“5 Keys to Investing in 2026″

I enjoyed reading this recently published piece from American Funds.  Yes, there are concerns as we enter into 2026, but is there ever a perfect time to invest??

What a difference a few years can make. At the start of 2023, market pessimism was widespread, investors braced for a recession, and many expected another down year in stocks. Instead, the economy proved remarkably resilient, inflation declined at a rapid pace, and U.S. stocks, as represented by the S&P 500 Index, soared 26.3%. Talk about surprises.  This was then followed by 2024 returns of 25.02% and 2025 returns of 17.88% for the S&P 500. 

History has shown that the economy and markets seem to always find ways to surprise investors. Whatever is in store for investors in the year ahead, here are five keys to keep in mind as we enter into 2026.

The Market is Broadening Beyond US Tech

The binary market environment dominated almost exclusively by US technology stocks (specifically the “Magnificent Seven”) appears to be shifting toward a more balanced landscape.

• International Resurgence: Non-US markets have recently outpaced the “Magnificent Seven,” with significant rallies seen in Europe, Japan, and emerging markets.
• Sector Diversification: Within the US, the rally is expanding to include more companies, particularly in sectors like industrials, financials, and energy, which are benefiting from regulatory reform and capital spending cycles.
• Europe’s Stimulus: A massive €500 billion infrastructure and defense spending package in Germany is expected to reshape the European economic landscape, boosting growth and offering new opportunities for industrial and construction companies.

The AI Theme is Evolving from “Buildout” to “Infrastructure”

While the report suggests we are not yet in an AI bubble (comparing the current environment to 1998 rather than the impending crash of 2000), the investment focus is shifting.

• Beyond the Chipmakers: The opportunity set is expanding from semiconductor manufacturers to the “infrastructure” layer required to power AI.
• Energy & Utilities: There is a heavy emphasis on the massive power needs of AI, creating opportunities for utilities and makers of Small Modular Nuclear Reactors (SMRs) like Rolls-Royce and GE Vernova.
• Adoption Phase: The focus is also moving toward companies effectively adopting AI to generate efficiencies, such as banks using it to save billions in operational costs.

Divergent Central Bank Policies (The US vs. Europe)

For the first time in a while, major central banks may move in opposite directions, creating distinct macroeconomic environments.

• The US Path: The Federal Reserve is expected to continue cutting rates to support a softening labor market, aiming for a federal funds rate near 3% by year-end 2026.
• The European Path: Conversely, the European Central Bank (ECB) might be an outlier that actually hikes rates or keeps them higher, driven by the inflationary pressure of Germany’s fiscal stimulus.
• Investment Implication: This convergence of growth (US slowing, Europe accelerating) and divergence of policy creates specific opportunities in global fixed income portfolios.

Emerging Markets: The “Tech-Tonic” Shift

There is a structural evolution in Emerging Markets (EM) as they transition from being purely manufacturing hubs to innovation leaders.

• Growth Engine: EMs are projected to contribute nearly 65% of global growth by 2035, driven by investments in electric vehicles, robotics, and AI.
• Hardware to Software: The long-term competitive edge for EMs will depend on bridging the “hardware-software divide”. While nations like China, Taiwan, and South Korea dominate the supply chain for batteries and chips, the next phase of growth involves developing the “brains” (software and operating systems) to turn these machines into intelligent systems.
• Automation: With aging populations in some EM regions, there is a specific push toward humanoid robotics and automation in logistics and elder care.

Dividends as a Critical Buffer

Valuations are currently elevated, with Price-to-Earnings (P/E) ratios across the US, Europe, and Emerging Markets sitting above their 10-year averages.

• Expect Pullbacks: Given the high valuations and “optimism priced into markets,” investors should be prepared for potential corrections.
• The Dividend Advantage: Dividend-paying stocks are highlighted as a key tool for navigating this volatility. Historically, they have been resilient during market declines (such as the dot-com bust) and can help smooth returns when growth stocks falter.

As we navigate 2026, the key for long-term investors is to embrace the transition from a binary, tech-led market to a more balanced and broadened opportunity set. While higher valuations and diverging central bank policies may introduce short-term volatility, the expansion of the AI theme into infrastructure, the resurgence of European and emerging markets, and the stability of dividend payers offer diverse avenues for growth. Rather than fearing potential pullbacks, investors should view them as part of a changing landscape where staying diversified and focused on the long-term will pay off in the future.