2026 Macro Outlook: Just the FACTs

15 minute read

As we look ahead to 2026, the same “FAT” forces that shaped markets in 2025 – supportive fiscal policy, fast-moving AI developments, and shifting policies under President Trump – continue to be key drivers of the global outlook. 

These forces may run the economy especially hot in the first half of the year, with front-loaded fiscal support, continued strong AI investment, and a stimulative Trump agenda ahead of the midterm US elections. A key difference in the year ahead: China’s economic path. Stabilisation there could have a bigger sway on global growth, inflation, and markets than it did last year.

In this month's CIO Insights, we lay out the “FACTs” and detail how these dynamics could shape the macro and market environment in 2026.

Key takeaways

• The year is likely to start with a big fiscal bang, and is likely to continue doing most of the heavy lifting through 2026. In the US, tax changes from the One Big, Beautiful Bill (OBBB) are expected to boost after-tax household incomes and consumption, while government spending – some of which may have been delayed by the Q4 shutdown – should pick up in early 2026. Together, these factors should create a front-loaded fiscal impulse that helps offset a cooling labour market in the first half of the year, with that support likely to linger into H2. In many other major economies, supportive fiscal settings will also help underpin global growth.
• AI will continue to dominate markets, both as a driver of equity performance and as a growing contributor to economic activity. The AI investment cycle remains in full force: data-centre buildouts, semiconductor demand, and rapid software adoption are all supporting growth. Sustaining this virtuous cycle will require continued technological breakthroughs, clear returns on investment for companies, and reliable access to funding as hyperscalers start to look to debt markets to finance their capex.
• Trump’s focus in H1 is clear: win the midterm elections. That means running the economy hot and leaning on visible, voter-facing actions: tax relief, regulatory rollbacks, and other measures to support household sentiment and business confidence. A new Federal Reserve (Fed) chair who is perceived as more dovish would help reinforce this policy tilt, even if it does not fundamentally change the outlook. These tools can help support growth through H1, even as the labour market cools. 
• Enter the dragon: 2026 is a year to pay closer attention to China. While the economy’s recovery remains uneven, any gradual stabilisation – supported by policy measures or growing momentum in AI and other high-tech sectors – could have a more noticeable influence on the global backdrop. Our base case is a slow and steady recovery that helps keep global inflation pressures contained. But if growth accelerates and China starts to exit deflation, that could remove an important cushion for the US and make the inflation path – and Fed easing – less certain.
• For markets, these factors point to a broadly supportive backdrop in 2026. Expansionary fiscal policy and Fed easing keep the near-term environment constructive for equities, particularly in the first half of the year, even as volatility persists. Meanwhile, the fiscal backdrop also reinforces the role of gold as a structural portfolio diversifier. At the same time, AI should remain a key driver of growth and market performance as long as its virtuous investment cycle holds, while China exposure could offer both participation in the global AI race and potential hedging benefits for portfolios heavily concentrated in US technology stocks.

(See our Glossary at the end for a breakdown of the terms used in this article.)

Fiscal: 2026 could start off with a big fiscal bang

We begin with fiscal policy, the first pillar of our “FAT” framework. The year ahead is likely to begin with a sizable fiscal bang, with policy support doing much of the heavy lifting for growth – especially in the US.

For one, the OBBB – Trump’s sweeping tax and spending bill passed in July 2025 – is expected to contribute positively to demand through a mix of tax and spending provisions. Meanwhile, the prolonged 43-day government shutdown in Q4 2025 created a backlog of federal outlays that should be released in early 2026. Together, these factors generate a front-loaded fiscal impulse, which could help to support consumption even as the labour market cools.

Chart 1 highlights the scale of this impulse: fiscal measures could add roughly 2.8 percentage points to US GDP growth in Q1 2026 (1) – a level of support on par with past periods of economic crisis. While that boost will naturally fade as catch-up spending normalises, the fiscal stance should remain supportive even after the initial Q1 surge, as OBBB provisions and elevated federal spending continue through the year. 

Additional targeted measures – such Trump’s touted $2,000 “tariff checks” or accelerated federal spending – are also possible in H1 ahead of the midterm elections in November.

If implemented, early estimates suggest these checks could amount to roughly 1-2% of GDP, a sizable one-off fiscal boost. A mid-year rollout is conceivable, but the proposal remains highly uncertain, given that it requires congressional approval and has already drawn pushback from Republican party members concerned about its cost. Even without that additional stimulus, the backdrop points to continued support from government policy, with the fiscal deficit expected to widen to 6.4% of GDP in 2026 from 6% in 2025.

