In our baseline scenario, government bonds will have scope to rally, especially where rate expectations have shifted the most since the war began, such as in the UK and the euro-zone. The dollar would also benefit over the course of the year, particularly against the euro and sterling, from a favourable shift in yield gaps and further US equity outperformance.
Our baseline scenario sees the AI-driven surge in equity markets continuing, with tech-heavy stock indices in EM Asia and the US outperforming as earnings expectations continue to grow strongly. By contrast, energy-heavy indices such as in Latin America will lag behind. We forecast the S&P 500 to end 2026 at 7,500, slightly below our pre-war forecast, but still more optimistic than most forecasters.
In the adverse conflict scenario, most policy rates will end 2026 above where market participants expect, reducing the scope for a rally in DM 10-year government bonds. The need for further fiscal support could also drive up term premia, which had generally been low across most risky bonds before the war broke out. In this scenario, global equities would come under more pressure in 2026, as tighter monetary policy combines with lower growth, but the dollar could rally further from a positive shift in US terms-of-trade and increased demand for safe-havens.
An overview of our forecasts and total returns projections is available through our Financial Market Dashboards.