Where To Invest 2026

Investment Outlook for 2026: A Detailed Analysis

Key Concepts:

• Excess Cape Yield: A valuation measure developed by Robert Schiller, adjusting for interest rates to assess stock market expensiveness.
• CAPE Ratio (Cyclically Adjusted Price-to-Earnings Ratio): A valuation metric using average inflation-adjusted earnings over the past 10 years.
• Forward P/E Ratio: Current stock price divided by forecast earnings for the next 12 months.
• Mag 7: The seven largest US technology companies (likely referring to Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).
• Credit Spread: The difference in yield between corporate bonds and government bonds, representing the additional compensation for credit risk.
• Sonia Rate: Sterling Overnight Index Average, a benchmark interest rate used in the UK.
• Recency Bias: The tendency to overestimate the importance of information received recently.

I. US Stock Market Valuations & Growth

The US stock market is currently considered expensive based on multiple valuation metrics. The Excess Cape Yield, as measured by Robert Schiller, indicates high expensiveness, historically correlating with lower 10-year real total returns. Historically, the US market has been cheaper approximately 75% of the time since the 19th century. Simpler measures like the forward Price-to-Earnings (P/E) ratio also confirm this expensiveness, mirroring levels seen during the post-pandemic euphoria.

Despite high valuations, US earnings growth has been strong and steady since 2013, with a brief dip during the pandemic. Broker forecasts predict continued brisk earnings growth, potentially exceeding the average 8% growth rate seen since 2013, projecting a 15% increase. This suggests the S&P 500 could sustainably grow at this rate without further valuation increases.

However, the market is heavily concentrated in the “Mag 7” mega-cap tech stocks, comprising roughly a third of the S&P 500 – a higher concentration than historically observed. While these companies are profitable, their dominance raises concerns. They currently account for only 25% of future index profits and 12.5% of future revenue, a significant shift from 2014. This 30% premium to their profit share is causing concern, even prompting warnings from the Bank of England. Recent performance (early December 2025) shows a weakening of the AI narrative, with several Mag 7 stocks experiencing declines (Nvidia down over 10%, Microsoft down 5%, Oracle down 23%).

II. Global Valuation Comparisons

Comparing CAPE ratios across countries reveals significant valuation differences. The US is expensive (cheaper only 5% of the time historically), alongside Taiwan, the Netherlands, India, and South Korea. Conversely, markets like Brazil, Mexico, Hong Kong, and Japan appear relatively cheap. The UK, despite recent outperformance, remains persistently cheap, while China is rallying and approaching UK valuations. However, the video cautions against relying solely on valuation as a timing signal, noting that expensive markets can remain so, and cheap markets can stay undervalued for extended periods. Forward valuation metrics show a similar pattern: US and India are expensive, while Mexico, Italy, China, and the UK are relatively cheap.

III. Sectoral and Style Analysis within the US Market

Within the US market, significant disparities exist between sectors. Unloved sectors like energy and basic materials remain undervalued, while communication services and technology remain expensive. Technology outperformed significantly in 2025, and utilities also rallied due to the energy demands of AI. Consumer discretionary stocks, however, indicate a less robust overall economy.

Analyzing investment styles reveals large-cap growth stocks, driven by the Mag 7, have again outperformed. Small caps have barely risen despite being cheap relative to large caps. Over the past decade, small-cap value stocks have significantly underperformed large-cap growth stocks, but this is historically unusual. From 2004-2012, small-cap value outperformed large-cap growth.

IV. Asset Class Performance & Outlook

Gold experienced spectacular performance in 2025, rising nearly 60% and outperforming the S&P 500 over the last 25 years. This surge was driven by a weak dollar, rangebound yields, and central bank purchases, further fueled by momentum. However, accounting for factors like dollar strength, real interest rates, and inflation, the current gold price is approximately 35% overvalued, suggesting potential vulnerability.

Developed market government bonds, particularly UK gilts, are becoming more attractive as the Bank of England begins cutting interest rates. Yields on gilts exceeding money market rates (SONIA) beyond the 5-year maturity point present opportunities. Corporate bonds offer income with less volatility than equities, but credit spreads remain small across all rating categories, making reaching for yield risky. The best time to invest in corporate bonds is during periods of credit market stress.

V. Macroeconomic Outlook & Forecasts

Monetary policy remains a positive tailwind for equities, with central banks globally (excluding Japan) in a rate-cutting cycle. The US is expected to see modest interest rate cuts (one in December 2025, two in mid-2026).

Vanguard forecasts developed ex-US equities to generate 7-9% returns over the next decade, with UK equities slightly lower. Bonds are expected to return 4-5%. However, US growth stock forecasts are significantly lower at 2.3% annually, below current cash returns (3.3%), due to overvaluation. Developed market ex-US stocks, US value stocks, and emerging market stocks are projected to deliver more respectable returns (over 6%).

Historically, US stocks have averaged a 6% real return above inflation, while UK stocks have averaged 5% over the last 120 years. Even cash-like bills have beaten inflation over this period, albeit by a smaller margin.

VI. Analyst Forecast Accuracy & Conclusion

Analyst forecasts for the S&P 500 have historically demonstrated recency bias, often being too bearish after downturns and too optimistic after rallies. 2025 may be the first year where the S&P 500 closes within the range of analyst forecasts. 2026 forecasts range from 4% to 17% above current levels, but are cautioned against being overly relied upon.

Conclusion:

The global equity market faces balanced risks in 2026. Positive factors include falling policy rates and strong US earnings forecasts. However, high valuations in many regions, expensive gold, and pockets of value in overlooked markets (UK, Germany, US small caps/value) present challenges. Inflation remains above central bank targets, slowing the normalization of interest rates. A stable geopolitical environment and continued economic growth are crucial for maintaining the current trajectory. A diversified approach, with a focus on value and quality, is recommended.

Notable Quote:

“Expensive markets often stay expensive and cheap markets often stay cheap for much longer than you’d expect.” – Speaker, emphasizing the difficulty of timing investments based on valuation alone.