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Royal Bank Invest

Investment Outlook 2026: Stability in shifting landscapes

Over longer periods of time (five years or more), investments such as stocks, shares and funds have the potential to give you higher returns compared to cash savings. But the value of investments can fall as well as rise. There is a chance you may get back less than you put in. Past performance is not an indicator of future performance and should not be relied on as such. You should continue to hold cash for your short-term needs.

Financial markets and the global economy kept calm and carried on in the face of a number of challenges throughout 2025. 

Tariff uncertainty, geopolitical conflict and speculation about huge technology investments raised eyebrows. But those concerns were mostly shrugged off as investors focused on fundamentals such as strong corporate earnings, healthy employment and falling interest rates. 

Stock markets repeatedly scaled all-time highs and the global economy maintained positive growth. But with several investor concerns still in play – such as worries around how long the artificial intelligence (AI) boom can last – will we see continued positivity in 2026?

UK economic outlook

There’s never a dull moment when it comes to the economy, and the UK is no different. Right now, we’re seeing two key factors affecting businesses and households – inflation, and a desire to save.

Let’s start with inflation. 

Prices shot up in the wake of Russia’s invasion of Ukraine as energy and many commodities became more expensive. UK inflation peaked at 11% towards the end of 2022 and took almost two years to fall back to the Bank of England’s 2% target. 

But the story doesn’t end there. Inflation may have dropped to 2% in mid-2024 but it soon picked up again. We’re some way from double-digit territory, but prices have risen by nearly 4% year-on-year. 

Economic impact

This reacceleration has prevented the Bank of England from rapidly lowering interest rates in 2025. And as higher rates generally encourage people to save rather than spend, it has also cast a long shadow over economic growth. 

The performance of different sectors since the Covid pandemic, in terms of their contribution to economic growth, has been diverse. At the top of the table, we have technology and professional services, which grew significantly over the past five years. But sectors such as retail and hospitality are contributing 5% less than they were at the start of 2020. 

Here's how much each sector’s contribution to the UK economy has grown or shrunk since just before the pandemic (for example, technology now contributes 39% more to the economy than it did in early 2020).

The fact that retail and hospitality have struggled shines a light on our second key factor for the UK economy – the consumer’s desire to save. So let’s turn our attention to household finances. 

Household spending and savings

Why are people spending less on staying away, eating out and shopping? 

It’s not necessarily because they don’t have the money. It may be tempting to think that in times of rapidly rising inflation we would see people cutting back on non-essential spending. But not so fast. 

While prices are on average 28% higher than five years ago, wage growth has also been strong – so strong that average wages are one third higher over the same period. 

It appears, instead, that Brits aren’t spending as much on those things because they prefer saving their money. UK households tend to put away more than 10% of their incomes – more than double what their US counterparts save. 

UK growth potential

So, stubborn inflation has kept interest rates high and, although wages have been strong, the British people like saving their hard-earned cash. This tells us two things:

• Businesses will have to work harder to part customers from their money.

• There is plenty of upside growth potential in the UK economy. Cash is available that could be used as a sustainable boost to spending and growth. And that could give the UK outlook an altogether different complexion. 

 

Geopolitical outlook – economy withstands global tensions

It’s been a year of war, peace and tariffs. 

We’ve seen global power struggles around trade, competition over new technologies and changing populations all taking their toll. 

These events typically create a challenging environment for the economy, and the ensuing uncertainty makes it difficult for investors and economists to gauge the future. 

But despite all this, data shows that the economy and financial markets are holding firm. 

This is likely because governments are now better at understanding their own strengths and weaknesses – making them quicker to respond and react to international developments. 

However, there are of course limits to how well countries and economies can respond to geopolitics. The more extreme an event, the bigger the potential strain. 

Should international tensions escalate, or if infrastructure were disrupted – as we saw with this year’s blackouts in Spain – we could eventually see an impact on the financial world. It would seem from this year, though, that it would take something pretty significant to shift the economic dial. 

Looking ahead

Conflict within the Middle East and Ukraine has showcased the evolution of modern-day war. Countries are now using cyberattacks, media influence and economic pressure to gain advantage. 

Governments and global organisations are investing in better awareness, stronger defences and smarter planning. 

We believe three key themes could emerge from current geopolitical tensions.

Alliances could change

 

International relationships are likely to continue to form, end or evolve as countries try to deal with the unpredictability of others. 

Defence spending could increase further

Governments could spend more on military and security – Germany, for example, has allocated more funds to this after years of reduced spending. 

