Hello, and Happy New Year to everyone. Thanks for joining our first quarter Global Market Perspectives webcast. Again, I'm Tim Hill. I'm joined today by today's speaker, Seema Shah, our Chief Global Strategist. Following a resilient 2025, marked by economic strength and AI-driven growth, what lies ahead for investors in Q1 of 2026? Seema is here today to share her insights on key themes shaping global markets and how investors can prepare for their portfolios for those markets.

Just as a reminder, if you have questions during today's comments, you can submit them at any time through the Q&A function, and we will get to them as soon as we're done with the formal comments. So with that, Seema, I will turn it over to you.

Great. Thanks, everyone. Thanks, Tim. Great to be back here with you at the Global Market Perspectives for the first quarter of 2026. Now, you'll see that the title of the piece for this quarter is A World of Opportunity. I'm trying to do a nice little play on AI there.

I think as we look back at last year, there was so much policy upheaval, there was so much volatility, at least from a policy perspective, and yet, the global economy actually did really well. And one of the main reasons for that is because of continued strength in balance sheets, strong consumer spending, and of course, really, impactful policy responses.

Now, that was 2025, but that really does set the stage for 2026. So as we go to the key themes, as I said, the global economy, we think can do very well this year. You're going to see broader growth, stronger growth in the number of different regions. The US specifically, although there have been concerns, we're expecting another robust year in 2026. Not only do you have all the usual things in play, like strong balance sheets, corporate profits, et cetera, but you've also got really active policy stimulus.

And even in the last two weeks, with all the noise from the Trump administration, the things that are being announced are still quite growth friendly, and I think it's important to keep that in mind. From a Fed perspective, well, it does make it difficult for the Fed to cut too many times this year. So we're only anticipating two cuts, and certainly, from the most recent data, it does suggest that that would be in the second half of the year.

This very robust, constructive macro backdrop is going to be good news for equity markets. We may not see the 20% gains that we had seen in '23 and 2024, but generally speaking, this is a good environment. We'll need to see earnings growth, but we do think that there will be a broadening out from technology, at least from US technology to other parts of the US market and to international markets too. So that's going to be a key point that I'll touch on.

And for fixed income, although spreads are very tight, again, this constructive macro backdrop still means positive total returns for investors, and it's a key part of any portfolio. And just generally speaking, in terms of the broad theme of what I'm going to be talking about today, it's a lot about balance and diversification. Diversification had a great year in 2025, and we're expecting the same thing, that momentum to follow through to '26.

So let's get straight into my first slide. So you can see I've got two charts here. This is really a look back, again, at 2025. When we're looking at growth forecasts for last year, there has been a big change. So the chart on your left is showing you consensus growth forecasts. The lighter blue bars are how the consensus growth forecast for 2025 shifted from liberation day through to the end of the year.

And you can see that in the US, actually, in the end, what growth forecasts were at the end of last year, they're quite different from the beginning of-- sorry. I'm going to go back again and let me start that whole chart again. So the chart on your left is showing you how consensus growth forecasts have changed, one, from liberation day and two, from the beginning of 2025.

So the lighter blue bars are how growth forecasts have changed since the beginning of the year, so in the full calendar year, what happened to consensus growth forecasts. And in the US, in fact, growth was only expected to be a little bit lower than where it started the year up. So this is telling us that there was some kind of response from the us, from policy administrators, from maybe the Federal Reserve, which meant that the US was able to overcome all of the concerns post liberation day.

You can see, if you look over to Europe and China, that 2025 forecast for growth actually ended up stronger than where they started the year and even after liberation day. So we can see that there are some really good news going on there with Europe, of course, we saw the big announcement about fiscal stimulus, that Germany, that's been really key. And for China, they doubled down their export growth into other Asian markets. It shifted away from US and really focused on Asia. And you combine that with an involution campaign, which did some really good things for domestic demand, at least in the first half of the year, and you end up with what was a constructive year.

Now, key to all of this is the chart on your right. Because remember, after liberation day, there were concerns that there could be a US recession. There were concerns about what would happen to China's growth, European growth, et cetera. Now, what actually happened is that tariffs were much lower in the end than what was initially announced in liberation day.

