2026: Entering a New Market Regime

In their outlook for 2026, Cyril Regnat – Head of Markets Research, John Briggs – Head of US Rates Strategy, Thibaut Cuillière – Head of Real Asset & Sector Research, Benoît Gerard – Rates Strategist, Emilie Tetard – Cross assets Strategist, and Nordine Naam – Forex Strategist, shared their views for the year ahead, highlighting how monetary policy shifts, supply dynamics and geopolitical uncertainty are redefining the investment landscape.

The U.S. rates outlook for 2026 is increasingly driven by structural considerations rather than near-term Federal Reserve decisions. With the market already priced for further rate cuts, conviction at the front end of the curve is limited. As a result, the focus shifts toward curve dynamics, where a steeper profile is expected to dominate across multiple horizons.

In the near term, steeper curves could emerge if rate cuts are delivered faster or earlier than currently priced, particularly if inflation proves sticky. Over the medium term, global spillovers from other sovereign markets – most notably the UK and Japan – are expected to remain an important source of pressure on long-duration assets. These spillovers are not new, but are likely to recur more frequently in a less coordinated global policy environment.

Over the longer term, the return of term premium reflects a broader regime change. The low-volatility environment of the 2010s, characterized by strong central bank forward guidance and high institutional credibility, is giving way to a period marked by greater macro uncertainty, geopolitical risk and policy unpredictability. Institutional factors also matter: risks around central bank governance and perceptions of independence have the potential to feed directly into long-end pricing, reinforcing the case for higher compensation for duration risk.

In Europe, short-term rate visibility remains strong. The ECB’s adjustment cycle is complete, anchoring the front end of the curve and reducing uncertainty around policy rates. At the same time, quantitative tightening continues to drain excess liquidity, shaping money-market conditions and gradually tightening funding dynamics.

Further along the curve, the dominant theme for 2026 is the evolution of term premium. Sovereign issuance is expected to remain elevated, with a growing share of longer-dated maturities. Combined with ongoing balance-sheet normalization by central banks, this places increased emphasis on the market’s capacity to absorb duration. Despite these pressures, the central scenario remains one of orderly absorption, supported by international demand and institutional investors.

Downside scenarios remain conditional rather than central. A sharp slowdown in the euro area labour market, underperformance in Germany, or a rapid euro appreciation driven by weak growth rather than capital inflows could prompt the ECB to signal renewed easing. Absent such developments, sovereign spreads are expected to remain broadly stable, with political risks contained in the near term.

Foreign exchange markets in 2026 are shaped by widening divergences in monetary and fiscal policy. Expectations for continued dollar weakness reflect slower U.S. growth relative to other regions, a more aggressive easing trajectory by the Federal Reserve and expanding fiscal deficits that may become more difficult to finance over time.

In Europe, the euro benefits from relative macro stability and a more neutral policy stance, while sterling remains vulnerable amid sluggish growth and ongoing fiscal constraints. Political uncertainty continues to weigh on sentiment, contributing to periods of volatility rather than a clear directional trend.

In Japan, short-term risks remain skewed toward further yen weakness, particularly in the context of political uncertainty and delayed policy adjustments. Tail risks cannot be ruled out, especially if global rates move higher. Over the medium term, however, higher domestic interest rates, balance-sheet normalization and shifts in policy communication are expected to provide support. Across emerging markets, currency performance is increasingly differentiated, reflecting local growth dynamics, commodity exposure and political developments.

Credit markets enter 2026 with valuations that remain tight across many segments, particularly when measured against longer-term historical models. Spreads are close to cyclical lows, leaving limited scope for further compression. At the same time, the technical support that underpinned performance in the previous year is expected to weaken.

Supply dynamics are central to the outlook. Corporate issuance is set to increase, driven by refinancing needs, M&A activity and funding requirements linked to large capital expenditure programs, particularly in technology and AI-related sectors. The key risk is not a deterioration in fundamentals, but rather the market’s ability to absorb this supply without repricing.

Within this environment, financials continue to benefit from strong asset quality and stable balance sheets, while non-financial high yield faces greater pressure from supply concentration and refinancing risk. The overall picture points toward greater dispersion across sectors and credit qualities, with volatility playing a more prominent role than in recent years.

The equities outlook for 2026 is anchored in a non-recession base case. Resilient growth, fiscal support and ongoing investment cycles provide a supportive macro backdrop, pointing toward moderate positive equity performance over the year, particularly relative to fixed income.

At the same time, structural risks warrant caution. Concentration in U.S. technology remains elevated, with high valuations, strong margin expansion and significant investor positioning creating vulnerabilities over the longer term. These risks are not viewed as near-term catalysts, but rather as factors that could weigh on performance as the cycle matures.

Diversification remains a key theme, especially for European investors who remain underweight domestic equities.   The significant political and geopolitical risks are reinforcing the importance of broad-based equity exposure rather than reliance on a narrow set of market leaders.

Finally, as risks are rising, and as traditional safe haven are challenged by inflation or debasement risks (for bonds and dollar), the use of liquid alternative strategies for equity protection is stronger than ever.

Across asset classes, 2026 will be defined by structural adjustment rather than cyclical repetition. Higher volatility, greater dispersion and the repricing of duration and risk are reshaping market dynamics. While visibility differs across markets, the common theme is a transition toward an environment where policy credibility, supply dynamics and diversification play an increasingly central role.