Gravity reasserts itself: why 2026 will reward selectivity

US assets enter 2026 with elevated valuations and unusually narrow leadership. Tariffs imposed in 2025 are likely to lift inflation in the first half of the year as higher costs filter through supply chains. At the same time, tighter immigration enforcement is reducing labour supply and weighing on potential growth.

For investors, the bigger issue is concentration risk. A small group of technology and AI-linked companies accounted for a disproportionate share of both earnings growth and equity returns in 2025. While artificial intelligence will transform productivity over time, much of the current investment wave is being funded with debt and rests on optimistic assumptions about asset lifespans and returns.

This does not argue for abandoning US equities. It does argue for greater discipline. Companies with strong balance sheets, pricing power, and credible returns on invested capital should fare far better than those relying on perpetual reinvestment to justify valuations.

China: Structural Strength Meets a Property Drag

China’s outlook remains challenging but nuanced. Growth is likely to slow further in 2026, yet the composition of that growth continues to improve. High-tech manufacturing has become a genuine source of global competitiveness, with Chinese firms gaining share in electric vehicles, renewables, and advanced manufacturing.

The persistent weakness in housing remains the key headwind. Falling property prices continue to undermine household confidence, which is unlikely to recover meaningfully without a stabilisation in real estate. Policymakers appear unwilling to deploy large-scale stimulus, viewing current growth as acceptable.

For investors, this points to a selective approach. Globally competitive manufacturers may offer value at depressed valuations, while sectors tied to domestic consumption and property remain higher risk.

Eurozone: Policy Support Creates Opportunity

The Eurozone enters 2026 with improving momentum. Inflation has fallen faster than in the United States, giving the European Central Bank greater flexibility to support growth if conditions weaken. Because a large share of household and corporate debt is floating rate, policy easing flows through more quickly to the real economy.

Fiscal policy is also becoming more supportive, particularly in Germany, where increased defence and infrastructure spending could lift growth over the medium term. Political risk and limited fiscal space in some countries remain constraints, but overall conditions look more constructive than in recent years.

From an investment perspective, European equities offer a rare combination of lower valuations, improving policy support, and more diversified earnings drivers than their US counterparts.

Japan: Reform Momentum Continues

Japan remains one of the more interesting developed market opportunities. Inflation has finally taken hold, wages are rising, and the new government is signalling support for fiscal stimulus and corporate reform. Policies aimed at improving capital efficiency and shareholder returns continue to strengthen the equity case.

The key uncertainty is monetary policy. The Bank of Japan is gradually tightening after years of extraordinary accommodation. While this creates some risk, slowing inflation may limit how far and how fast policy normalisation proceeds.

For investors, Japan offers exposure to structural reform rather than cyclical growth, making it a useful diversifier in a slowing global environment.

What This Means for Investors in 2026

The most important shift for investors is that US exceptionalism is no longer guaranteed. Non-US markets outperformed in 2025, and the underlying drivers of that trend remain in place. Lower valuations, broader earnings bases, and the potential for a weaker US dollar all support greater international diversification.

This is not a call to exit US markets. It is a call to rebalance risk after years of concentration. In 2026, returns are likely to be harder won and more sensitive to valuation, balance sheet strength, and capital discipline.