A potential productivity surge, stretched valuations, the prospect of Fed easing, and the trajectory of the US dollar are the four critical themes that will shape global markets in 2026, says Damien Hennessy, investment director at Zenith Investment Partners.
Mr Hennessy says that while recent US equity performance has been extraordinary, the path ahead depends on whether current enthusiasm for a tech-driven productivity boom against a backdrop of Fed policy easing eventuates.
“The US market is up 16 per cent year to date, following gains of 23 and 24 per cent in the previous two years. The last time we witnessed a comparable productivity surge was in the second half of the 1990s, which delivered five years of 20-plus per cent returns,” he said.
“There are clear parallels being drawn between that episode, which famously ended in the dot com bubble and burst, and now. That said, we may well be on the verge of a genuine boom in productivity.”
A significant boost in capital expenditure over the past 12-18 months, alongside a resilient consumer sector, have emerged as key factors determining whether a productivity boom eventuates.
In that scenario, Mr Hennessy says that strong corporate earnings could continue, helping to minimise inflationary risks as productivity gains allow for non-inflationary growth, which could result in an environment of steady bond yields and a steady Fed funds rate.
“This is a powerful scenario, but one that is more narrowly focused on the US tech sector. I see it as a narrative rather than an outcome at this stage, but if it eventuated, it would override concerns about valuations,” Mr Hennessy says.
“Our research places a productivity boom at a probability of around 30 per cent.”
Regardless, Zenith’s central forecast remains a soft-landing, which has largely transpired over the past 12 to 18 months.
“Our base case is a soft-landing, helping drive a rotation into other regions and market cap segments. If we see slower US growth and two to three rate cuts, we are likely to see further evidence of a global recovery,” he says.
“In an environment with a slightly weaker US dollar, emerging markets can do well, alongside Europe and Japan. We have already seen this broadening out over the past three months.”
Mr Hennessy says current lofty valuations are a minor factor in the short term, though are far more important when looking at returns over a 7–10-year horizon.
“If you were to look at valuations right now, you could reasonably argue that US equity returns over the next 7-10 years are likely to be in the very low single digits,” Mr Hennessy says.
“However, if the productivity surge materialises and corporate margins remain high, then US equity returns are more than likely going to be around 6-8 per cent.”
Mr Hennessy said geopolitical turbulence has been a key concern for markets since 2022, which is unlikely to change.
“Policy is polarised across countries and trading groups, and I don’t expect this to change any time soon.
“As investors, there’s little we can do other than continue to monitor situations as they unfold. This turbulence is one of the reasons why gold has firmed as an option for defensive assets other than bonds.”
On the US Dollar, Mr Hennessy challenged the view that the currency is on track for a major bear market.
“There was a consensus that it could go into a major bear market with a 20 per cent decline, but we aren’t of that view,” he says.
“The direction of the US dollar is critical for investors, particularly when making decisions about investing in emerging markets and whether to hedge currency exposure.
“It’s certainly at risk of some downside, but not to that extent.”
In terms of what could create headwinds in 2026, Hennessy highlighted two key risks: the Fed doesn’t cut rates, and AI-related corporate earnings and capex plans disappoint.
However, Zenith believes that although valuations are challenging in some markets and sectors, 2026 is shaping up as a year where a soft-landing should encourage investors to look beyond the US tech sector for opportunities in a broadening global market rally.