So the chart on your right, those bars, those blue bars that you can see, that is what the worst case expectations were for the tariff impact on US growth. So for example, for China, at one point, there were concerns that tariffs were going to be sitting around the 100% mark, and they would have a very negative impact to US growth. For Europe, there were concerns it would be a 25% tariff. For Mexico and Canada, maybe that there wouldn't be the USMCA exemptions, et cetera, et cetera.

And when you add that up, after liberation day, the concern was that US growth would be hit by about 2.6%. In the event as the straight line shows you, tariffs were much lower and therefore, the impact to US growth was what was much, much lower. So rather than being a 2.6% hit to growth, we're expecting it to be somewhere around the 1% to 1.5% level.

And remember too, that because tariffs were introduced later in the year, because also, there were some exemptions which came about with sectors, companies, that in the end, actually, the impact from tariffs was that much smaller. Maybe it's going to be spread into some of it into 2026, but we really have to see.

Now, the key things that we're going to be watching out for from a tariff side is going to be, of course, the IP ruling, which we're expecting to hear from later this week. So we'll be hearing whether or not the Trump tariffs are actually going to be legal. Just on that point, if they are deemed to be illegal, then we do think that the Trump administration will find other avenues, lots of other avenues open to them, whether that's focusing on sectoral tariffs, maybe to finding slightly different rationale. But tariffs, we do believe will happen in the US.

The second thing that we have to keep an eye on and this is just very recent news, is just around the announced tariffs from Trump overnight, about 25% tariff in any country, which is trading with Iran. So we need to keep an eye on that. Our general view though, is if you take out the geopolitics, which definitely just does accompany stuff, but given the increased focus on affordability by the Trump administration this year, we do think that suggests that tariffs will, ultimately, end up a little bit lower than where they were in 2025.

So as we go into 2026, which I should say, as we start 2026, the general picture for global growth has been quite promising. We think a lot of that momentum is going to continue. And from a tariff side, we think it's going to be less impactful to growth than what we saw in 2025.

But let me talk more in depth about the US. So what's been interesting from a US perspective is that because of the government shutdown and the lack of US economic data at the end of last year, it did create this vacuum, enabled a lot of concerns, fears to start to percolate. Now, when we actually look at the data, we're not too concerned.

So the chart on your left is showing you how economic data that's both hard data, so actual measures of economic activity, and soft data, so that's really confidence measures, how they've evolved since April. Now, the key takeaway is one is that actually from the hard economic data side, it's a pretty strong picture. But the second takeaway is that it's a little bit of a confusing picture.

So for example, if you see consumer confidence is near record lows, it plummeted after liberation day and actually, it's continued to come down. And yet, despite really weak consumer confidence, retail sales have done really, really well. And at the same time, retail sales are really strong despite the fact that job growth is really low.

So what exactly is going on here? The key thing that we're looking at is that the consumer confidence, we believe, has been weaker because of affordability concerns, concerns around inflation, the price levels that people are facing, even concerns about policy volatility and some of the things that are coming through from the administration. And yet, actually, the impact has been quite small, which is why retail sales continue to do well.

The other thing, which is worth keeping in mind as well, is that business sentiment is doing quite well. There has been a bit of a recovery in the last few months. And you can see that mirrored in the increase in CapEx. I should say the very, very strong performance by CapEx. And when we take a step back and we look at some of the GDP numbers, activity numbers that are broadly coming through for Q3 and Q4, well, Q3 growth was set at 4.3% in the US. That is double trend growth. So overall, this is a picture of strength.

Now, one of the key factors that have been driving growth through 2025, and we think is going to continue in '26, is, of course AI CapEx. So the chart on your right there just shows you the contribution to US growth from tech CapEx. You can see that over the last three or four years, the contribution to growth from AI CapEx has risen very, very considerably. And in fact, in the first three quarters of last year, AI CapEx accounted for about 40% of GDP growth.

