Fathom Market Outlook 2026

Economics

The global economy is expected to experience solid, resilient growth in 2026, though it will be uneven. The consensus forecast for U.S. GDP real growth in the coming year is 2% to 2.5%, supported by fiscal spending, tax benefits, and a strong capital expenditure cycle, particularly driven by AI investments. U.S. core inflation (PCE) is projected to continue easing, potentially falling to 2.3% by year-end. Central banks, including the Federal Reserve, are expected to implement additional rate reductions in 2026, with the pace driven primarily by a cooling labor market. While not a base case, the risk of a rapid uptick in unemployment in the first half of the year could prompt a more aggressive easing cycle.

Growth in the Euro area (1.2%) and China (4.8%) is anticipated to be solid, with our China's outlook more bullish than consensus due to ongoing policy stimulus. The environment will be characterized by a K-shaped recovery, where economic growth is not uniform across income groups or sectors.

Geopolitical rivalry has fueled a shift toward state-sponsored capitalism, where fiscal stimulus has become permanently procyclical. This paradigm shift means fiscal dominance is now present in most developed economies. In the context of fiscal dominance, interest rates and inflation targets are increasingly becoming political choices. Debt sustainability (with global debt above 235% of global GDP) is feeding into the new 'neutral' interest rate equation. Despite government debt pressures, structural forces (ageing demographics, digital disruption) remain deeply entrenched, exerting long-term disinflationary pressure in developed economies.

Geopolitical shifts, fiscal dominance, and political dysfunction are significant sources of market complexity and risk, demanding active risk management. Volatility is expected to increase, particularly as the full impact of AI on growth and corporate spending becomes clearer. Global fragmentation has intensified as national interests supersede global alliances, marking a shift from U.S. dominance to an increasingly multipolar order.

This shift has been accelerated by trade tensions (e.g., the 2025 U.S. tariff campaign). The observed outcome is strategic reshoring rather than outright deglobalisation, with supply chain rebalancing limited mainly to sectors critical to national security, such as IT and energy.

The result is that political and geopolitical forces will increasingly overshadow market signals, leading to heightened macroeconomic and financial market volatility. This fundamentally reinforces the case for global portfolio diversification.

Currency and Commodities

A trend of slow depreciation in the US dollar (USD) is expected in 2026, though this trajectory is subject to significant crosscurrents.

Structural Negative Factors for the USD:

·      Twin Deficits: Persistent US twin deficits, with a budget deficit expected at 5.5% and a current account deficit of 3% (albeit down from 3.9% in 1H25). This contrasts sharply with major competitors:

Eurozone: Current account surplus of 2.7% (budget deficit 3.2%).

Japan: Current account surplus close to 4%.

China: Current account surplus at approximately 2%.

• Central Bank Divergence: The trend of Fed easing is out of step with the ECB being "on hold" and the BoJ tightening.

• Market Overhang: The foreign investor "overhang" in US fixed income and equity markets, coupled with investor concerns over US credit markets and the high valuation of US equities compared with non-US markets.

• Political Risk: The question of Fed independence remains an investor concern.

  
  

Key Counter Arguments (Supporting the USD):

·      Growth Differential: The US maintains a real growth differential (US at 1.5%-2% vs. Japan <1% and Eurozone slightly >1%).

·      Yield Differentials: Bond yield differentials will likely remain USD positive (US Treasury/Bund spreads at 130 bps and JGB spreads vs US Treasuries at 210 bps).

·      Political Risk in EU: Potential deterioration of EU political developments could discourage investor flows into the Euro.

In commodities Industrial metals are favored for performance due to tight supply conditions meeting strong demand from manufacturing and industrial construction. Gold is expected to continue attracting strong flows as a hedge against macro uncertainty and a weakening dollar, but the bulk of outsized gains is behind us. Oil will continue to be suppressed by sizable inventories and unfavorable demand/ supply dynamics.

Rates and Credit 

We expect solid but lower returns in fixed income markets in 2026, as yields trend lower and there is less scope for major central bank rate cuts.

• The bulk of returns will likely come from coupon income rather than price appreciation.

• Resilient economic growth and persistent inflation pressures are factors that may limit the drop in yields.

• The overall environment is supportive for bond investors due to a bias toward easing, positive real interest rates, and steepening yield curves.

  
  

The fixed income strategy should focus on active management and diversification to navigate the complex rate environment. U.S. core inflation (PCE) is projected to continue easing toward the end of the year. Wage increases and inflation are expected to remain moderate, giving the Federal Reserve (Fed) room to lower interest rates. The Fed is expected to implement additional rate reductions, another 1 or 2 cuts in the first half of 2026. The Fed is expected to err on the side of being too loose, given the fear that stagnation in job growth could lead to a recession and, due to high debt levels, escalate into a credit crisis. A phase where interest rates will gradually rise again is expected to begin after the first half of 2026. Rate hikes by the European Central Bank (ECB) are not likely until 2027.

The 10-year Treasury yield is projected to end 2026 in the 4-4.25% range, with risks weighted toward the downside. Ten-year US and German government bonds are expected to move sideways for some time before a new upward trend begins. The German 10-year government bond yield is expected to fluctuate between approximately 2.6% and 3% for the time being.

• Long-duration bonds are favored in the first half of the year.

• A strategic overweight is advised for short-term inflation-linked bonds.

• Nominal bond exposure should favor developed market government bonds outside the U.S. due to higher fiscal sustainability.

  
  

Corporate balance sheets are generally strong, with recent credit events viewed as localized. Credit spreads are currently very tight, making significant further tightening unlikely.

·      Fixed income investors should focus on high-quality-credit issuers.

·      While high risk credit like HY and private credit returns are projected to be lower in 2026 (estimated 5.4%) compared to 2025 (9%), a preference is advised for High Yield (HY) credit over generalist private credit offerings. The later are facing big allocation calls into dubious datacenters investments, the premium over IG doesn’t compensate for the illiquidity at this point and are mostly floating rates loans in a falling rates environment.  

Equities

 U.S. equities are supported by the AI theme and expected rate cuts. The S&P 500 is forecast to see a fourth year of gains, but with a higher dispersion of returns among sectors. Shares are trading at historically elevated valuations due to strong anticipated Earnings Per Share (EPS) growth of 14%. The outlook for shares is positive on balance, but is largely priced in.

The Innovation Super Cycle (AI, clean energy, life sciences) will create new winners and disrupt incumbents. AI remains the fulcrum of market narratives and corporate investment, though its payoff is anything but straightforward.

The risk of bubble-like instability in core U.S. tech needs to be monitored, though the AI investment cycle itself is expected to continue driving CapEx.

The equity market is expected to broaden out, favoring cyclical sectors and opportunities outside of the highly concentrated U.S. mega-caps. We prefer EU mid-caps outside France and Emerging markets over non profitable US tech.

• Emerging Markets (EM) are expected to outperform Developed Markets (DM), supported by a weaker dollar, favorable macro conditions, and FX tailwinds. Low-beta markets and beneficiaries from lower rates like Brazil are noted as potential outperformers. Specific attention should be given to India and China for long term investment opportunities.

• Specifically for China, it remains in a balance sheet recession but is executing a pivot to engineer a sustainable equity bull market. Policymakers aim to shift household savings into equities and prioritize the consumption of services over goods (healthcare, finance, leisure) to rebuild wealth and restore consumer confidence.

• Within DM, Japan is highlighted as offering compelling returns due to corporate reforms and the return of inflation. We keep a cautious stance due to heightened FX risk implications but acknowledge the value proposition.

Alexandros Tavlaridis

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