We recognise that returns in 2026 are unlikely to be as high as we have seen in the last three years with higher volatility and a meaningful pullback possible, but we will continue to utilise our key strengths – our time horizon, our multi‑asset nature and our great managers – as we move into the New Year.
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