Now, when you take into account that a lot of it is imported, well, then maybe the impact is smaller. But overall, we know that tech CapEx is one of the main reasons why investors come to the US, main reasons why you're seeing so much focus on AI. So we do believe that this is a key driver of economic growth. And keeping in mind, too, that a lot of the big tech companies have intentions to continue growing that side of their business, to the point that some estimates suggesting about 1.3 trillion to be spent on AI CapEx over the next five years. This seems likely to remain as a key anchor of growth going forward.

Let's go into the next slide, please. Now, one of the differences between last year and this year is the fact that last year, if you think about government policy, it was a little bit restrictive. It actually weighed on economic growth. Think about just, of course, tariffs. Going into 2026, this is going to turn around. So actually, fiscal policy is going to be quite stimulative. Government policy deregulation is all going to be quite growth friendly.

One of the key ways this is going to come through is through the One Big Beautiful Bill. Now, of course, that was passed through in 2025, but it's 2026 that we really see the impact. The chart on your left here is showing you what the net impact of the OBBA in terms of tax refunds will be for households. So the lighter blue bar at the end there is just showing you that for your average taxpayer, they will get an increase in the tax refund by around 750 or so dollars.

So in total, an average taxpayer would receive about a $3,800 tax refund check in Q1 of this year. That is very meaningful, particularly when you consider that a lot of these tax refund checks are likely to be siphoned straight through to spending. It's actually even better news for your higher-income households.

So the rest of this chart on your left there is breaking down what the impact, what the average tax s will be dependent on what kind of income profile you have. And you can see quite clearly there that your higher income households are likely to see a greater refund than your lower-income households.

Now, unfortunately, your higher-income households have a lower propensity to spend. So actually, the feedthrough to consumer spending is a little bit muted. But either way, this is really good news. It's a short-lived boost. It's only Q1, so you can see the impact just in the first half of the year, not probably in the second half of the year, but it's still a really important boost.

And it's not just households that are benefiting, it's corporates too. So when you take into account the tax incentives that are coming into play from the One Big Beautiful Bill for corporates, we're estimating that your average tax rate for your average corporate is going to be falling from around 21% last year, all the way down to about 15%. That is very, very meaningful.

And not only that, although this is a one-time boost, these tax incentives are really for a short-term period, think about this. The tax savings that a lot of companies that will be making here, if they reinvest it into their companies through CapEx, R&D, what that means is that this ends up having a more prolonged boost. So what, essentially, I'm saying is that although this OBBAs has a very temporary impact, initially, if companies take advantage of it and reinvest it into their companies, well, then you could see the benefit being prolonged and actually, multiplied. So this could end up being a really big deal.

The other point to make on this is that whereas as I showed you before, the One Big Beautiful Bill, really, is skewed for benefits for the high-income households, it is worth keeping in mind that in midterm elections year, the Trump administration is very, very focused on affordability.

And we've seen a whole host of measures being announced being discussed in the last two weeks from intervention in the mortgage market. I think about some of the tariff exemptions that were announced at the end of last year. Now, there's a big question mark whether or not they're going to be passed because of fiscal sustainability concerns in some cases. But what we do know and what we can be sure of is that the Trump administration is likely to be laser focused on affordability through 2026. And so overall, that does really bode well for low-income households as well as for high-income households.

Let's go to the next slide. Now, household balance sheets continue to be a very, very solid anchor for the US economy. I usually show these two charts in most of our GMP calls, so hopefully, it's quite familiar to our audience here. The chart on your left shows you household balance sheet strength.

Now, we continue to update these charts every quarter, and you can see that household balance sheet strength continues to improve. Household liabilities, as a percentage of net worth continues to come down to the point that balance sheets are the strongest that they've been since the early '70s.

Now, why is that? It's mainly because of the increase in net worth. So to put this into context for you, since 2020, overall net worth in the US has increased by about $63 trillion. $7 trillion of that was just in Q2 alone. So that is what is driving household balance sheets. It is a lot of it because net worth, household wealth is very much exposed to equity markets and real estate. But overall, this is put households in a good position that they can almost cushion against any headwinds that they may not be anticipating.

Similarly, on a corporate side, if you look at corporate profits, well, they are doing incredibly well. Companies, your average company, is sitting in very good health. It's also worth keeping in mind that historically, it's very difficult to get a US recession when corporate profits are doing so well. I mean, of course, this makes sense. You need to have corporates almost struggling for it to be almost adjacent to a recession.

