Politics and key risks: Diversification

How will politics shape markets in 2026?

Political headlines will remain front and center in 2026, but history suggests their impact on financial markets is often short-lived. While trade policy, domestic politics, and geopolitics contributed to volatility in 2025, investors have since refocused on solid economic fundamentals, falling interest rates, and structural growth trends like AI.

Trade policy will stay in the spotlight

The US Supreme Court is set to rule on the administration’s use of IEEPA for tariffs, potentially affecting around 70% of tariff revenue. If current tariffs are overturned, new, more targeted tariffs are likely, increasing policy uncertainty and volatility, especially if trading partners retaliate. However, a divided US Congress—probable after the midterms—could limit major shifts in trade policy.

Leadership changes are also in focus

The Fed will get a new chair in 2026, with challenges ahead given high inflation and debt, but we expect monetary policy to remain broadly supportive for markets. The US midterm elections in November will add to headline risk, with all House seats and one-third of Senate seats up for grabs. While political rhetoric may intensify, history suggests markets typically look past election cycles. Current odds suggest a divided Congress, which would likely result in legislative gridlock and limit the scope for major policy changes on trade, fiscal stimulus, or financial regulation.

Globally, political risks persist

In Europe, attention will center on political stability in France and the UK, while the Russia-Ukraine war and tensions in the Middle East are likely to persist. In Latin America, elections in Chile, Colombia, Peru, and Brazil could reinforce the region’s shift toward right-leaning governments. Asia’s political calendar is quieter, but Japan’s fiscal policy decisions and China’s new Five Year Plan—emphasizing growth, security, and technology—will be closely watched.

Key risks

What risks could bring markets back to earth in the year ahead? The most prominent in our view are: 1) a potential disappointment in AI progress or adoption, 2) a resurgence or persistence of inflation, 3) a more entrenched phase of US-China strategic rivalry, and 4) the (re)emergence of sovereign or private sector debt concerns.

An AI disappointment

We believe current investor enthusiasm for AI is justified by strong capital spending, innovation, and adoption. But valuations are high, markets have rallied strongly, and no investment boom has ever seen capital spending perfectly match future demand. The AI rally may face periods in 2026 when investors fear excess investment, bottlenecks, or obsolescence. Broader risks could emerge if refinancing dries up, triggering defaults or threatening financial stability.

A return of inflation

The inflation impact of US tariffs has matched expectations, though tariff evasion may be higher than anticipated. A risk for 2026 is that second-round effects—US companies raising prices or profit-driven inflation—could make inflation more persistent and harder for the Fed to ignore, limiting its ability to respond to risks and potentially keeping long-term yields elevated.

US-China conflict

The US-China rivalry intensified in 2025. Ongoing competition suggests further brinkmanship will remain a risk through 2026, especially around tariffs, rare earth exports, and AI chip sales. So far, escalations have ended in negotiated agreements, reflecting incentives to avoid prolonged disruption.

Debt concerns

In 2025, global bond investors repeatedly flagged rising government debt, with episodes of higher yields in the US, France, Japan, and the UK. If governments fail to reassure markets on borrowing and inflation risks, or pressure central banks to cut rates, yields or currency volatility could rise. Rapid yield increases would pose risks to equity markets. Investors should also monitor both public and private credit markets, where tight spreads and looser lending standards may have created vulnerabilities.

Several factors could lead to market weakness

Illustration of potential key market risks for 2026, with dotted lines depicting indirect influence

This figure is an illustration of the potential key market risks for 2026. This chart is an illustration from UBS.

