Produced in partnership with Betashares.
Global economic growth will hold up in 2026, inflation in developed markets will continue to moderate, and the US Federal Reserve should cut rates further, according to Betashares’ recently released investment outlook paper, Shock and Ore.
Prepared by the Betashares investment strategy and research team, which includes chief investment officer, Louis Crous; chief economist, David Bassanese; and senior investment strategist, Cameron Gleeson, the outlook paper suggests that in the current environment, risk assets like global and Australian equities are set to climb higher. Betashares predicts that the S&P 500 Index and the ASX 200 Index will round out 2026 on 7769 points and 9368 points respectively.
After a turbulent and unsettling 2025, which featured the US administration’s “reciprocal” tariffs and significant disruption both domestically and globally, Betashares’ base case outlook should give some comfort to investors that a US recession is not on the cards. Geopolitical shocks don’t always have the adverse impact they’re expected to, Gleeson says, citing the relatively benign reaction of global nations to US President Donald Trump’s Liberation Day tariffs, despite some extreme initial market volatility.
“Raising the average US tariff on imports from 2.5 per cent to 15.8 per cent might normally have been expected to either reignite inflation or curtail demand, pushing the US into recession, but in the end, neither of those outcomes eventuated,” Gleeson tells Professional Planner.
“The pass-through effects on the US consumer remained muted, and the drag on growth was offset by US fiscal stimulus and a private sector AI capex boom.”
“Another paradox of 2025 was that the stronger than expected economic environment and ever-growing corporate profits occurred alongside rising unemployment.”
Two tailwinds: Fiscal support and AI capex
Despite rising US unemployment, and its potential to create real recessionary risk, the US economy appears strong, and the Fed is poised to cut rates further if unemployment becomes a problem.
Overall, the strength of the US economy will continue to buoy the global economy and global markets, with Betashares identifying the “twin tailwinds” of fiscal support and ongoing AI capital expenditure as key sources of economic stimulus.
The introduction of the One Big Beautiful Bill Act (OBBBA) in mid-2025 is expected to deliver an aggregate increase of US$100 billion ($144.6 billion) in tax refunds to US taxpayers in the first half of 2026.
On the corporate side, OBBBA provides generous tax incentives. This has already started to spur business activity and boost forward-looking capex indicators.
“US consumers and businesses are set to receive a significant boost in 2026, although some of this will be offset by the economic drag of tariffs,” Gleeson says.
As for AI capex expenditure, which Betashares describes as “rocket fuel” and includes investment in digital infrastructure like fiber optics towers, data centres and hyperscalers, there’s still growth to come.
While AI investment will significantly contribute to US GDP growth in 2026, its contribution is expected to be lower than 2025.
Last year, AI investments accounted for about one-third of US GDP growth through to Q3 2025, contributing more to growth than traditional drivers like consumer spending.
But geopolitics will matter more to markets in 2026
The outlook paper also discusses how escalating competition between the US and China is reshaping the global economy. Betashares highlights the government prioritisation and fiscal support being directed towards defence spending, AI hardware supply chains and critical minerals, as well as geopolitical risks, such as the potential for regime change in Iran.
So what? Asset class implications
Looking ahead at the next 12 months, the possibility of cross asset class relationships affecting Australian investors’ returns is higher than ever, according to the Betashares paper, which singles out the US dollar as the biggest swing factor.
Betashares predicts a weaker US dollar in 2026, as the interest rate differential advantage that the USD has enjoyed against most other major currencies is eroded.
“Historical experience shows that currency cycles last years and overshoot in both directions, with the last major US bear market (2002-2011) producing a 30 per cent real depreciation,” the Betashares’ outlook states.
“This was also a period that saw significant US fiscal expansion and a more aggressive geopolitical policy, drawing parallels with today.”
When it comes to global equities, the robust US economic outlook and a supportive Fed are positive, although Betashares prefers ex-US developed market equities and emerging markets, given the likelihood that a weaker US dollar will erode US equity returns.
The paper points to the strong recent performance of both ex-US developed market equities and emerging markets, which materially outperformed the Nasdaq 100 and S&P 500 in 2025.
“For Australians holding unhedged global assets, currency movements can have a significant bearing on investment outcomes in Australian dollar terms, for example, the USD weakness meant the stated 17.9 per cent S&P 500 Index return for 2025 was a much more modest 9.3 per cent when translated into AUD terms,” the paper states.
In that context, Australian equities, which delivered 10.3 per cent for the year, outperformed unhedged US equities, despite the strong performance of the Mag 7.
Betashares’ outlook for Australian equities is the most positive it has been for a number of years, driven by strong earnings expectations, particularly among small to mid-caps, and a bullish outlook for commodities.
“With the ASX 200 trading at a forward P/E of 20.9x, significantly above the 20-year average of 15.9x, there is limited scope for further multiple expansion, and this environment favours companies with strong earnings growth, whether in that’s the materials sector benefiting from higher commodity prices or other high-quality companies across the market,” Gleeson says.