So these two things, for us, continue to be good news. There is one thing which is a bit of a caveat here. So as I showed you before, consumer confidence is very, very weak in the US. So how does it align with the idea that household balance sheet strength is so strong?

Well, one of the reasons that consumer confidence is so low is because affordability concerns and really, affordability concerns amongst the low-income households. So there is a K-shaped economy in the US. It's a bit of a buzzword for economists at the moment. What do we mean by that? It just that there is a huge divergence between the strength of high-income households and the strength of low-income households.

So we can see that I mean, even in that $7 trillion increase in net worth that I mentioned earlier in Q2 last year, $5 trillion of that was for high-income households. So there is clearly a major divergence. But importantly, delinquencies, any of the affordability problems that are coming through that is very much focused on low income households. Remember that the top 10% of households, which account for about 80% of net worth, they also account for about 50% of consumer spending in the US.

So this is very much a social issue, but just from an economic perspective, the problems in low-income households are very unlikely at this stage to be enough to topple over broad consumer spending strength in the US. So we're going into 2026, starting 2026 with consumers in a really, really good health.

Let's go to the next slide. What is the one thing that could go wrong for consumers? Well, it's the labor market. Now, we've been seeing in the last few months, a year or so that the conversations around the labor market has been deteriorating. And actually, when we look at a number of surveys, you can see that job demand has been fading.

Now, the chart on your left there is showing you a non-farm payroll growth. You can see over the last couple of years, this has been trending lower. And in fact, the last three months, on average, you actually saw negative payroll growth. So what gives on this? That is a concern. But I want you to remember that actually firings and layoffs in the US economy are very, very low. That hasn't picked up. So you're essentially in a low hiring, low firing state of the US economy.

So what is going on? Well, there's two or three drivers we think that could be behind these moves. So the first thing to say is that there is a bit of a structural supply shift going on in the US. We've talked about it before. In terms of immigration, the new administration, the Trump administration's immigration policies are much stricter, and that has had a pretty grave impact on labor supply.

Now, the implication of this is that for non-farm payroll growth, what is considered to be consistent with a robust economy has come down very, very considerably. So let me put that into context for you. Around COVID or pre-COVID, I should say, a non-farm payroll growth number of around $125,000 or above would have been considered very consistent with a strong US economy. A number of about $50,000 below would have been really cause for concern, suggesting that maybe the US economy was heading towards recession.

Now, in 2025 and into 2026, what we're seeing is that because labor supply has dropped, actually $125,000 number is reflective of a very, very strong economy. A $50,000 non-farm payroll growth, rather than being consistent with, potential, economy, which is heading to recession, it's actually consistent with a solid economy. So your break-even level has dropped from about $125,000 to what we're estimating to be about $30,000.

Now, payroll growth, at the moment, is still below that $30,000 level, if you're looking at a three-month rolling basis. So this is still some cause for concern. But when you couple that with the fact that job layoffs have not increased, we're expecting that the labor market is not severe enough, I guess the conditions are not severe enough to be a real worry at this stage. It's something that we need to watch very carefully, but it's not too much of a worry.

Now, I mentioned labor supply, so that there was a second reason. The second reason, which, unfortunately, we cannot prove just yet, I don't think anyone can, is just the potential impact of AI. Now, that there's been a lot of investment into AI. We know that there should be some productivity gains coming at some point. Imagine that if companies start to see real productivity gains from their investment in AI, they may not need to have as much labor.

So what you could see is a US economy, which is growing incredibly well, but you just don't have the job gain because companies simply don't need the labor. And we don't have any evidence of that yet. That's something that we will be tracking over quarters and years to come, but we do think that this is an important theme, which will become increasingly important over the coming years.

Let me jump to slide 8, so inflation. We've just had the inflation number for December come through just a couple of hours ago. Headline inflation in the US sitting at about 2.7% at the end of 2025. Now, that is still above the 2% target. So inflation is still sticky, but as you can see from the chart on your left, which is showing you the composition of inflation, ultimately, inflation, at least is not trending higher.

