How will AI shape the economy and markets in 2026?

Markets are riding a wave of optimism, fuelled largely by the promise of artificial intelligence (AI). Despite challenges from megatrends such as ageing populations and ongoing trade tensions, company earnings have been strong and investment in new technology is surging.

But what does this mean for the year ahead? Below, we explore how AI is shaping economic prospects, where the opportunities and risks lie, and what long-term investors should consider as they look to 2026 and beyond.

Higher US economic growth is on the horizon

We anticipate that AI will stand out among other megatrends, given its capacity to transform the way we work and how productive we are. We expect economic growth in the US to accelerate modestly to around 2.25% in 2026, powered by AI investment and supportive government spending. There’s even a chance that US growth could reach 3% in the coming years – well above most forecasts.

Inflation¹ is likely to remain above the central bank’s 2% target, meaning US interest rates may not fall as much as markets hope. The jobs market should stabilise, keeping unemployment below 4.5%. However, the first half of 2026 may be softer, as the effects of recent economic shocks linger and productivity gains from AI take time to materialise.

The main risk to our view is if AI optimism collapses and investment slows, leading to disappointing growth.

What about the rest of the world?

In the UK, growth is expected to slow to 0.8% in 2026, as taxes rise to keep government borrowing in check. We think inflation is likely to fall but stay above the Bank of England’s 2% target. This drop in inflation will allow the Bank of England to lower interest rates to 3.25% over the course of the year. The main risk to our view is if concerns about government debt intensify.

In the euro area, we expect growth to hover near 1%, with little of the AI-driven boost seen in the US. The drag from higher US tariffs will be offset by increased defence and infrastructure spending.

In China, meanwhile, we see similar AI-related dynamics as in the US and expect growth to near 5%. This could accelerate further if innovation and AI investment accelerates.

What does this mean for investors?

US technology stocks have performed extremely well in recent years, and they could maintain their momentum given the rate of investment and anticipated earnings growth. However, expectations are now very high and volatility in this sector is likely to increase. We expect US shares² to deliver more muted annualised³ returns of 4.2% to 5.2% over the next 10 years (in GBP terms).

Meanwhile, with interest rates higher than in recent years, bonds⁴ are offering an attractive income and can help to protect portfolios if AI disappoints.

For investors, holding a globally diversified and balanced portfolio – one with the right mix of shares and bonds for you – offers the best chance of steady returns. Stay focused on your long-term goals and don’t get swept up in market excitement.

¹ Inflation is the rate of increase in prices for goods and services. 

² US shares are represented by the MSCI USA Total Return Index Sterling.

³ Annualised returns show what an investor would earn over a period of time if the annual return was compounded (i.e. the investor earns a return on their return as well as the original capital).

⁴ Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.
 

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Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

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