As we enter 2026, the investment landscape presents both compelling opportunities and areas requiring careful navigation. Drawing on insights from leading global investment institutions, we see an environment where patience, diversification, and disciplined investing will be crucial to success.
The investment environment for 2026 presents a clear choice: investors can chase the momentum of recent winners and hope the rally continues, or they can invest with discipline, diversification, and a focus on sustainable businesses at reasonable valuations. At Prosperity, we firmly believe the latter approach offers the best path to long-term success.
The Global Economic Backdrop – “Steady but slower growth”
Major investment houses including JPMorgan, Goldman Sachs and Morgan Stanley, maintain constructive outlooks for global growth in 2026, albeit with more modest expectations than in recent years. The consensus points to steady global expansion supported by three key drivers:
- Artificial intelligence investment continuing at unprecedented levels
- Accommodative monetary policy as central banks complete their normalisation cycle
- Supportive fiscal policies in major economies.
Given JPMorgan assigned a 35% probability to a US recession scenario, this reminds us that uncertainty remains elevated. The shift from a growth period to one requiring selectivity and discipline, marks a fundamental change.
The Australian Market Opportunity – “Growth to return after lagging in 2025”
After underperforming many global peers in 2025, the Australian market heads into 2026 with more balanced prospects. Earnings growth is expected to return for the first time in several years—a meaningful positive development after a challenging period for corporate profitability.
The Australian economy is forecast to grow around 2% in 2026, supported by resilient household consumption, solid immigration, and improving global conditions.
Within the Australian market, the materials sector has shown renewed strength, particularly gold miners, which have benefited from record gold prices driven by central bank buying and safe-haven demand. The big four banks have delivered stable dividends, but limited share price growth, reflecting the challenges of higher funding costs and cautious consumers.
Equity Markets: A More Selective Environment – “Positive but moderate returns due to valuations”
Global equity markets face a year of likely positive but more modest returns compared to the strong gains of recent years. Elevated valuations, particularly in US growth stocks, suggest the easy returns of the AI-driven rally may be behind us. Vanguard's research indicates US equities, especially growth stocks, may deliver muted returns over the next five to ten years, with the strongest risk-return profiles instead found in high-quality fixed income, value-oriented equities, and non-US developed markets.
The artificial intelligence theme continues to dominate, but the investment cycle is shifting from the infrastructure build-out to adoption and monetisation. This transition creates both opportunity and risk.
For our portfolios, this environment reinforces our commitment to diversification and thoughtful positioning. While we maintain exposure to AI themes through technology holdings, we're not placing all our chips on one transformational narrative. Our approach of combining varying styles, large and small companies, plus developed and emerging markets, aims to position our portfolios to benefit from multiple sources of return.
Fixed Income: An Improving Opportunity Set – “Bonds look attractive again”
With government bond yields having normalised, fixed income now offers more attractive entry points than at any time in the past decade. Morgan Stanley's research suggests Government bonds will rally in the first half of 2026, as central banks complete their policy normalisation, though returns may moderate in the second half.
However, tight credit spreads mean corporate bond investors need to be selective. Investment-grade spreads remain near historical lows despite strong fundamentals, leaving limited room for capital appreciation. In this environment, careful selection and avoiding the temptation to reach for yield in lower-quality segments remains important.
Emerging Markets: A Compelling Diversification Story – “It’s not just about China”
After 15 years of underperformance relative to developed markets, pockets of emerging market equities trade at substantial discounts on both earnings and book-value metrics.
The emerging markets story has evolved beyond China. While China faces structural headwinds including weak private sector confidence and slower long-term growth, the rest of the emerging market universe—including India, Southeast Asia, South Korea, and Taiwan—forms a more balanced growth constellation. These markets are central to global AI, semiconductor, and advanced manufacturing cycles.
JPMorgan forecasts double-digit gains for emerging market equities in 2026, supported by stronger demographics, rising domestic consumption, and a weaker US dollar.
Key Investment Themes for 2026
Artificial Intelligence: Moving from Hype to Reality – “Winners will depend on monetisation, not hype”
The major cloud companies are expected to spend nearly $500 billion on AI infrastructure in 2026. Vanguard's analysis suggests up to a 60% chance that AI-driven investment could help push US economic growth to 3%, materially above consensus forecasts.
As the investment cycle matures, winners and losers will emerge based on ability to monetise these massive investments. Today's leaders may not be tomorrow's beneficiaries. For investors, this means maintaining disciplined exposure to the theme while avoiding overconcentration in any single narrative or set of stocks.
