2026: TrAIumphalism

If 2025 was the year when artificial intelligence escaped the laboratory and Donald Trump escaped political gravity, 2026 will see the consequences of these events play out further on the global stage. It will be another year dominated by political and policy uncertainty, with cyclical economic considerations likely to take a backseat as policymakers grapple with changing geopolitical circumstances. That said, worries of a bursting of the AI bubble will keep policymakers on their toes, as markets party like it was 1999. However, the crucial difference between today and the dawn of the millennium is that we are no longer basking in the glow of the peace dividend that formed the backdrop to the economic environment of the time. Consumers are anxious; governments are heavily indebted and policy choices are more constrained. Buckle up for another trip around the sun.

Rampant Trumpism

Trade policy dominated the first half of 2025 as President Trump followed through on his threat to use tariffs as a means of extracting concessions from trading partners. By September 2025, the average effective US import tariff rate stood at 10.65%, up from 2.2% in January. Analysis conducted by UPenn Wharton suggests that tariff rate changes generated $124.5 bn in net customs revenue in the first nine months of 2025, while importer shifts in purchasing behaviour reduced potential revenue by only $31.5 bn. In other words, they achieved the goal of revenue generation without derailing the economy, which may embolden Trump to further weaponize trade. But the longer-term effects have yet to feed through. Consumers do not like paying higher prices while the full impacts on growth and inflation have yet to be felt. Bottom line: We can expect to hear more on Trump and tariffs in 2026.

Meanwhile, Jay Powell’s term as Fed Chair will end in May. Concerns that his successor will be more willing to accede to Trump’s demands for looser monetary policy in order to boost growth has the potential to undermine Fed independence. Markets will be keeping a close eye on this issue.

But it is in the realm of geopolitics where Trump will have the biggest influence. In 2024 he promised that “when I’m back in the White House, we will expel the warmongers, the profiteers … and we will restore world peace.” Admittedly, he did enforce a deal in the Middle East in 2025, but this is honoured more in the breach, and he has had no impact on ending the war in Ukraine, despite promising in June 2024 that “I will have that war settled between Putin and Zelenskyy as president-elect before I take office.” Indeed, Trump’s casual disregard for Russian activities close to NATO’s borders (and sometimes inside them) has undermined trust in US willingness to guarantee European security. US military strikes against Iran and Nigeria demonstrate that Trump is not shy about projecting force. But the January 2026 action to overthrow Venezuelan president Maduro, with Trump promising to run the country “until such time as we can do a safe, proper and judicious transition” has raised question marks around whether his foreign policy is ultimately guided by a coherent vision of peace or by transactional calculations that vary from case to case. The result is not disengagement, but an erratic form of activism that has left allies uncertain, adversaries emboldened and global risks harder to price.

As The Economist noted at the end of 2025, the main beneficiary of Trump’s bombast is China. It resisted US tariff pressure, exposing how dependent America and its allies remain on Chinese manufacturing value chains. Moreover, Trump’s strategy has often played into China’s hands. Bilateral tariffs alienated allies rather than building a coordinated response, while attacks on science funding, immigration and foreign researchers will ultimately weaken America’s innovative edge.

The 2026 Midterms may act as a check on Trump’s ambitions. The smart money suggests that the House of Representatives is likely to come under Democratic control following next November’s elections, with the result that a divided Congress will mount some serious opposition to his plans. History is on the Democrats’ side: Only twice in 14 Midterms since 1970 has the House majority aligned with the President’s party. In addition, Trump’s net approval ratings are in negative territory, though admittedly by less than at this point during his first term (although his approval rating has dropped faster, albeit from a higher starting point in 2025). But it would be unwise to fall back on historical patterns to justify betting against him – after all, this is a President who revels in tearing up the rulebook.

AI caramba

Progress in AI will continue to dominate the economic conversation. The most pressing concern for policymakers is the prospect that the AI bubble will burst, dragging down markets in its wake, in much the same way as happened in 2001 following the deflation of the tech bubble. This is a valid concern: Market concentration is high, with the Magnificent 7 accounting for 34% of the S&P500 market cap. Market valuations also look exceptionally toppy, with Robert Shiller’s CAPE measure estimated to have reached 39.4x in December – a value exceeded only in 1999-2000 on data back to 1881. Indeed, the OBR was so concerned about the prospect of spillover effects from a global equity price correction that the November EFO included a scenario in which a 35% decline in equity prices was estimated to produce a 0.6% reduction in UK GDP in 2027-28. It is not only the financial markets which are increasingly AI dependent: In the first half of 2025, business investment in information processing equipment accounted for the bulk of US GDP growth. Any reversal of the AI boom could have significant impacts on the real economy.

While caution is warranted, there are significant differences to the 1999-2000 boom. The current AI cycle is driven by profitable, cash-rich companies which are experiencing robust demand for their products. Admittedly, expectations have outstripped earnings growth as investors engage in a process of price discovery in a wholly new environment, so some wobbles are likely along the way. But there is real demand for the products emerging from the latest AI revolution, backed by an emerging infrastructure. A key trend in 2026 will be the continued shift from experimentation to integration as corporates begin to embed generative AI tools more deeply into core business processes. This will drive productivity gains, although these are likely to be uneven and manifest in ways that are hard to measure in conventional statistics. As with past general-purpose technologies, the biggest effects will come not from flashy applications but from mundane process redesign: faster coding cycles, cheaper discovery processes and increasingly automated customer support functions.

This may add to social tensions as large companies with data, capital and managerial capacity pull further ahead, while smaller firms struggle to keep up. There are increasing concerns that graduate entry level jobs will feel the AI squeeze as white-collar occupations once thought relatively insulated from automation become vulnerable to the application of new technology. The political significance of this phenomenon will increase in 2026, especially as it collides with an already febrile debate about inequality, immigration and cultural change. We see these concerns manifested in the rise of political populism across Europe and the US. 2026 will likely see further declines in the popularity of centrist politicians (Emmanuel Macron and Keir Starmer to name but two) as they struggle to manage the fallout from these competing forces and deliver a return of the feelgood factor that they have long promised their electorates.

Other things to watch

In the absence of any shocks, there are few things to get excited about on the macro front although fiscal policy across the industrialised world remains an area to watch. In the US, Trump’s bias towards tax cuts balanced with (theoretical) spending restraint may start to put some strain on Treasury markets, especially if the new Fed Chair is perceived as soft on inflation. Across the wider world, high debt levels and interest rates which are considerably higher than four years ago will limit government’s room for fiscal manoeuvre. Markets are unlikely to be prepared to fund unlimited borrowing, while voters are not willing to pay higher taxes. This can has been kicked down the road for so long that it is one that most people ignore. We may do so at our peril.

Geopolitically, the world remains unsettled. The risk in 2026 is less of sudden escalation than of chronic instability as conflicts drag on, diplomatic frameworks weaken and international institutions struggle to command authority. For businesses and investors, the defining challenge of 2026 will be navigating a world where technological acceleration coincides with political friction. Scenario planning will become a core managerial skill as businesses will have to adjust rapidly to changing economic and geopolitical currents.

Clearly, 2026 will not be a year of calm. It will be a year in which the forces unleashed in the first half of the decade take firmer shape as we take another step along a road increasingly less framed by the post-1945 settlement. Never was Yogi Berra’s aphorism more apt: “The future ain't what it used to be.”