The age of uneven prosperity – opportunities and risks in 2026

AN UNUSUAL feature of the economic cycle is that the world feels uncertain even as the headline data suggests otherwise. US growth is expanding, but some sectors are experiencing near-recessionary conditions. The labour market is softening – yet not collapsing.

Inflation has moderated, though it is still above the US Federal Reserve’s target of 2 per cent. The stock market is trading at an all-time high and household wealth sits at a record US$170 trillion, 70 per cent higher than pre-pandemic levels.

Yet, with data trending in the right direction, the average person still feels bad about the economy.

This is most clearly demonstrated by the dichotomy between the “misery index” – defined as the summation of unemployment and inflation – which sits at a cycle-low level; and consumer confidence, which is at recession lows. Paul Krugman, the Nobel Prize winner in economic sciences, described this as a “vibecession”.

The explanation is not psychological; it is structural. The economy has split into a K-shaped pattern where rising wealth – especially from asset inflation – supports high-income spending, while lower-income households confront real wage stagnation, higher borrowing costs, and a lack of offset from wealth growth.

In fact, another feature of the current cycle is that companies are planning for more layoffs even as revenue and profit margins are at record highs.

The productivity revival has allowed companies to grow earnings without proportionately rehiring workers. For financial markets, this is positive. For the labour market, it is corrosive.

The other critical factor to consider is the artificial intelligence (AI) capital expenditure super-cycle.

What began as a thematic tailwind has become the gravitational centre of US economic and equity performance. Much of the S&P 500’s upside has been driven by enthusiasm around AI infrastructure and hyperscaler investments.

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Harvard economist Jason Furman noted that investment in information-processing equipment and software was 4 per cent of gross domestic product – or 92 per cent of growth – in the first half of this year.

GDP excluding these categories grew at a mere 0.1 per cent annual rate in the first half. This specific feature also drives another K-shaped growth structure: anything AI is booming, but less so in other sectors.

Investing in a world of uneven prosperity

While economic fundamentals are an important starting place, markets care more about earnings. And on that score, the US continues to deliver.

Corporate margins remain resilient, and cost discipline is strong. If profits continue to hold, a sustained sell-off appears unlikely.

Investors have also internalised this, steadily pricing out the number and speed of the expected Fed rate cuts in 2026. That said, a gradual easing cycle can provide bullish support for risk assets. Historically, such “insurance cuts” bolster equities, provided growth remains stable.

Dismissing the AI cycle as a bubble misses the nuance. Unlike the dotcom era, today’s investment surge is backed by tangible utility: data centres, chips, cooling technology, grid upgrades and software that is already improving productivity.

The capex burden is enormous – and financing it relies not only on cash-rich hyperscalers, but also on a rapidly expanding private credit ecosystem. But the return potential is equally large. Cost savings, automation and workflow optimisation are beginning to show up in earnings.

There is no question now that any company that does not embrace the potential of AI could be left behind. The question is not whether AI creates value, but how quickly use cases scale relative to valuations.

After two years of strong returns, some caution is warranted as valuations reflect lofty expectations of future earnings. Pockets of exuberance exist, particularly in speculative smaller-cap AI names and some large-cap names trading at unsustainable valuations.

Large-caps, by contrast, remain supported by durable end-markets, fortress balance sheets, and the ability to invest based on strong free cashflows from legacy businesses and moats.

Their dominance may not disappear overnight, but continuation of mega-cap outperformance is far from guaranteed.

Undergoing transformation

For investors, this is an argument for selectivity and diversification: equal-weighted indices, low-volatility factors and disciplined stock-picking offset risks of AI monetisation disappointment, which invariably rises as valuations become rich.

Investors should consider adding to sectors outside of technology: financials, industrials and healthcare.

Beyond the US, the world is undergoing its own transformation, driven by shifting geopolitical calculus.

Europe, long dismissed as structurally stagnant, is quietly rewriting its growth paradigm. The region is investing heavily in defence, energy independence and industrial revitalisation. The single-currency union is also embracing more fiscal stimulus to pivot away from an export-driven model.

Geopolitical tensions have forced developed markets to rethink supply chains, invest in national resilience and localise critical manufacturing.

Trillions of dollars are being poured into energy, defence and infrastructure. A better growth backdrop will benefit banks, defence companies and select industrial champions.

Emerging markets are also entering a more favourable phase. Emerging-market Asia stands out for its combination of stronger earnings growth and undemanding valuations.

Politically complex

China remains politically complex but tactically constructive. After several years of digesting a property bust, Chinese equities are now showing resilience, and secular growth segments such as AI and technology self-sufficiency are showing long-term attractiveness.

Chinese households have amassed a largesse of savings, and all it takes is a positive catalyst to restore confidence and for investments to recover.

Divergent central bank trajectories – especially between the Fed, European Central Bank, Bank of England and Bank of Japan – create opportunities across duration and currency exposure.

Rising long-end government yields reflect not only macro fundamentals, but also growing concerns about fiscal sustainability.

Skittishness around deficits and debt trajectories is likely to remain a driver of bond markets in 2026. Hence, duration exposure should be kept in the intermediate range of five to seven years, where underlying yields remain attractive.

Still, coupon carry remains attractive. Selected Additional Tier-1 bank capital and Asian investment-grade credits offer compelling income opportunities.

For Singapore-based investors, allocating some US dollar bonds makes sense: current yield differentials already price in unusually high Singapore dollar appreciation, creating a potentially favourable entry point.

Gold’s appeal

Gold has once again reasserted itself as a geopolitical hedge. Central banks are accumulating the yellow metal at a pace unseen in decades and retail demand, especially in Asia, remains strong.

In an era of fracturing alliances and rising security concerns, the precious metal’s appeal as a non-sovereign reserve asset has only grown.

Speculative elements now also play a larger role, but the structural demand backdrop is likely to keep prices supported.

For suitable clients, we continue to advocate an allocation to alternative assets which can offer diversification benefits and provide different sources of returns as public market returns moderate.

Overall, for a diversified investor, 2026 should be a broadly constructive year, although the returns may become more subdued compared with the strong levels in the last two years.

Nonetheless, investors should consider taking profit in some gains and lean into sectors that have lagged, but will experience improving prospects next year.

The writer is chief investment officer of UOB Private Bank