Source: UBS, as of 12 November 2025

Scenarios

	Bull scenario (Tech boom)	Bull scenario (Tech boom)	Base case (Solid growth)	Base case (Solid growth)	Bear scenario (Disruption)	Bear scenario (Disruption)
AI	Bull scenario (Tech boom)	Robust, broad-based AI spending and rapid adoption. Monetization exceeds expectations, driving productivity and corporate profits. “Agentic” and physical AI applications accelerate, fueling optimism and further investment.	Base case (Solid growth)	Solid AI investment continues, with steady adoption and gradual monetization. Productivity gains are incremental, supporting business sentiment but not transforming macro growth.	Bear scenario (Disruption)	AI investment stalls or contracts due to disappointing monetization, technical setbacks, or obsolescence. Corporate caution leads to reduced capex and slower adoption.
Economy	Bull scenario (Tech boom)	US growth outpaces trend, led by strong consumption and business investment. Unemployment remains low, wage growth is healthy. Other major economies benefit from global tech spillovers and easing trade tensions.	Base case (Solid growth)	US grows at its 2% trend rate; labor market softens but unemployment stays below 5%. Consumption is resilient. Growth in Europe and China is supported by targeted fiscal stimulus.	Bear scenario (Disruption)	US growth slows sharply—below trend or even flat—due to lagged tariff impacts, weaker consumption, and spillover effects. Other major economies also weaken; risk of recession rises.
Policy	Bull scenario (Tech boom)	US tariffs fall below 10%, reducing trade friction. Possible Russia-Ukraine ceasefire boosts global sentiment. Central banks maintain or tighten policy only modestly; credit spreads tighten.	Base case (Solid growth)	Fed cuts rates toward 3-3.5% as inflation stabilizes near targets. US tariffs remain in the high teens, but retaliation is limited. Fiscal stimulus in Europe and China supports growth.	Bear scenario (Disruption)	Central banks respond aggressively: Fed cuts 200–300bps. Policy focus shifts to crisis management. Credit spreads widen. Trade tensions and inflation risks persist.
			Targets (December 2026)
MSCI AC World	Bull scenario (Tech boom)	1,450	Base case (Solid growth)	1,350	Bear scenario (Disruption)	830
S&P 500	Bull scenario (Tech boom)	8,400	Base case (Solid growth)	7,700	Bear scenario (Disruption)	4,500
EuroStoxx 50	Bull scenario (Tech boom)	6,800	Base case (Solid growth)	6,200	Bear scenario (Disruption)	4,400
SMI	Bull scenario (Tech boom)	14,600	Base case (Solid growth)	13,600	Bear scenario (Disruption)	10,500
MSCI EM	Bull scenario (Tech boom)	1,640	Base case (Solid growth)	1,560	Bear scenario (Disruption)	1,070
Fed funds rate (upper bound)	Bull scenario (Tech boom)	4.00	Base case (Solid growth)	3.5	Bear scenario (Disruption)	1.5
US 10y Treasury yield (%)	Bull scenario (Tech boom)	4.75	Base case (Solid growth)	3.75	Bear scenario (Disruption)	2.50
EURUSD	Bull scenario (Tech boom)	1.14	Base case (Solid growth)	1.20	Bear scenario (Disruption)	1.26
EURCHF	Bull scenario (Tech boom)	0.98	Base case (Solid growth)	0.95	Bear scenario (Disruption)	0.90
Gold*	Bull scenario (Tech boom)	USD 3,700/oz	Base case (Solid growth)	USD 4,300/oz	Bear scenario (Disruption)	USD 4,900/oz

Messages in Focus

Hedge market risks

Related investment idea

Investors should consider a diversified approach to hedging market risks. Holding sufficient liquidity can help investors avoid forced selling. Quality bonds offer attractive yields and can buffer portfolios. Gold’s diversification benefits remain important. Periods of low volatility can also provide an opportunity to lock in gains while maintaining upside potential through structured investments.

Messages in Focus

Diversify with alternatives

Related investment idea

Including alternatives can enhance diversification, provided investors understand their liquidity needs and the features of the asset class. We recommend a 20-40% allocation in endowment-style portfolios. For 2026, we see hedge funds benefiting from low stock correlation, high return dispersion, and increased M&A activity; in private equity, our focus is on middle-market buyouts, carveouts, and secondaries, while select direct lending and private real estate and infrastructure offer attractive income, diversification, and exposure to structural trends.

Building an effective alternatives allocation

Related investment idea: Diversify with alternatives

Investors with a long-term horizon and an “endowment” investment style may benefit from allocating up to 20-40% of their portfolios to alternatives such as hedge funds, private markets, and infrastructure. The optimal allocation depends on individual risk tolerance, liquidity needs, and long-term objectives, but a well-structured alternatives allocation can enhance diversification and improve risk-adjusted returns.

Effective diversification across alternative strategies is essential to maximize their benefits, in our view. By investing in a mix of hedge funds, private equity, private credit, and infrastructure, investors can access varied sources of return and reduce potential downside risk. A balanced approach ensures the portfolio remains resilient and adaptable to changing market conditions.

Manager selection is especially important in alternatives. Investors should therefore prioritize high-quality hedge funds with strong track records, private market funds with robust governance and expertise, and infrastructure assets offering stable cash flows. Those making smaller allocations may benefit from fund-of-funds or evergreen solutions, while larger investors may prefer a diversified selection of single managers.

Can AI power the market even higher?

AI-linked innovation has been the engine of the market’s ascent in recent years. Investors should remain mindful of the risks inherent in any investment boom. Yet, we believe that powerful trends in capex and accelerating adoption are likely to drive further gains for AI-linked stocks in the year ahead.

