We think the AI-driven surge in equity markets will continue over the next year or so, with tech-heavy stock indices such as those in the US, Japan, and China outperforming. While risk premia are generally low across equity and risky bonds, most measures of equity valuations are not yet as stretched as during the late1990s. We forecast the S&P 500 to rise to 8,000 by the end of 2026.
By contrast, government bonds in several major markets face structural headwinds on account of fiscal profligacy, quantitative tightening, and reduced demand from key buyers such as pension funds. While the tail-end of the global rate-cutting cycle will help to a degree, we think long-term yields are set to remain significantly higher than in the 2010s. We also expect a near-term recovery in the US dollar, especially against European currencies, even if its still-high valuation might be a headwind over a longer horizon.