The four strategies for investing in 2026

Having looked last week at the lessons I could take from 2025, it’s time to turn my attention to 2026. After three years of rising markets, it’s natural to be optimistic, but prudent to temper that with caution. There’s a good case to be made for a fourth year of decent returns. It would nevertheless be wise to put some protections in place.

I think four strategies will reward investors next year. The first is to stay invested, but with a wary eye on the unfolding cycle. The economic outlook is benign even if some cracks are starting to show in the jobs markets on either side of the Atlantic. Growth continues, and will be boosted in 2026 by modest monetary easing. Bear markets or big corrections are rare in the absence of a recession, and that looks unlikely.

A good framework for viewing the market cycle is Goldman Sachs’s four-part rotation from Despair to Hope, Growth and then Optimism. The arrival of Covid six years ago marked the start of a very short despair Phase, while the rest of 2020 can be viewed as the Hope segment in which the market rebounded strongly on the back of rising valuation multiples.

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The third, Growth phase, in which earnings typically pick up the baton, was also shorter than usual. It began at the start of 2021 and lasted through the market’s interest-rate-fuelled de-rating through most of 2022.

We have been in the final, Optimism stage of the cycle through the last three and a bit years, in which investors have become more confident, edging towards complacency in some corners of the market. In this period, as usual, valuations started to rise again and built on earnings growth. It’s a bit unusual for this phase to go on as long as it has or to deliver the 70% or so inflation-adjusted market growth that we have enjoyed. But that doesn’t mean it can’t continue, if the fundamentals allow it.

They just about do. Earnings growth is forecast to be in the low double digits both next year and in 2027. That would not have been predicted during the tariff tantrum last April. It will go some way to justifying valuations, which in many cases are towards the top end of their 20-year range. In America, they have already pushed through into uncharted territory. Only in Europe, the UK and China do they sit closer to average levels.

It is the divergence in market valuation and, as I discussed last week, in the relative performance of different regions that leads to the second key strategy for 2026 - diversification.

It worked well in 2025 because the US, which has led the pack for so long, finally underperformed its international peers, in Europe, Japan, and especially in emerging markets. I see no reason why this should not continue next year. China, in particular, is making similar progress to the US in terms of technology and innovation, but investors are only just spotting the opportunity and valuations are low.

Our analysts see Japan as a source of optimism. It is emerging from years of low inflation and matching interest rates. Wages are rising, pushing consumer spending power higher. Corporate reforms have fed the market and are being matched in Korea too.

It’s not just geographical balance that will pay off next year. As value sectors like financials and mining feel the benefit of a spillover of technology capital spending, the old economy is playing catch up. The Magnificent Seven is still expected to deliver nearly half of the S&P 500’s earnings growth next year, but that is less than this year as growth from the other 493 accelerates.

Which leads to my third strategy for 2026 - a shift from passive index trackers to active stock-picking. For much of the past decade or so, beating the market has been nigh on impossible in the face of strong returns from a handful of market leaders. The only thing that mattered was owning the Mag Seven. That won’t be the case as attention shifts from the hyper-scalers to the broader beneficiaries of the AI revolution, and investors focus on sifting the winners from the losers.

It is this increase in uncorrelated returns within markets and sectors that argues for my fourth and final strategy - putting in place protection against what I expect to be heightened late-cycle volatility. The final push through the Optimism phase is often characterised by choppy markets which can test even the coolest investors’ zen.

The extent to which you wish to put in place stabilisers and hedges will be determined by many factors - not least your tolerance for risk and your age. The returns from cash will start to dwindle through 2026 as interest rates retreat and that will increase the appeal of other income payers - infrastructure and equity income stocks will have a role to play.

Political developments may trigger further ups and downs next year. A new Fed chair will raise questions about the US central bank’s commitment to keeping inflation in check. November will bring Mid-Term elections, which may change the balance of power in Congress.

What’s my biggest worry about 2026? The fact that no-one seems unduly concerned is top of the list. The outcome most often predicted by market strategists - a flatter but still rising trajectory - is not a common outcome. Bull markets usually go out with a bang, not a whimper. To predict a 10% gain after three years of 20%-plus advances feels like a triumph of hope over experience. I expect 2026 will be rather better or considerably worse than this.

This article was originally published in The Telegraph.

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