The global economy is facing significant challenges. Geopolitical tensions are often palpable, and the sharp rise in precious metal prices suggests that fear is widespread, likely driven by a range of perceived threats.
Such an environment calls for a cautious investment approach. Yet from time to time, short-term developments can turn out to be considerably more positive than this uncertain backdrop would suggest. In those moments, there may still be room for unrestrained optimism in the short term, despite what appears to be a precarious situation.
Financial markets tend to thrive on a combination of reasonable growth, declining inflation, falling interest rates, and easing geopolitical tensions. Is such a mix conceivable in 2026?
Expansionary fiscal policy everywhere
Let us start with the German economy. For years, it has delivered little to no net growth, weighed down by substantial structural challenges. And yet, stimulating economic growth can be remarkably simple: inject a large amount of money into the economy and activity picks up. That is precisely what the Merz government intends to do. Whether this planned expansionary fiscal policy will structurally improve Germany’s long-term earning capacity remains an open question. For market sentiment, however, that concern can be postponed.
China and Japan are also relying on expansionary fiscal policies to keep confidence intact. The U.S. economy is growing at a moderate pace, but it will receive short-term support from a significant tax rebate linked to the Big Beautiful Bill. From February onward, many households will receive money back, and at least part of it will almost certainly be spent.
In addition, a ruling by the Supreme Court on the legal sustainability of import tariffs is hanging over the market. It would not do much for Donald Trump’s ego, but electorally it could work in his favor if the tariffs were struck down. In that case, some of the levies already paid would have to be refunded. That would be negative for public finances, but likely positive for economic activity in the short term. Time is ticking for Trump. The faster economic growth accelerates, the greater the chance that Republicans can retain their majorities in both chambers of Congress.
Lower inflation is quite plausible
Inflation in the euro area is now in line with the European Central Bank’s target. In my view, the expected pickup in economic growth is not strong enough to derail that progress. On the contrary, lower energy prices, moderating wage growth, a gradual easing of food price inflation, industrial overcapacity in China, and the stronger euro seen last year all make it likely that European inflation will decline further over the course of this year. The ECB could then surprise markets with one or more rate cuts, although not in the very near term.
U.S. inflation remains above the Federal Reserve’s target, but not by much. The latest Beige Book points to a kind of bifurcation within the economy. Higher-income households are doing well and are readily increasing their consumer spending. Those with more limited means, by contrast, are under pressure. The Beige Book describes how these consumers are becoming more price-sensitive in their purchasing behavior. This, in turn, discourages producers from passing on the full impact of import tariffs to consumers, which helps contain inflation. This dynamic could well become the dominant force in 2026.
If the economy grows at a moderate pace and inflation remains contained, there will be diminishing justification for the Federal Reserve to keep interest rates at their current restrictive levels. Rate cuts would then come into view for 2026.
It is hard to imagine things getting much worse
That leaves the geopolitical environment. Tensions are high, and that breeds uncertainty. But one can also ask how much worse the situation can realistically become. We cannot rule out, for example, that the war in Ukraine comes to an end this year, or that the grim regime in Tehran collapses. If China also exercises restraint with regard to Taiwan, and Denmark and the United States reach an agreement over Greenland, sentiment would improve markedly.
It is therefore not difficult to sketch a positive scenario for financial markets, one featuring perfectly reasonable economic growth, lower inflation, interest rate cuts, and easing geopolitical tensions. For most market participants, this will not be the base case. But the probability may be higher than is often assumed.
There are, of course, many risks. But there is always hope.