Quick Bites | What are the Big Risks in 2026?

As we approach the end of 2025, we have a brief review of the current fundamental issues around capital markets, as a base for 2026. Let’s focus on the leading economy, the US. The US Manufacturing PMI Index is still in a rising trend, but slightly below the 50 neutral level, while the Services PMI Index is in a rising trend above the 50 neutral level. As the latter makes up a much larger part of the economy, on this basis it seems the US economy is stable and slowly expanding.

US consumer confidence (as reflected in the Conference Board Consumer Confidence Index) is dropping and is currently slightly below average. Despite this, Retail Sales are accelerating, currently growing at +4%.

The picture in Australia is somewhat complicated by the recent spike in inflationary pressures, which limit the opportunity of the Reserve Bank to continue with its run of interest rate cuts. Australian corporate earnings have been tepid at best, and it is no surprise that the ASX 200 Index has dragged the chain compared with its developed market counterparts in its year to date performance.

Back to the US, which is the bellwether for global capital markets. S&P 500 companies reported excellent Q3 results (revenue +8%, earnings +13%). Consensus expectations for the coming year’s earnings growth have been in a rising trend since June, currently at +13-14%. With share prices generally following earnings, this is a positive backdrop.

Apart from absolute valuation multiples (e.g. P/E ratios), relative valuation multiples that investors are willing to pay for their asset class are a key indicator of their confidence in the economy and corporate profitability.

There are good reasons for the high investor confidence. A further point is that there is low correlation between valuation levels and the next one-year returns – it is more about fundamental issues than valuation levels.

However, the risk is that investors are too optimistic, and that corporate earnings do not deliver on lofty expectations. High investor confidence is based on the strong delivery of corporate earnings to date, and on the fact that the world economy keeps growing and recession fears never materialised. But confidence does not protect from negative surprises.

From a shorter term perspective, the CNN “Fear & Greed Index” (a compilation of 7 equally weighted indicators that measures aspects of stock market behaviour) has recovered from an 11 reading to the current 31 reading. This puts it in the Fear category. This category, along with the direction of travel, is technically showing more good reasons for optimism than pessimism.

Source: CNN

What negative surprises to be fearful of in 2026?

Source: BCA Research

According to BCA Research and a survey of its clients (global fund managers), a bursting of the AI bubble is viewed as the top threat to markets heading into 2026. Other risks, such as sovereign debt, geopolitical shocks, and recession, lagged far behind. In their latest weekly poll, half of respondents viewed AI as the top threat heading into 2026.

BCA argues that the AI capex boom is increasingly reliant on private-credit financing, making the system more fragile if funding tightens. They see higher odds of an “AI Winter” appearing over the next 1-3 years if capex slows and productivity gains fall short of what equity markets have priced in. For now, AI is still the market’s biggest opportunity and its most acute vulnerability.

Second in the list of concerns is a sovereign risk scare. This is not surprising considering the recent spike in global bond rates and the number of advanced and emerging economies struggling under the burden of growing fiscal pressures.

Next come the risks of geopolitical shock and further down the list global recession. It all makes for interesting reading, but the truth is that no-one has a crystal ball telling them what the future will be. Stay well diversified, be cautious of blue sky promises, and try stick with quality. During periods of expensive valuations, it is better to avoid chasing the latest market fad and ensure that you have a seat available when the music stops.