John Hancock: 2026 Global Markets Outlook

In many ways, an investor’s job is like that of a racecar driver: to outperform while managing risk. In a year like 2025, with markets in fifth gear and maximum risk taking often rewarded, it can be nearly impossible for a disciplined investor to keep up. Heading into 2026, we see more opportunities for risk-managed strategies to add alpha to portfolios, and we expect “drafting” the market—rather than attempting to set the pace in the lead car—to benefit many investors.

2025: markets have been on a straightaway

This year has been a short-term investor’s dream: trend following, momentum trading, and lower-quality areas of the market (e.g., unprofitable tech companies, retail favorites, and crypto-related assets) have led the way for much of the year. Seemingly every day, a new announcement of an artificial intelligence (AI) investment causes equity markets to rally, despite historically extended valuations. The phenomenon is global, as non-U.S. markets such as Spain and South Korea have delivered outsized gains in 2025,¹ even though economic and earnings growth in those countries remains lackluster.

In our view, technical trends, market momentum, investor sentiment, and retail participation have been the primary drivers of the extraordinary short-term performance across riskier markets.

Why has sentiment been so positive this year?

• The U.S. Federal Reserve has embarked on a rate-cutting cycle, even though the U.S. economy is still in decent shape and inflation has yet to drop back down to the central bank’s 2% target. These preemptive rate cuts, designed to prevent a recession, are contributing to risk taking as U.S. financial conditions ease.
• Analysts have continued to revise their corporate earnings estimates higher, recently forecasting 14.2% year-over-year earnings growth for the S&P 500 Index in 2026, 9.0% for the MSCI EAFE Index, and 13.0% for the MSCI Emerging Markets Index.²
• The U.S. dollar (USD) has suffered one of its steepest declines in recent history, falling over 8% year to date as of this writing.² A weaker dollar acts as a liquidity release valve, helping riskier assets (most notably, international stocks priced in USD) surge higher.
• Fiscal stimulus announcements across the globe have also fueled investor optimism, including the One Big Beautiful Bill Act in the United States and defense spending proposals in Germany after years of fiscal austerity.

What are some risks to keep an eye on?

• We believe U.S. stocks are more or less priced for perfection: At the time of writing, the S&P 500 Index was trading at a forward price-to-earnings ratio of 22.5x, flirting with the all-time high of 24.0x in 1999.²
• High-yield bond spreads—a measure of how much risk is priced into the credit markets—are now near historically tight levels, at under 3%,³ and have very little room to narrow further, in our view.
• There may be excessive optimism on the part of investors that the global economy will experience a “no-landing” scenario—in other words, that it will simply avoid a recession this cycle.
• The housing market bubble appears to be deflating, which will probably translate to lower economic growth as consumers’ net worth (driven in part by home price appreciation/depreciation) starts to decrease.
• The corporate earnings bar may be perched too high going into 2026, as many companies still need to demonstrate that they can monetize their substantial spending to date on AI capital expenditures (CapEx).
• Momentum investing, as reflected in speculative frenzies in certain markets and asset classes, may ultimately lead to a massive misallocation of investor capital.

Short term vs. long term: managing the tug-of-war

So how should investors manage the tug-of-war between short-term and often-diverging long-term market perspectives? For us, to borrow a phrase from auto racing, it’s about “drafting” the market by competing in the race without necessarily trying to set the pace. For example, fully invested portfolios with lower risk profiles, higher-quality allocations, a more defensive tilt, and a greater focus on income may make sense in today’s environment.

• We are partial toward “quality at a reasonable price,” holding higher-quality stocks with upward earnings revisions, where investors are not overpaying for their earnings growth. Consistent with this emphasis, we favor overweight positions in the information technology, communications services, and industrials sectors.
• We endorse diversification across global equities, including U.S. mid-cap stocks, which are trading at a meaningful discount to their large-cap counterparts, helping to mitigate valuation risk in today’s market.
• We view investments in high-quality infrastructure and utilities as likely beneficiaries of increased power demand around the ongoing AI boom and associated buildout.
• Internationally, we favor overweighting growth versus value stocks based on better forward earnings prospects on the international growth side and concentration risk on the value side, where nearly 40% of the MSCI EAFE Value Index is in the financials sector.⁴
• In fixed income, we prefer quality with a mild credit bias. High-yield bonds were recently yielding ~7%,⁵ which may look enticing compared to equities, but investment-grade corporates and mortgage-backed securities are both yielding nearly 5%,⁵ so investors are not receiving much extra compensation for the additional credit risk.
• We also like high-quality tax-exempt municipal bonds that feature elevated yields, attractive supply/demand dynamics, and defensive characteristics.

Why not just sit on the sidelines in “low-risk” cash?

Market momentum can be a powerful and persistent force, so sitting in cash can result in missed investment opportunities. In fact, the late innings of a bull market tend to produce the strongest returns, so investors could lose out on the chance to capture significant equity gains in a relatively short amount of time. We think staying invested—without reaching too far up the risk spectrum—makes sense in this (or really any) market environment.

Granted, it’s difficult for disciplined investors to find value in today’s global equity markets. In 2026, however, we expect there to be more favorable entry points as one or more market risks materialize, hopefully bringing valuations back to more modest levels. Meanwhile, for bond investors, we believe there are still opportunities to take advantage of mispriced assets. We see income as a potentially more important driver of fixed-income returns than capital appreciation in 2026.

Bottom line: it’s about finishing, not winning, the race

In auto racing, the primary goal is to win, which can often mean taking on undue risks. For investors, the main objective should be to finish the race, while trying to stay as close to the frontrunners as possible.