A longer-term question: the US debt path hinges on growth

While near-term stimulus is supportive, longer-term questions about US debt sustainability remain. The government’s effective interest rate remains relatively moderate at around 3.3%, and with an average maturity of roughly six years, higher borrowing costs would take time to feed through to overall funding costs.

As the stylised simulation in Chart 2 shows, even a sustained spike in long-term yields to 6% (a level not seen since 2000) would raise effective interest costs gradually, not abruptly.

With debt levels now around 100% of GDP – and absent meaningful consolidation or other adjustments – the trajectory ultimately depends on whether the US can grow its way out of the burden. This is where the AI-driven productivity story could play a role – echoing the dynamic of the late-1990s productivity acceleration that extended into the early 2000s.

Stronger nominal GDP growth – roughly 4% or more – would help stabilise the debt ratio by keeping growth ahead of interest costs. Without that tailwind, the adjustment has to come from elsewhere: fiscal consolidation, a rise in longer-dated yields, a weaker dollar, or potentially even some quantitative-easing-like intervention.

Not just a US story: fiscal activism is global

As we saw play out in 2025, the shift toward more stimulative government policy is global:

• In Japan, newly elected Prime Minister Sanae Takaichi is hoping to keep the reflation of the economy ongoing, with spending plans that harken back to the Abenomics era (see more CIO Insights: Japan – still rising).
• In Europe, Germany and other eurozone economies are loosening fiscal constraints for defence, infrastructure, and industrial transformation (see CIO Insights: Will Europe’s fiscal spark ignite real growth?).
• In China, the government has signalled a “more proactive” fiscal stance to support growth (2). With the country’s latest Five-Year Plan focused on boosting domestic demand, near-term steps will likely reinforce those priorities.

Chart 3 highlights that in a number of major economies, fiscal balances in 2026 are expected to remain more expansionary than their pre-pandemic averages, and in some cases are widening further from 2025. Put together, this illustrates that fiscal policy will remain a key driver across major economies in 2026.

AI: Too big to fail

AI is the second pillar of our “FAT” framework, and its influence on markets and growth has only intensified. Over the past year or so, AI has become systemically important on both the market and macro fronts – driving much of the US equity rally and accounting for the bulk of recent GDP growth:

• For equity markets, the “AI complex” – the Magnificent Seven and their surrounding ecosystem – now represents roughly 37% of S&P 500 market capitalisation, with the top 10 US stocks (all AI-exposed) accounting for about 41% of index value. 
• For growth, their contribution is equally striking: investment in information-processing equipment and software – roughly 4% of GDP – accounted for about 92% of real GDP growth in H1 2025. Excluding this AI-related category, GDP grew at an annual rate of just 0.1%.

To understand whether this engine can keep running, it’s useful to frame the AI cycle as a self-reinforcing virtuous cycle, illustrated below in Chart 4. We examine each leg of this cycle below.

Breakthroughs in AI continue to push the frontier forward

The “breakthrough” leg of the AI cycle remains anchored in scaling laws: as models are trained with more data and compute, performance improves in jumps rather than incremental gains. What’s more, researchers continue to identify new scaling laws – for example, in pre- and post-training – that extend the frontier. Recent models from OpenAI, Anthropic, and Google’s Gemini 3-class have set new standards across reasoning, coding, and multimodal benchmarks – with those advancements illustrated in Chart 5 below.

Innovation is also accelerating at the infrastructure layer. Nvidia and AMD have both committed to an annual cadence of new data-centre GPU platforms, effectively compressing the traditional 2-3 year upgrade cycle into a yearly rhythm. This faster hardware cycle reinforces the breakthrough loop by enabling continued gains in model capability.

Returns on AI investment are increasing

The second leg of AI’s virtuous cycle is whether this capex is seeing a return on investment (ROI) – and the answer is increasingly yes – both for hyperscalers and early enterprise adopters. As of  Q3, the Magnificent Seven delivered earnings growth of 30% (3) – which not only beat estimates, but was an acceleration from 2Q.

AI is already showing clear ROI in specific use cases, especially software development. Coding-related workloads now make up roughly half of total token usage, and overall token consumption has increased by nearly 20x over just the past year (illustrated below in Chart 6), reflecting rapid real-world adoption. Companies like Cursor – scaling from zero to US$100 million in annual recurring revenue (ARR) within a year – illustrate how quickly AI-native tools can generate commercial returns.