Now, remember, after liberation day last year, there were concerns that inflation would really get out of control. The companies would be passing on the impact of the tariff increases. Now, we haven't really seen that much evidence of that. The chart on your right is showing you a micro study, looked at the prices of a number of goods, both imported and domestic.

Now, the key takeaway from this here is that, yes, prices have increased for imported goods, but actually, so have domestic goods prices. So this means to us that at least so far, there hasn't been that much of a tariff impact coming through. Keep in mind too, that as well as you have the impact of a soft labor market, as I just showed you a very limited job gains, but you also have potential of AI productivity gains.

So taking a step back and just looking at the inflation picture, yes, there is caution because the tariff pass-through could still be coming. But overall, we do think there's a disinflationary trend in play. And although inflation is unlikely to get the 2% level, by the end of this year, our forecast is suggesting inflation will end 2026 at 2.5%, it is still moving in the right direction. So over time, some of the Fed's caution can hopefully fade.

Let's go to the next slide in terms of talking about what the actual impact on the Fed is going to be in terms of their policy. So just remember, we have a US growth story which looks very, very robust. Q3 growth, as I said, running double trend growth. You have a lot of fiscal stimulus coming through, which we think is going to help boost consumer spending and give an additional boost to CapEx, which is already very strong.

You have a labor market, however, which is soft, and there's a lot of question marks about is this completely driven by labor supply or is this something of related to my story. So big question mark said that the Fed is watching very carefully. And then the third thing is that inflation is sticky, and although there has been a bit of a disinflationary trend, the Fed is still watching carefully to see if there's going to be more tariff pass through.

So in essence, they have a conflicted picture. On one side, they've got to think about their inflation mandate. And on the other side, they have to think about their employment mandate. What do they do?

Well, to my mind, what they should be doing is they should be just taking policy rates to around the neutral level. So that's, essentially, where policy is neither stimulative, nor restrictive. That sounds really simple, but unfortunately, nobody actually knows what the level of neutral is. And in fact, even within the Federal Reserve, from their own estimations, there's a huge range of estimates, ranging from 2.5%, as you can see on this chart here, all the way from 2.5%, all the way up to around 4.5%

So what does the Fed do? When there's so much uncertainty, I guess the sensible thing is just try and take it to the midpoint of that range. So from that perspective, what we're anticipating for this year is that the Fed is going to cut rates twice, two 25 basis point moves. That should take Fed rates to just below the midpoint of the neutral range.

Why just below? Well, it's a good question, because given that the economy is running so well, the growth is so good, why do they even need to take it to below the midpoint? Well, I think this is where the change in Fed Chair starts to come in.

So that Powell's term is coming to an end in May. There's going to be a new Fed Chair. We almost certainly know that that new Fed Chair is going to be a little bit dovish. We don't think it's going to change the picture very much. But certainly, it may end up resulting in one more policy rate cut than is actually justified by the economic fundamentals. So that two cuts for 2026.

And very, very quickly, just a quick word on the discussions right now. The investigation by the DOJ into Chair Powell, what does that specifically do to the Fed outlook?

We actually think that s Fed is just going to stay very focused on the economic conditions, very focused on reasserting their independence. And to me, that still aligns with the two rate cut forecast. So we haven't changed our view on that. And interestingly, market expectations are still priced as two cuts for this year.

Let's talk about global. I've talked a lot about the US. Now, as I said before, China's growth last year did really well. After liberation day, there were real concerns that export growth would struggle. In fact, China doubled down on their export growth. They shifted away from the US, given tariffs, and they really focused their export movements into other Asian countries.

So intra Asia trade picked up. You can see that from the chart on your left, which is showing you the change in export growth is as the year progressed. But they also increased their export growth into Europe, which I'm going to talk about a little bit more here. But clearly, what China did is they diversified away from the US, they reduced their dependence on the US, and they shifted their focus into other regions of the world. And that was good news. What you ended up having for China was a year of, OK, domestic demand growth and very, very strong export growth.

