The base case for the year ahead is growing more positive after this week’s data leaned into a soft-landing narrative for the economy. And yet, the only thing that feels truly certain is the sheer range of ways growth, inflation, policy and geopolitics can wrong-foot a market already pricing in much of that optimism.
Markets are walking into 2026 with an almost eerie level of confidence. While December has brought losses for stocks and bonds, these are only modest. The S&P 500 is within 2% of all-time-highs, credit spreads are tight, and 10-year yields are within a recent multi-month range. Investors apparently see growth holding up, inflation gliding lower, and the Fed easing further into stability rather than desperation.
It’s late cycle in price action, given the gains since 2020 lows, but a restart in the growth narrative cycle. Equities are likely to keep grinding higher, credit should stay bid, and the consensus is that the macro backdrop and policy mix will remain structurally supportive.
Breadth is the new pillar of faith that risk appetite is standing on. Investors now believe the bull market is finally broadening beyond a handful of mega-cap tech stocks. Small caps are back in focus. The equal-weighted S&P 500 often outperforms the SPX. Value has pockets of life. Commodities, especially industrial metals, reflect a more bullish outlook.
The premise now is that there’s still equity upside, but the alpha is in rotation out of US mega-cap concentration and into the rest of the market and the rest of the world. It’s treated as so self-evident that the switch theme is starting to become self-fulfilling.
However, AI and relations between the US and China sit on top of all of this as a kind of grand macro narrative anchor. The market still trades on the basis that the AI investment cycle is only getting started. That will drive massive demand for data-center power and critical minerals to support the grid build-out. Hence copper, certain power markets and “picks-and-shovels” infrastructure plays are framed as structural longs, not just tactical trades.
At the same time, the US–China relationship turns that AI story into a full-blown great-power race. Beijing’s grip on refining and processing of critical minerals clashes with the US’s desire for tech dominance as much of the non-chip side of the AI capex buildout has significant China exposure. Markets are assuming that rivalry stays contained enough to sustain the trade but disruptive enough to ensure further policy moves to secure inputs for datacenters and subsequent power systems.
Putting it all together, the true non-consensus stance isn’t to fight the more positive macro narrative. The economic backdrop and policy setup still argue for a constructive view on risk. Instead, the challenge is to stay the course when the path gets more volatile in 2026. Much of this bullish outlook has been priced in. Whether it’s a further rotation into 2025 laggards, or a doubling down on AI exceptionalism, all of which falls under a growing geopolitical shadow, risk sentiment will continue to be jolted by spasms of doubt.