Commodity and Resource Sectors: Structural Support Emerges – “Gold supported by central bank buying and geopolitics”
The energy transition and electrification themes are creating compelling opportunities in commodity markets, particularly copper. With a decade of underinvestment in new supply and surging demand from electric vehicles, data centres, and renewable energy infrastructure, copper faces supply constraints that could support higher prices.
Gold continues to attract attention, with JPMorgan forecasting prices reaching $5,000 per ounce by end-2026, supported by central bank buying and ongoing geopolitical uncertainty.
For Australian investors, these themes provide natural portfolio exposure through the materials sector, which has already delivered strong performance. Our approach focuses on operators with strong balance sheets and efficient cost structures, rather than speculating on commodity price movements alone.
Infrastructure and Real Assets: Long-term Value Creation – “Steady income, inflation protection”
Infrastructure investment is experiencing renewed focus, driven by energy transition needs ageing infrastructure in developed markets. This includes the build-out of AI-related power and data infrastructure. Listed infrastructure offers equity-like total returns with high income yields comparable to fixed income, providing a valuable diversification benefit. While short-term performance may be influenced by interest rate movements, the long-term structural demand for infrastructure assets remains compelling.
Managing Key Risks
While we maintain a constructive outlook, several risks warrant close attention:
Valuation Risk and Market Concentration
Equity valuations in major markets, particularly the US, remain elevated by historical standards. Market concentration in a handful of mega-cap technology stocks means that broader market performance depends heavily on these companies continuing to deliver exceptional results. Any disappointment in AI monetisation or earnings growth could trigger meaningful corrections. This concentration risk reinforces our commitment to geographic and style diversification.
Inflation Persistence
Inflation may prove stickier than markets currently expect, particularly in the US where fiscal stimulus and AI-related infrastructure spending continue to support demand. Allianz forecasts US inflation remaining above 3% in 2026, which could limit the Federal Reserve's ability to cut rates. For Australia, housing inflation has shown persistence, keeping the Reserve Bank cautious. Our fixed income positioning accounts for this risk through diversification across different duration and credit quality profiles.
Geopolitical Uncertainty
Geopolitical tensions remain elevated, with ongoing conflicts, trade policy uncertainty, and US-China technology competition creating periodic volatility. The fragmentation of the global order and emergence of new rules around trade and investment mean that geopolitical considerations are becoming as important as traditional economic analysis.
Labour Market and Recession Risk
Signs of labour market softening, particularly in the US, create the potential for consumption weakness that could trigger a recessionary dynamic. While not the base case for most forecasters, this remains the most significant near-term macro risk.
Prosperity's Approach for 2026
In this environment, our investment philosophy provides clear guidance. We will continue to:
- Maintain Disciplined Diversification
With returns likely to be more dispersed in 2026, diversification becomes increasingly important. Our portfolios incorporate multiple engines of potential return. This multi-asset approach is designed to help manage portfolio risk and reduce the magnitude of severe falls, consistent with our diversification philosophy. - Play to Our Strengths
Our philosophy explicitly recognises that we focusing on areas where we can add value and being prepared to be nimble when risk or opportunity emerges. These strengths become more valuable in a market environment that rewards selectivity. - Build for the Long Term While Staying Nimble
We build portfolios for the long term, but we recognise that markets can become carried away by optimism or pessimism in the short term. When markets move away from what history tells us is reasonable value, we look for opportunities to adjust positioning. This might mean taking some profits from areas that have performed strongly, adding to assets that have been overlooked, or maintaining patience when our long-term conviction differs from short-term market sentiment. - Apply Evidence-based Allocation Decisions
Our philosophy guides us to allocate based on evidence: for asset classes, geographies, and investment sizes where markets are efficient at pricing assets, we use index approaches; where active management has demonstrated its value, we carefully select skilled managers. This evidence-based framework helps us allocate resources where they're most likely to add value.
Thank you for your continued trust in Prosperity. We remain committed to sharing informed, considered perspectives and supporting our clients through changing economic conditions with a focus on long-term outcomes, risk awareness, and disciplined decision-making.
If you have any questions about this commentary or would like to discuss how these themes relate to your circumstances, we encourage you to contact your Principal Adviser.
This communication contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Prosperity Wealth Advisers (ABN 32 141 396 376) is an authorised representative of Prosperity Wealth Advisory Services Pty Ltd, Australian Financial Services Licensee (533675).