Now, in 2026, we're expecting the export growth picture to stay pretty strong. We're expecting only very modest domestic stimulus coming through. So the domestic demand picture is likely to stay fairly weak. But when you put the picture together, strong export growth and fairly modest domestic demand growth, what are you left with, well, it's a pretty solid growth year. And so we are expecting Chinese policymakers to announce another growth target of around 5% for this year. So this is still a good news economic story for China.

Now, one of the things, as I said before, is that they started to export more into Europe. From a European standpoint, that may not be great news going forward, because Chinese exports are typically cheaper, so you almost may be displacing a lot of the European domestic goods market by cheaper Chinese goods. So that's something that we need to watch.

But on the other side of the equation is the fact that last year, Germany announced a very, very significant fiscal stimulus expansion. The chart on your right is showing you how that's really going to be divided up and really the size of it over the next five years. So the bars are showing what the difference is relative to what was announced in 2024.

So not only is Germany going to be focusing on increasing their defense spending, but they also have a huge sum being dedicated to infrastructure spending. And that's what's really key from a growth standpoint. So as we're looking out over this year, we are expecting Germany's growth, European growth to be a little bit stronger.

It's not going to be the strongest performer in the world. It's not going to be as strong as the US, certainly. But what we can see is that Germany and the rest of Europe is really navigating a lot of the various geopolitical conflicts, the supply chain changes, et cetera, by introducing really strong and important policy stimulus. And that does give some confidence for the European growth story in 2026.

My final slide on the macro bit is just thinking about central banks. Now, remember, that over the last decade, even longer, what you've typically seen is that global central bank policy has been very synchronized. Central banks around the world have raised policy rates at the same time, and they've cut policy rates at the same time. You can see that from the left-hand side of the left-hand chart there, so everyone moving in sync, with the exception of the Bank of Japan.

Things are changing in 2026. So as you can see from the dotted line, which are market forecast for the various central banks, whereas the Fed is expected to cut rates a couple of times this year, there are several central banks which are expected to keep rates on hold throughout 2026. And you've even got a couple of central banks, which are looking to hike rates.

So for example, for the ECB, they've almost finished their rate-cutting cycle. Maybe they have one more left. But there is a good chance that their next move is going to be upwards. If you look at Australia, Canada a couple of those, something to think about rate hikes and of course, the Bank of Japan, where they already have rates at 30-year highs, are likely to have one or two more rate hikes at least in 2026.

Why is that important? Well, last year, international markets did really well. I'm going to talk about that a little bit more in a bit. But international markets did really well. And the main reason for that was because of dollar weakness. The dollar weakened in 2025 down to a couple of reasons. One was because of concerns about US growth after liberation day, and the other was because of concerns around policy credibility in the US. And some of the stuff that the US administration was doing was filling a lot of people with some concerns. You saw a shift away from the US.

Now, in 2025, one of the things that we're seeing is that the US dollar is no longer as overvalued as it was at the beginning of '25. In fact, it's actually fairly valued against Europe. At the same time, there's a general consensus expectation that policy volatility is going to be a little bit less in 2025.

Now, I'll admit that the first two weeks of the year may be suggest the opposite could be true. But certainly, in terms of the way that investors are thinking about US policy, I think it has strengthened since the worst points of liberation day. And the third thing to keep in mind is that the Fed is expected to cut rates a little bit more than other central banks. So how do we put this together?

From our perspective, the focus should really be on interest rate differentials. And with the Fed cutting rates, whereas a lot of other central banks are on hold or hiking, this should put some further downward pressure on the dollar. But because policy credibility is no longer in as much question, and because the dollar is no longer as overvalued as the beginning of last year, the dollar depreciation that we're anticipating in 2026 is not going to be as sharp as what we had last year.

Before I talk about the general market, let me just summarize the global picture. So we are expecting global growth. This is across most of the main regions in 2026 to be fairly strong. Europe and China really driven by some clever policy choices, and in the US, in particular, fiscal policy stimulus is going to be key.

With this, we don't think the Fed is going to have to cut rates very much at all. The labor market is something that we need to watch, but overall, we're expecting two Fed cuts for this year. And I should have said we're expecting those to come through in the second half of the year, not in the first half.

And then for the global economy, because it's looking pretty strong and because of the Fed being a little bit more dovish than the other central banks, we're expecting something, I guess, a slightly weaker US dollar in '26 too.