The economic backdrop

We expect the economic backdrop to be supportive of stocks in 2026. Growth enters the year somewhat uneven, but as the year evolves, we expect business and consumer confidence to improve, fiscal stimulus in major advanced economies to gain traction, and tariff effects to fade.

How will governments manage rising debt?

In some countries, current policies mean government spending is at “escape velocity” and will continue rising as a share of GDP unless decisive action is taken. We believe “financial repression”—a regime that channels savings and central bank funds into government bonds, suppressing yields—is likely to become more common in coming years.

Our currency views for 2026

Entering 2026, we see persistent US twin deficits and declining interest rates continuing to weigh on the dollar, especially as rates elsewhere remain stable. Against this backdrop, we favor long positions in the euro, Australian dollar, and Norwegian krone versus the USD. Our preference is for high-yielding currencies, which should benefit as risk appetite broadens in FX markets over the next year.

Forecasts

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Disclaimers

Year Ahead 2026 – UBS House View
Chief Investment Office GWM | Investment Research

This report has been prepared by UBS AG, UBS AG London Branch, UBS Switzerland AG, UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS AG Hong Kong Branch, and UBS SuMi TRUST Wealth Management Co., Ltd.

Global asset class preferences definitions

The asset class preferences provide high-level guidance to make investment decisions. The preferences reflect the collective judgement of the members of the House View meeting, primarily based on assessments of expected total returns on liquid, commonly known indexes, House View scenarios, and analyst convictions over the next 12 months. Note that the tactical asset allocation (TAA) positioning of our different investment strategies may differ from these views due to factors including portfolio construction, concentration, and borrowing constraints.

Attractive: We consider this asset class to be attractive. Consider opportunities in this asset class.
Neutral: We do not expect outsized returns or losses. Hold longer-term exposure.
Unattractive: We consider this asset class to be unattractive. Consider alternative opportunities.

Note: For equities, we have collapsed “Most Attractive” with “Attractive” and “Least Attractive” with “Unattractive” from the five-tier rating system that is found in the Equity Compass into 3 tiers.

Cautionary statement regarding forward-looking statements

This report contains statements that constitute “forward-looking statements,” including but not limited to statements relating to the current and expected state of the securities market and capital market assumptions. While these forward-looking statements represent our judgments and future expectations concerning the matters discussed in this document, a number of risks, uncertainties, changes in the market, and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to (1) the extent and nature of future developments in the US market and in other market segments; (2) other market and macroeconomic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current market crisis; (3) the impact of these developments on other markets and asset classes. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

Emerging Market Investments

Investors should be aware that Emerging Market assets are subject to, among others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and sociopolitical risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. CIO GWM generally recommends only those securities it believes have been registered under Federal US registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as “Blue Sky” laws). Prospective investors should be aware that to the extent permitted under US law, CIO GWM may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws.

Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment-grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Subinvestment-grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher-yielding bonds for shorter periods only.

Nontraditional Assets

Nontraditional Assets Non-traditional asset classes are alternative investments that include hedge funds, private equity, private credit, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks.

Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments, there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:

Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-U.S. securities and illiquid investments.
Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements.
Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws.
Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment.
Private Credit: There are risks specifically associated with investing in private credit. This could include losses stemming from defaults on loans, which in significant adverse circumstances could result in a substantial loss of investment.
Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in U.S. dollars, changes in the exchange rate between the US dollar and the issuer’s “home” currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a US investor.

CIO research disclaimer

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Politics and key risks

How will politics shape markets in 2026?

Trade policy will stay in the spotlight

Leadership changes are also in focus

Globally, political risks persist

Key risks

An AI disappointment

A return of inflation

US-China conflict

Debt concerns

Several factors could lead to market weakness

Scenarios

Messages in Focus

Hedge market risks

Messages in Focus

Diversify with alternatives

Building an effective alternatives allocation

Explore more of the Year Ahead 2026

Can AI power the market even higher?

The economic backdrop

How will governments manage rising debt?

Our currency views for 2026

Disclaimers

Politics and key risks

Trade policy will stay in the spotlight

Leadership changes are also in focus

Globally, political risks persist

An AI disappointment

A return of inflation

US-China conflict

Debt concerns

Several factors could lead to market weakness

Scenarios

Messages in Focus

Hedge market risks

Messages in Focus

Diversify with alternatives

Growth

Income

Growth

Can AI power the market even higher?

The economic backdrop

Income

How will governments manage rising debt?

Our currency views for 2026

Disclaimers