- Inflation and interest rates should be constructive for most economies.
- Global trade is proving to be resilient.
- Three risks: First, a major correction in the US stock market, with global reverberations.
- Second, global bond market selloff.
- Third, an exacerbation of geoeconomic risks.
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Commentary: Three risks for 2026
The global economy took in a great deal of stress in 2025; but it is ending the year with much better outcome than expected. Fears that global trade and commerce will succumb to endless geoeconomic volatility unleashed by the US has thankfully proven to be wrong. All economies in South and South-East Asia are on track to have their exports rise substantially in 2025 over 2024, both to the US and the rest of the world. The key actors in the trade war, China and the US, are tracking economic growth rates much higher than forecast back in April.
The 2026 outlook is broadly constructive. Inflation is not an issue in most parts of the world, the US being an exception. Interest rates have been on an easing trend worldwide, with only Japan bucking the pattern. A major tech investment cycle is underway, and commodity supply-demand balance is favourable. Short of a few manifestations of shocks, another stable year lies ahead, in our view. But it is worth looking at a few scenarios under with this benign outlook can be upset.
First, a major correction in the US stock market. If companies that are leading the AI-tech wave begin to report a slowdown in earnings growth or the new US-developed AI models turn out be not superior to the made-in-China models that are much cheaper, there could be a major reckoning. Hundreds of billions being deployed to AI-infrastructure could prove to be excessive, warranting a re-rating of the value of the entire AI-investment complex. Given the disproportionate valuation of tech companies in the major US stock indices, and the disproportionate size of US stocks in global equity holdings, a sharp correction of AI-adjacent stocks will reverberate through global financial markets. It would hit the balance sheets of asset managers, sovereign and private, cast a chilling impact on investment and lending, and affect global consumer sentiment substantially. It is not clear to us if there are major systemic implications like there was during the 2008 global financial crisis, but even if the shock turns out to be of smaller magnitude than it was then, there would nonetheless be financial stability implications. Credit spreads of AI-related businesses would jump and electronics exports, especially semiconductors and servers, would likely collapse. US growth could fall to 1% or below in this scenario.
Second, global bond market selloff. Warning lights are aplenty, from record debt burdens in industrial economies to rising rates in Japan. For the US, sticky inflation, no progress toward fiscal consolidation, data issues, a propensity toward financial repression, and a steady erosion of Fed independence add up to rather worrisome mix. This could lead to short-term interest rate volatility and yield curve inversion, and like the equity market selloff scenario, have adverse ramifications for the global economy.
Third, an exacerbation of geoeconomic risks. There is no shortage of conflict flash points, ranging from Latin America to Europe to the Middle East to Asia. There is also no assurance that a flurry of late-year “deals” would pave the way for a stable trade environment next year. Like it or not, these risks will be omnipresent in 2026, in our view.
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