Three big market themes to watch in 2026

As we approach the end of what has been broadly a positive year for investors, it’s time to look ahead to what might move markets in the year ahead. This article examines three key themes which could drive markets in 2026.

1. Will AI spread its wings?

In the last knockings of 2025, there has been mounting concern about a potential AI bubble, with fears valuations in certain areas are looking stretched. Whether the artificial intelligence theme continues to power markets ahead in 2026 or drag them lower is likely to depend on the extent to which the technology starts to prove its commercial worth.

Part of this may come down to the willingness of individuals and companies to pay for access to the chatbots powered by large language models, which have been the most visible real-world application of AI to date.

Investment bank Goldman Sachs has identified what could be a significant emerging development in artificial intelligence as businesses in less fashionable industries start to reap the benefits and that begins to show up in their earnings. As it points out, the basket of stocks it has identified do not trade on the sort of valuations seen among those with more obvious links to the AI theme. 

Relevant examples include banks being able to process transactions more rapidly and cost-effectively; retailers using AI to increase efficiency in logistics, operations and marketing; health care providers speeding up paperwork and data processing and restaurants employing automated drive-thru and kitchen functions.    

If this thinking proves to be on the money it could hint at broader productivity benefits from AI in the economy and a possible boost to GDP growth. 

The emergence of Google-owner Alphabet as a potential threat, thanks to the launch of its own custom AI chips, has seen shares in the erstwhile poster child of AI, Nvidia, come under pressure as its previous dominance of the AI semiconductor space is questioned. 

With Amazon also developing its own chips we could see an increasingly competitive market for artificial intelligence infrastructure. And a broadening out of the AI theme, while it could involve some turbulence, might be a healthy development for markets in the long run.

2. Inflation: under control or back out of the box?

Fears tariffs imposed by the Trump administration would result in a significant spike in prices have proved unfounded so far but inflation remains above central bank targets on both sides of the Atlantic.

Analysts at JPMorgan suggest an inflation shock is a possibility. “The risk for 2026 is that as activity gains momentum, workers start to feel more confident asking for higher pay and inflation does become a bigger issue. 

“We are mindful that economists generally have a poor track record of forecasting inflation spikes. The magnitude and persistence of the inflation rise that occurred in 2022, which proved so traumatic for both stocks and bonds, was not predicted by consensus forecasts.”

This is a key point. As the experience in 2022 illustrates, if inflationary pressures were to ramp up, it could be bad news for both equity and bond markets.

A key factor may be the appointment of a new Federal Reserve chair in May 2026. Incumbent Jerome Powell has attracted criticism from the Trump administration for being too slow to cut rates. The actions of the new chair and how close their ties to the White House are perceived to be could have an impact on inflation expectations and on the US dollar.

For its part, Morningstar plays down fears about political influence on the Fed: “While some investors worry about the erosion of Fed independence, the Fed’s commitment to inflation stability is deeply ingrained and is expected to endure any temporary political pressures.”

Whatever happens with inflation, the risks of overreacting to any volatility we do see next year are clear. Investors who sold out of equities during the tariff-inspired market correction in April 2025 would have missed out on the gains seen in the remainder of the year. 

Often the very worst days for the market follow the very best days. This is why, more often than not, time in the market beats timing the market and holding your nerve during choppy periods is typically rewarded.

3. Can UK stocks build on their recent success?

Despite an impressive showing for UK-listed shares in 2025, investors, both from overseas and these shores, continue to shun them as the fund flow data from Morningstar shown in this chart demonstrates.

If this longstanding trend were to reverse then it could prove a significant catalyst for the UK stock market in 2026 and beyond.

While the UK’s own economic outlook is far from certain, the FTSE 100 derives more than 70% of its revenue from beyond these shores. Morningstar notes the dividend yields on offer in the UK eclipse those in other G7 economies and valuations are considerably lower than in the US market. 

Plus, if AI does have a wobble in 2026 then the London market’s relatively limited footprint in this area could go from being perceived as a weakness to a strength.