Political challenges could deepen

 

Ongoing conflicts are unlikely to be resolved overnight, which creates significant challenges for those involved around the funding needed and their political relationships with allies. 

 

 

It’s worth highlighting again that the global economy remained resilient in the face of many challenges throughout 2025. While we should stay alert to any potential geopolitical escalations in 2026, it’s likely that we will see the same resilience throughout next year.  

Investment landscape in a changing world

It was a rewarding year for investors despite various challenges. There was a lot to navigate, from global tensions to major trade policy changes, but financial markets showed impressive strength. 

Despite worries around tariffs, technology shifts and geopolitical conflicts, the key theme that defined 2025 was resilience. 

Tariffs, tariffs, tariffs

A major event was ‘Liberation Day’ in April when US President Donald Trump unveiled sweeping tariffs against all the country’s key trading partners. 

While this caused a steep drop in stock markets, they quickly recovered when new trade deals were agreed. They then kept doing well despite ongoing tariff uncertainty, spurred on by resilient, positive company performance.

The rise of AI

Another big story was the growing adoption of AI. The relevant companies saw huge growth as investors embraced the technology’s potential. 

Spending on AI infrastructure has helped boost the US economy, almost matching consumer spending in its contribution to growth in the first half of the year. 

There were some market jitters through the second half of 2025 as concerns grew that markets might be overplaying the AI story. But investors broadly still believed in its long-term potential. 

Reasons for optimism

Looking to 2026, the investment team at Coutts – the bank behind Royal Bank Invest – expect another year of steady growth supported by three key factors.

Continued economic growth

 

 

Global growth is slowing but remains positive. The global economy is expected to grow 2.9% in 2026, according to the OECD. While this isn’t a record-breaking number, it is reassuringly steady. 

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Supportive government policies

Governments remain proactive in supporting their respective economies. For example, in the US, new tax cuts and the roll out of President Trump’s ‘Big Beautiful Bill’ are expected to boost spending. Elsewhere, Germany is also upping its spending on things like infrastructure after years of restrictive budgets. 

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AI’s ongoing impact

 

 

 

AI is almost certain to remain a key theme next year. It’s still in its early stages, with just under 10% of American companies using it to deliver their core goods or services (according to the US Census Bureau). This leaves a lot of potential for future growth. 

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Investment themes for the year ahead

For Coutts, the most likely scenario for 2026 is continued economic strength and solid company earnings. Interest rates are expected to keep coming down next year as well, which is typically a positive environment for stock markets. 

But Coutts have also analysed what could drive even better performance next year, and where the risks are. 

A more optimistic outlook could include AI creating big improvements in how companies operate, driving even stronger growth. There is the possibility of bumps along the way, like we’ve seen in the latter stages of 2025, but over time AI is expected to be a major driver of productivity. 

Alternatively, risks to watch include fears around a stock market bubble – with high valuations right now – and the majority of returns coming from just a handful of technology giants. 

On balance, the Coutts team believe these risks, while important, are worth enduring given how well companies are performing. 

What this means for your investments

 

Coutts’ investment process is developed using two pillars: Anchor and Cycle. Anchor is their long-term analysis. It asks: What will markets look like in five years' time? Cycle looks at where we are in the business cycle right now – is the economy growing or shrinking, and how fast?

Following this process, Coutts has earmarked two key areas going into 2026:

 

The US remains exceptional

There may be concerns about the US government's big debt and disruptive trade policies, but America remains a world leader when it comes to economic growth and innovation. 

The region’s population, productivity and established institutions make it a standout among global economies. And given the strong performance of US companies throughout 2025, this momentum could carry forward into 2026. 

Stocks may be getting expensive as they've done so well, but Coutts still believes there are positive times ahead and are positioned accordingly. 

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Sterling is cheap versus the US dollar

Coutts believes the British pound (sterling) is currently cheap compared to the US dollar. Earlier this year they adjusted their investments to take advantage of this, increasing exposure to assets held in sterling. This means that, if US stock prices fall and the dollar is weak, it should help reduce losses because returns become worth more when converted into the UK currency.

This approach helped soften the impact of the market drops that followed Liberation Day, and supported performance when markets started recovering. 

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Staying alert

As always, the Coutts team closely monitor the landscape and are ready to respond to market developments – good and bad. Their investment strategy is designed to absorb and adapt to bumps in the road while making the most of opportunities. So if anything does change, they’re ready to respond swiftly.