US inflation, not geopolitics, remains biggest risk to markets in 2026, says this chief investment strategist

[SINGAPORE] A resurgence in US inflation – rather than geopolitical flashpoints or political rhetoric – poses the biggest threat to financial markets in 2026, said Stefan Hofer, chief investment strategist of LGT Private Banking.

While recent developments, including fresh tensions between the United States and Europe following President Donald Trump’s comments on Greenland, have shaken global markets and weighed on the US dollar, Hofer noted that investors are ultimately guided by economic fundamentals rather than political noise.

In an interview with The Business Times, Hofer explained that the latest market sell-off reflects heightened sensitivity to headlines, but not a fundamental shift in how investors assess risk.

“We expect more heated rhetoric in the near term, but eventually some form of US-European agreement to address US security concerns,” he said, referring to Greenland.

Against that backdrop, he believes that corporate earnings and macro fundamentals will ultimately see investors through this “unprecedented” US-Europe tension.

“At the end of the day, the market pays as much attention to CPI (consumer price index) prints and the non-farm payroll report or jobs report (as they do to geopolitics),” he said. “The market will react very, very differently if you have CPI prints which are suddenly pointing to accelerating inflation… there would be a disconnect with looser monetary policy.”

LGT has not changed its view that US interest rates still have an easing bias based on fundamentals alone, with Trump’s aggressive stance towards the Federal Reserve potentially accelerating that trajectory. However, that assumption hinges on inflation moderating, noted the Hong Kong-based chief investment strategist.

“New norm” for inflation

One reason why markets have so far absorbed political shocks, or at least seen their effects fade quickly, has to do with a shift in expectations around what level inflation should settle.

Hofer pointed out that investors are increasingly accepting that the traditional 2 per cent US inflation target may edge closer to 2.5 per cent instead, with many viewing it as the “new normal” even as it puts upward pressure on prices.

US consumer prices rose by 2.7 per cent in December, unchanged from November, but this figure is lower than the 3 per cent seen at the start of 2025.

Still, inflation risks could intensify as fiscal and monetary easing take hold over the course of the year. A key uncertainty, he added, is how much slack remains in the US labour market. Proposed tax cuts aimed at high earners could inject fresh stimulus into an economy that already appears close to full employment.

“If there’s not enough slack in the economy, you will end up accelerating inflation… (it’s like) pouring gasoline onto the economic fire,” he said.

Even so, Hofer said that LGT remains broadly “risk-on” for 2026, underpinned by strong corporate earnings, especially in the US. This comes as large tech companies continue to deliver significant profits, offsetting valuation concerns and political uncertainty.

“To some degree, political noise, be it Venezuela or Greenland, has no impact on Nvidia’s earnings,” he felt. “As long as quarterly earnings releases are robust, which we have no reason to think why 2026 would be any different, then the market has an upward bias.”

However, he cautioned that valuations are looking stretched – with greater volatility expected this year, marked by bouts of profit-taking followed by recovery.

Against that backdrop, he said that investors should look beyond the tech or artificial intelligence winners of last year. According to him, the next opportunity lies in the physical infrastructure underpinning AI, which is extremely energy intensive. This includes power generation, electricity grids, cooling systems and data centres.

“We strongly view that in the US, Europe and most advanced economies, there’s going to be a ramping up of infrastructure spending, and that is a great investment opportunity,” Hofer noted, adding that this is a five- to 10-year long window.

Looking ahead, he expects active diversification to become more critical, advising investors to add at least 20 per cent or more to uncorrelated assets, or alternatives, in their portfolios. Alternative assets such as gold typically move differently from traditional stocks and bonds.

“The idea is to get through this year’s volatility, but it’s smoothed out by the alternatives, which are going to behave differently, and you could walk away with, say, 8-12 per cent total return,” he said. “It’s doable.”

Ultimately, inflation remains the key metric. “That is the No 1 risk we’re actually watching out for,” added Hofer.