Let's move to equities now. Last year was a really interesting year for the US market. Now, you did see double-digit gains for the S&P 500. But really interestingly, the US was actually outperformed by a lot of regional markets. If you're looking at just the US MSCI world, the S&P 500, or I should say the US, was outperformed by about 70% of those regional markets in the MSCI World Index.

So that is a very big international outperformance relative to the US. That's not to say that the US market did badly. Of course, as I said, they still had double-digit gains.

Now, what we're seeing as well is that through last year, particularly in the last part of 2025, there were growing concerns about AI growing, scrutiny, wondering if really that rally could be extended with as much power as we've seen in recent years. So we've seen the market lose a bit of momentum in the US.

So in 2026, we still think that the economic backdrop is pretty constructive. But with valuations being as elevated as they are and with the scrutiny around AI tech, we think that it's going to be a little bit more difficult to get the kind of gains that we've seen in recent years.

What the US needs in order to get these strong gains is earnings growth. We're not expecting to see much multiple expansion, so we're not going to see much of a valuation move up, given that valuations are already so stretched. So really, the outlook for the US comes down to what is going to happen to US earnings growth.

As I said, the US macro backdrop is really constructive. And typically, that should suggest that earnings growth can do well. Throw in the fact that you've also got fiscal stimulus, which is going to help a lot of the specific sectors within the US. And importantly, keep in mind that the Federal Reserve is going to be cutting rates against a backdrop of no recession.

So the chart on your right is just showing you historically what's happened to the market when the Fed is cutting against a backdrop of recession, and what happens to the market when the Fed is cutting against a backdrop of no recession. And you can see quite clearly, with I guess the darker blue line there, that the market typically does really, really well in that kind of environment. So this bodes well for the US story.

What I will say, though, is that increasingly, with the scrutiny on AI and with this macro backdrop looking fairly healthy, what we should see this year is a further broadening out of those games. You don't just need to be focused on AI tech. You can be thinking about other sectors-- consumer discretionary, financials-- those typically do really well in a strong growth year.

Also, think about the other AI beneficiaries, so companies that maybe don't sit directly in the tech space, but should be seeing their AI adoption start to really pay fruit. So there's a lot of opportunity in the US right now, beyond just that typical AI tech story.

And talking a little bit more about the AI tech side, of course, I can't really mention this without confronting the fact that there are concerns, that there is a bubble at the moment. We've done a couple of comparisons, we've run a couple of pieces, and I really encourage you to go on to our insights website to read them.

The first thing that I'll say is that as you can see from the chart on your left, although there are concerns about valuations, US tech companies are not-- the valuations are not as stretched as you saw during the dotcom bubble. So that gives US some reassurance.

Think about also the fundamentals of these companies. They have strong cash flow. They have good profits. They've got earnings growth. So there's a very good earnings delivery which suggests that these companies are doing well because of fundamentals, not just because of the multiple expansion.

So those are two really good things that give us some reassurance. But at the same time, last year, you did see an increase in debt financing. So as these companies were going about thinking about AI CapEx, rather than funding it through cash, you did see an increasing number of firms have to turn to debt financing.

That typically can be or I should you say that can be a concern in terms of global developments. The chart on your right here is going to be really important, though. Now, if you're thinking about debt leverage, if you're thinking about the tech sector today in terms of debt leverage compared to its own history, actually, it doesn't look that bad.

And if you compare the tech sectors debt leverage to the rest of the S&P 500, well, actually it looks pretty healthy. But that is a snapshot of today. We're anticipating that with that $1.3 trillion expected increase in AI CapEx over the next five years, more and more companies are going to be turning to debt financing. So it's something that we need to watch.

We're not in a bubble right now, but we need to keep an eye on this. And just that reason alone of having to keep an eye on these companies, the fact that there may not just be winners, but there could actually be winners and losers, so this isn't just a one-way trade, it really does make sense that as well as maintaining, certainly, some AI tech exposure in the US, investors should increasingly think about diversification. What are the other opportunities out there, given this additional scrutiny on AI tech?

