Five macro themes tipped to shape markets in 2026
As an eventful year draws to a close, one team of economists predicts what will happen to financial markets in the year ahead. City writer Graeme Evans runs through them here.
2nd December 2025 13:32
by Graeme Evans from interactive investor
A forecast that the S&P 500 index will rise to 8,000 is among the calls of a leading consultancy after it highlighted the five macro themes that will shape markets in 2026.
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Optimism around the economic benefits of artificial intelligence (AI) has driven another stellar year for the leading US benchmark, which is up 16% so far in 2025 to last night’s 6,812.
Capital Economics believes that 2026 will bring further evidence of the transformative potential of AI, although the boost to growth is likely to be uneven and centered on the benefit to the US of the surge in capital spending needed to build AI infrastructure.
It estimates that AI added around half a percentage point to American GDP growth in the first half of this year, a trend it expects to underpin an above-consensus forecast for the US economy to grow by 2.5% next year.
Capital Economics added: “There is no question that equity valuations are high, especially in the US. But they are not yet as stretched as they were during the last tech-driven equities bubble in the late 1990s and earnings growth should remain solid.
“As such, we think equities can keep rallying for a while yet: we forecast the S&P 500 to rise to 8,000 by the end of 2026.”
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Elsewhere, the picture is less encouraging as AI adoption and associated investments have been slower to take hold outside the US.
This is one reason why the consultancy expects the continued underperformance of Europe’s economy, with its GDP forecasts for both the UK and the eurozone below consensus at 1.2% and 1% respectively.
This year has seen China close the gap with America in key areas of AI technology, yet its broader economy continues to be held back by deep-seated structural problems, according to the report.
Outlining its second theme for 2026, Capital Economics expects the country’s economy will remain stuck in low growth and deflation.
It points out that a model that continues to prioritise supply over demand has resulted in chronic excess capacity and persistently weak consumer spending.
It said: “Policymakers are pledging to address the problem, but the imbalance will remain a defining feature of China’s economy in 2026.”
On the theme of trade, the deal struck between Xi Jinping, the president of China, and US President Donald Trump at the end of October has removed the risk of further escalation. However, underlying tensions remain and the restrictions on global trade that were put in place in 2025 will not be dismantled next year.
The consultancy said: “In short, don’t expect a repeat of the fireworks that accompanied Liberation Day, but the political forces reshaping the global economy will continue to push the US and China further apart – and will direct patterns of trade, capital and technology flows throughout 2026.”
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The fourth theme concerns central bank policy, which in the US is likely to ease at a pace slower than investors are anticipating and President Trump is demanding.
Capital Economics sees one further reduction by the Federal Reserve after this month’s expected cut, which will leave the Fed funds rate in a 3.25-3.5% range.
It said: “This could bring the Fed into conflict with President Trump, who has been vocal in calling for lower borrowing costs.
“Our base case is that a change in Fed leadership in May will not fundamentally threaten the institution’s independence or trigger a major shift in policy, but it remains a clear source of risk.”
In the UK, it expects inflation to fall faster than both the Bank of England and markets anticipate and for interest rates to finish 2026 down by another percentage point at 3%.
Finally, the fiscal strains that rattled investors at various points this year will continue to stalk markets in 2026.
The report said: “Ultimately, we suspect that a combination of central bank rate cuts and a subtle increase in financial repression will keep government bond markets broadly anchored.
“But short, sharp sell-offs triggered by fiscal worries – similar to those seen in France, the UK and the US this year – are likely to be repeated at points in 2026.”
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