2026 UK investor outlook

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Heading into the tailend of the year, investors might feel wedged between the market stories and hopes of 2025 and the clarity that hasn’t quite arrived yet.

The AI trade is in full swing but, with more questions emerging than answers, it seems more like we’re finishing chapter one than closing the whole book. Inflation is receding on both sides of the Atlantic but interest rate trajectories appear more cautious. Gold is still hovering round all-time highs and global markets are grappling with domestic pressures as well as international unease, to say the least.

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Throw in the rollout of November’s Budget plans in the UK and the narratives playing out underneath the global economy all point to 2026 offering a year of transition rather than catharsis. Here are some themes investors should keep tabs on as we turn the page and start a new chapter.

We’re hooked. Generative AI platforms are seeing 7bn monthly site visits [1] and we’re integrating them into our everyday routines more than ever. So far, so good for the AI hype train. Now we just need to see that appetite translate into meaningful revenue uplift and margin impact among the companies embedding AI in their operations. The potential of the tech has gripped the market but hyperscalers’ vast capital expenditure plans, coupled with limited visible pay-off, has allowed nerves to creep into the market recently. No-one wants another metaverse boom and fizzle.

Fortunately, Nvidia’s earnings have continued to confound the critics and keep the AI party alive. It’s unfair to lump the entire fate of technological step change on Mr Huang though and tech concentration remains a concern. The sooner we see more breadth and depth in market leadership, the better.

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If 2026 sees AI beneficiaries wrest the baton from the hyperscalers, demonstrating the value AI brings to them, justifying those high spending levels and dissipating the risk of relying on just a few companies to lead the market, the more investors will be able to concentrate on the long-term theme and not the short-term concentration risk. Case in point - 2025 kicked off with DeepSeek undermining assumptions about the spending needed to expand AI capabilities, rocking the market leaders. If we see a similar breakthrough in data centre efficiency next year, it might be good for the long run but it would likely unsettle the big AI players in the near term.

More broadly, with AI bubble chat never far from the conversation, earnings will be key. Valuations are naturally higher in tech but the Magnificent 7’s forward price-to-earnings (P/E) ratio of 29.3 won’t sit comfortably with many, against the broader S&P 500’s 22.4. That gap gets harder to stomach, given Mag-7 earnings growth is expected to slow from 25% year-on-year in the third quarter of 2025 to 11% in 4Q 2026, so says HSBC [3], while that of the other 493 companies in the large-cap index is forecast to improve from 4% to nearly 15% over the same timeframe.

It makes the case for sector diversification next year not least because, as we’ve mentioned, the next phase of AI proliferation is likely to expand beyond the hyperscalers into the rest of the economy. If 2026 is the year that happens, holding a range of assets in different industries may well provide investors with the opportunity to tap into the next phase of AI utility.

This time last year we were questioning US ‘exceptionalism’ and 12 months on, we’re still asking if other regions are on the cards. AI valuation nerves in the US prompted investors to explore a brief dalliance with European equities early in the year, with emerging markets attracting attention in the summer, after tariff dust-settling revealed some opportunities away from China, as well as the AI chip boom advancing markets like South Korea.

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That said, nothing has really replaced US innovation and tech leadership, despite tariff fears that seem largely managed by now. One noticeable knock-on effect from US policy uncertainty has been China’s strategy of AI self-reliance through domestic chip production, state investment and subsidy programs. Even with US concessions being made around access to Nvidia chips, the constant changes and inability to rely on the latest agreements have clearly prompted a more homegrown approach which could well set the stage for a step up in the AI arms race eventually, if not initially.

Will the UK market get a look in?

The frustrating thing about the London market in 2025 is that the only attention it has garnered has been from private equity and US companies happily paying a premium to whisk companies off into unlisted land. Only one month out of the past 55 has seen inflows to UK-focused funds, according to Calastone’s fund flow index [2], and that lone positive reading was reversed pretty quickly after the 2024 Budget. It seems foreign investors are willing to be patient with the value they see, even if UK buyers aren’t - the UK market currently trades on a forward P/E of 12.8, a 42% discount to the US.

Will that change in 2026? That could depend on how the AI trade plays out. While the old school sectors like pharma and defence on this side of the pond don’t scream innovation, they would have served as decent diversifiers this year. The FTSE 100 has returned 16.9% in the year to date, with a 3.1% dividend yield. Another point of transition here might materialise if the Chancellor’s three-year stamp duty holiday on shares in newly listed UK companies manages to revitalise London’s dearth of IPOs. Giving private companies the confidence to list in the UK and make them feel welcome could shake up the distinctly untechy index and make it more attractive to investors too.

Gold finds itself in the unfamiliar position of having rallied to record levels at the same time as stock markets are hitting their own highs and inflation is subsiding. The 50.1% rise in the price of the yellow metal over the past year might have initially been driven by a flight to ‘safety’. Exactly when that strategy gave way to momentum buying is up for debate though, and appetite for gold ETFs might have blurred the whole thing with a big dollop of FOMO. It means the current level carries a mix of diversification and speculation but, if rate policies start to look murky or the geopolitical stage becomes messier, investors might be glad to stick around in the so-called safe haven.

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The market is expecting two cuts from the Fed in 2026 and one in the UK (assuming we get an early present on 18 December) but is leaving room for a raft of rate rises in Australia, Canada and Europe on the back of strengthening economies.

If rates do continue their descent in the US and UK, does that put small and mid-cap companies back on the radar? The argument over the past few years has been that companies further down the cap scale have been hit by a double whammy of lower consumer confidence (around 50% of FTSE 250 revenues are domestically exposed versus 25% for the FTSE 100) and higher indebtedness than large caps, which gets worse with higher rates. Should those worries start to wash away with rates subsiding, the crowd might start to work their way down the index. If that starts to happen, selectivity will be key. While some good companies outside the topflight made sure to put their house in order during and after Covid, and have felt the weight of rate rises anyway, others weren’t terribly strong to begin with. Balance sheet health and sustainable margins matter more than ever.

AI spending concerns might have replaced the storytelling stage somewhat but, while we all unpack the web of partnerships and supply chain financing, investors have the chance to ask another question that’s both worrying and exciting in equal measure, “What next?” Just like the app economy created an entirely new economic ecosystem on the back of the iPhone, what brand new paradigm could we see with AI leading the way? The pace of change over the past few years has shown us we could be living in a completely different world by the time we meet back here in 12 months.

None of this means skimming past earnings or wilfully ignoring valuations though. Technologies can be world-changing but they still need to be measured by real-world application and the companies able to get the best out of them. Nor does it mean AI is the only game in town. Diversification is likely to play a big role in 2026 because, as 2025 has shown us, we never really know just what is round the corner.

Discrete calendar year performance

As at 9 Dec 2025. Source: FE Fundinfo. In local currency. Past performance is not a reliable guide to future results.

Sources:

[1] 2025 Generative AI Landscape, Similarweb, December 2025 [2] Calastone Fund Flow Index, December 2025 [3] Market Update, HSBC, Oct 2025

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.