Tech firms are also reporting higher productivity or lower operating costs as more workflows move to AI agents. As models become more capable, we expect AI adoption to expand across a wider range of functions and use cases, allowing more companies to deploy them at scale and realise ROI.

Funding is the key cyclical risk in the AI buildout

The final leg of this cycle – and the most cyclical risk – is how the AI buildout is financed. The scale of required investment is substantial: Morgan Stanley estimates around US$2.9 trillion of incremental global data-centre capex between 2025 and 2028 (4), with roughly half funded by Big Tech’s cash flows and the other half needing external financing.

Because such a large share depends on the availability and price of credit, the AI cycle remains highly sensitive to liquidity, credit conditions, and policy shocks. This is why funding is the leg of the cycle most exposed to macro volatility, and any tightening in financial conditions could directly affect the pace of deployment (read more in CIO Update: Is AI in a bubble?).

As long as liquidity remains supportive, the AI cycle should continue to drive both market performance and global growth. However, investors should be aware that higher financial leverage increases vulnerability to shocks. This sets the stage for the final pillar in our “FAT” framework: Trump policy.

Trump: running policy hot and loose to win the midterms

Trump is the third pillar of our original “FAT” framework, and we see the midterm election cycle guiding much of his policy focus in the coming year. This is critical because he enters 2026 with net approval ratings above his first-term levels, as shown below in Chart 7, but moving along the same downward path. We believe this softening trend, driven largely by dissatisfaction with the cost of living (5), will shape how his administration's policy is likely to be deployed in the year ahead.

On top of fiscal stimulus, Trump could lean on other policy levers that are fast, visible, and executable without Congress

With the fiscal boost from OBBB already in place, and with any new stimulus checks dependent on congressional approval, the administration may lean on a broader set of tools that deliver quick, visible signals to households and core supporters. In particular, actions that do not require Congress and can be advanced through executive authority are likely to feature more prominently:

• Spotlighting tax relief and stimulus: The White House is likely to highlight OBBB’s take-home-pay benefits, including the elimination of federal tax on overtime and tips and the higher state and local tax deduction caps. These provisions apply to 2025 income and begin to show up when households file taxes in early 2026, providing a well-timed lift to sentiment ahead of the midterm elections.
• Deregulation: The administration may also signal or begin targeted regulatory easing in areas such as energy, environmental rules, or financial oversight. The speed of these measures varies, since many regulatory processes take time, but even signalling a shift can support business confidence. Similar efforts were part of the early-term policy mix in 2017 and remain among the few levers the president can initiate without Congress.

In the current two-speed economy – where strong AI-driven corporate investment and an equity bull market stand in contrast to a softer jobs market – visible policy actions are critical in shaping how households perceive the economic environment (read more in CIO Insights: AI runs hot, jobs run cool, and the Fed runs loose).

Indeed, US households continue to face cost pressures, with Chart 8 showing a sustained decline in sentiment across the board. This underscores the need for policies that can help stabilise confidence where it is weakest.

A new Fed chair will shape dovish expectations, but inflation remains a key issue

Trump may not control monetary policy, but his choice of the next Fed chair is drawing close attention from markets. Recent reports, alongside betting markets, currently place National Economic Council Director Kevin Hassett as the leading candidate (6), and investors generally expect any Trump nominee to lean more toward easier policy. 

Any incoming Fed chair will have to take economic reality into consideration, however. Inflation is still far from the Fed’s stated 2% target, and a strong fiscal impulse in 2026 could keep demand firm. As shown in Chart 9, demand-driven inflation still accounts for roughly half of core PCE, which is not consistent with a rapidly weakening labour market. Wage growth also remains in the 3-4% range – elevated enough to keep headline inflation above target.

On the labour side of the equation, while hiring has indeed slowed, constrained labour supply has also resulted in a “low-hire, low-fire” environment. The Dallas Fed estimates that changes in immigration policy has meant breakeven job growth – the level needed to keep unemployment stable – has fallen to around 50,000 jobs per month, well below historical norms and in line with the average monthly payroll gains of roughly 55,000 in 2025 so far  (7). That means the Fed may have less room to ease policy aggressively, even as headline labour data softens.