So let's go to the next slide. This is our world map and valuations. Regular viewers will be very familiar with this. Really focus on those boxes. It shows you how expensive a single market is relative to its own history. If it's red, it's very expensive. If it's green, on which I have to say, there's not much of. But if it's green, it's cheap relative to its own history.

So the key takeaway here is that the US is clearly, actually, I think along with-- well, actually, just mainly the US, it's really the most expensive market in the world to the point before about AI tech. So where else can you go?

It's not a very clear story. Last year, the outperformance of international markets was really down to three things. One, as I mentioned before, was dollar depreciation. The other thing was stronger fundamentals. Of course, we saw for Europe and China, as I mentioned before. And the third thing was that there was a valuation differential between the European market and the US, Asian markets in the US, which made them extremely attractive at the beginning of last year.

Fast forward to the beginning of 2026, and you can see that actually, Europe doesn't really have that much of a valuation differential against the US. That relative attractiveness has disappeared. So what Europe really needs is a strong fundamental story. As I mentioned before, because of the fiscal stimulus, we are quite positive on European growth.

Keep in mind too, that there's always going to be pockets of the European market, which are more attractive than just what that headline index suggests. We continue to like European financials, for example. And then there's other part of the European market which really do stand to benefit from AI. So I'm thinking industrials, health care, et cetera. So there are pockets of opportunity within Europe, which we actually do find very attractive. But you do need to have active management, stock selection to really try and take advantage of that.

Asia is a really interesting one for us. You do get exposure to AI tech. So if you like tech, think about Asia because you actually can get it at a cheaper valuation. And on top of that, the China fundamental story, as I said before, is pretty promising, and that should pay dividends for the whole of the region.

Now, just back to the US, and I should say, look, we are positive on US big cap tech. So we do think they should have exposure, but this is really about thinking what else there is in addition to US tech. Part of the story is a US small cap tech is one of the few areas in the global market, which is looking attractive.

So think about this, US small cap, it's very economically sensitive. It's very interest rate sensitive. And as I said before, we're expecting a strong growth here in the US. And we're expecting Fed rates to come down. And you have a valuation differential. So I think any investor should really think about the US small cap space as an area to focus on for '26.

That's equities. Let's move on to fixed income. Now, typically, when you have a Fed cutting cycle, you will see the short end of the yield curve. So you're one or two-year rates will come down. But also, your belly and your long end will also come down with it.

We haven't really seen that this time. So front-end rates have come lower. But actually, the long end of the Treasury yield curve has not been coming down in conjunction. What has been going on there is really down to Fed efficacy. What is the effectiveness of Fed policy, and I guess, what are the constraints in stopping it from feeding through to the bond market.

For this year, as I said, we're expecting two Fed cuts, but we're not actually expecting the 30-year point, for example, to come down much. Why is that? Well, there's two factors. One is because of continued fiscal sustainability concerns, concerns really just about US fiscal debt. We don't think that this is something which is going to become an emergency or a market crisis, but certainly, it's something which is simmering at the back of people's bond investors' minds, and is probably meaning that the long end of the curve is not as attractive as it would be.

The second factor that we need to keep a very, very close eye on is just this discussion around Fed independence. The Trump administration, we know they want the Fed, to your point, to come down because that's what really feeds through to mortgage rates. Unfortunately, if there's questions around Fed independence, Fed credibility, all that's going to do is put upward pressure on the long end.

So when we're putting this together, we are expecting the two-year point to come down the front end of the yield curve to come down. We think that the belly of the curve can come down a little bit as well. But that 30-year point, we have got some concerns that there will be the steepening of the yield curve as this fiscal sustainability concerns and the Fed independence concerns continue to percolate in the market.

It's important to say at this point-- and you can see this from the chart on your right-- that this isn't just a US concern. The fiscal sustainability concerns is global, and that is putting upward pressure on a lot of yield curves around the world. In Japan, with talk around a fiscal stimulus bill from the new Takaichi government, if you think about Germany, their announced fiscal stimulus. In the UK, maybe no fiscal stimulus, but real concerns about debt sustainability. All of this is putting upward pressure at the long end. So this is a global narrative that we're seeing.