Midterm elections will shape the back half of Trump’s administration 

With fiscal policy loose and monetary policy expected to be dovish, the policy backdrop going into the November midterms is broadly supportive. But with inflation remaining the top issue among voters, and the margins in the House very tight – 219 seats for Republicans to the Democrats’ 213 – the outcome remains highly uncertain.

History also works against the incumbent party. As Chart 10 below shows, midterm House elections have delivered a swing against the president’s party in all but two cases since 1938, including during Trump’s own presidency in 2018.

A loss of the House, even if Republicans retain the Senate, would materially constrain the administration’s ability to pass new fiscal or legislative initiatives. In that scenario, the policy environment would take on many of the characteristics of a lame-duck presidency, with Trump potentially refocusing on trade tariffs and brokering peace deals – which would impact the market outlook in the tail-end of the year.

China: a potential swing factor for 2026 and beyond

Enter the dragon. China is the newest addition to our macro framework, expanding last year’s “FAT” forces into “FACT”. In particular, we believe China’s economic path and rapid progress in AI could matter more for the global macro environment in 2026 than it has in recent years.

A quick look back at 2025

China played a more visible role in global markets in 2025, even as the recovery in its domestic economy remained uneven.

For one, China saw increased prominence on the global stage, particularly when it came to technology. As we saw during the “DeepSeek moment” toward the start of the year, breakthrough models underscored rapid progress within China’s AI ecosystem – with ripple effects across global markets (read more in CIO Insights: China AI – Build Now, Profits Later). Meanwhile, its presence across EVs, robotics, and biotech also continued to grow. 

Importantly, China has focused on developing its own AI tech stack, with many foundational models now scoring among the top in industry benchmarks (as highlighted in Chart 5 above). On trade, China also adopted a firmer stance in its negotiations, including restrictions on rare-earth exports.

Domestically, however, conditions are still weak: deflation lingers, the property downturn has shown little sign of a clear turnaround, and household confidence remains depressed, as illustrated in Chart 11. As a result, policymakers have largely continued to keep policy accommodative to support the economic recovery.

Even so, weak macro conditions didn’t necessarily translate into weak equity performance across the board. Sector-level divergence widened: high-growth industries – particularly those linked to AI and advanced technology – outperformed despite sluggish headline growth.

Market expectations highlight this divergence: 12-month forward earnings estimates point to growth of more than 20% for tech-related sectors like information technology, versus just above 5% for broader China equities. This reflects, in part, China’s scale in hardware production and its large power infrastructure, which help sustain activity in chips, AI hardware, and industrial technology even when the wider economy is soft.

Developments in China will influence the global macro backdrop

While many asset allocators have viewed China as a market to ignore over the past few years, we think that 2026 may mark the beginning of another cyclical shift.

Our base case – which recent data continues to support – is a slow and steady stabilisation: while policy makers are working to prevent further weakening, the housing market remains in a slump and fierce business competition continues to result in persistent deflation. Put together, this should keep global goods and energy prices contained, and allow the US to continue with expansionary policy.

That said, if China’s economic recovery accelerates and starts to inflate, this disinflationary cushion that the US has relied on will fade. Firmer Chinese demand could lift goods and commodity prices, complicate the Fed’s easing path, and renew cost-of-living pressure for US households – all of which narrow the Trump administration’s policy room. 

Part of the uncertainty reflects an increasingly two-speed economy in China as well, as illustrated in Chart 12 below. The old economy – still working through the aftermath of the property boom-bust – remains subdued, but the new economy, led by AI, industrial automation, and parts of healthcare innovation, continues to expand more quickly. China is fast becoming a global leader in more advanced manufacturing categories. We don’t believe a shift will happen overnight, but we do expect to see a more visible recovery going forward.

What these “FACTs” mean for investing in 2026

Against this backdrop – shaped by the “FACT” forces of fiscal dominance, AI advancements, China’s recovery, and Trump’s policy agenda – we see several investment implications:

• Equities remain supported, particularly in the first half of 2026. With fiscal policy set to run hot into the start of the year and the Fed continuing on its easing path, the macro backdrop remains one of inflationary-growth. Such a regime has historically favoured equities – though policy announcements and geopolitical developments are likely to create periods of volatility.
• We continue to prefer gold over government bonds as a defensive allocation.  Elevated public debt levels and persistent fiscal deficits continue to raise questions about the long-term appeal of “risk-free” assets like government bonds, while supporting demand for real stores of value like gold. Even after a strong rally in 2025 – with the asset up more than 60% – this backdrop supports the case for holding gold as part of a diversified portfolio.
• AI is not a bubble, yet. The current AI boom is being driven not just by valuation expansion, but by tangible capex, earnings growth, and productivity gains. As long as the virtuous cycle of breakthroughs, rising returns on investment, and continued funding continues, we believe this cycle differs meaningfully from past speculative tech episodes. The key risk to monitor is a break in this flywheel – particularly via tighter financial conditions.
• China exposure can offer a dual role: growth and portfolio hedge. As China competes alongside the US in the AI race, its equity market stands to benefit from continued advances. At the same time, progress in China’s AI ecosystem could come with relative pressure on US tech leadership, reinforcing China’s potential role as a hedge – especially for portfolios concentrated in US technology stocks.

The investment truth that lasts: stay diversified, stay invested

As we head into 2026, the forces we’ve highlighted throughout this outlook – fiscal policy, AI, China, and Trump – will continue to shape the global landscape in meaningful ways. These forces will create both opportunity and volatility, but the principles of long-term investing remain unchanged: stay diversified, stay disciplined, and stay invested.

Thank you for your continued trust as we navigate your investment journey together. From all of us at StashAway, we wish you and your families a healthy, fulfilling and prosperous year ahead.

Yours in investing,

The StashAway Team

Authors

Stephanie Leung, Chief Investment Officer

Stephanie and her team oversee the full spectrum of investment products and portfolios offered at StashAway. She brings more than two decades of investment expertise across multiple asset classes. Prior to joining StashAway in 2020, she managed investment portfolios at institutions such as Goldman Sachs and multi-billion dollar family offices in the region.

Justin Jimenez, Head of Macro and Investment Research

Justin has more than a decade of experience in economic and investment research, and contributes to shaping the investment office's views on the global economy and asset classes. Prior to joining StashAway in 2022, he was an economist at Bloomberg.

Glossary

Fiscal impulse

How much government policy is adding to or subtracting from economic growth. A positive fiscal impulse means new spending or tax cuts are pushing growth higher.

Capex (capital expenditure)

The money firms spend on long-term assets such as buildings, equipment, and infrastructure.

ARR (annual recurring revenue)

A key metric for subscription-based businesses. Measures the predictable revenue a company expects to receive each year from ongoing customers.

ROI (return on investment)

A measure of how much profit or value an investment generates relative to its cost.

Hyperscalers

The world’s largest technology companies, operating cloud computing and AI infrastructure. Major players include Amazon, Microsoft, Google, Meta, and Oracle.

Scaling laws

A principle that AI model performance improves predictably as you increase compute power, data, and model size.

Token usage

In AI, tokens are the basic units of text that models process. Token usage measures how much AI is being consumed, serving as a proxy for real-world adoption and commercial activity.

References

1. Ahmad, S., Parry, C., & Sheiner, L. (2025). Hutchins Center Fiscal Impact Measure. The Brookings Institution. Retrieved from: https://www.brookings.edu/articles/hutchins-center-fiscal-impact-measure
2. Cao, D. (2025). Proactive fiscal policy in 2026 emphasized. China Daily. Retrieved from: https://global.chinadaily.com.cn/a/202512/08/WS6936f3eda310d6866eb2d847.html
3. Laidley, C. (2025). Wall Street Continues to Underestimate the Growth of Magnificent Seven Companies. Here's Why. Investopedia. Retrieved from: https://www.investopedia.com/wall-street-continues-to-underestimate-the-growth-of-magnificent-seven-companies-here-is-why-11857190
4. Morgan Stanley. (2025). How Credit Markets Could Finance AI's Trillion Dollar Gap. Retrieved from: https://www.morganstanley.com/insights/podcasts/thoughts-on-the-market/credit-markets-ai-financing-gap-vishy-tirupattur-vishwas-patkar
5. Lange, J., & Reid, T. (2025). Exclusive: Trump approval falls to lowest of his term over prices and Epstein files, Reuters/Ipsos poll finds. Reuters. Retrieved from: https://www.reuters.com/world/us/trump-approval-falls-lowest-his-term-over-prices-epstein-files-reutersipsos-poll-2025-11-18
6. Polymarket. (2025). Who will Trump nominate as Fed Chair? Retrieved from: https://polymarket.com/event/who-will-trump-nominate-as-fed-chair
7.  Cheremukhin, A. (2025). Break-even employment declined after immigration changes. Federal Reserve Bank of Dallas. Retrieved from: https://www.dallasfed.org/research/economics/2025/1009