Could Japan and UK markets outshine US equities in 2026?

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The rotation trade was in full swing, as jitters over AI spend caused the Magnificent Seven to dislocate, with companies like Amazon falling 12% but companies like Apple rallying almost 2%. US software companies continued to weaken as new releases from Claude caused many to question whether Software as a Service (SaaS) has a future.

This broadening out trade is gaining traction, both within the US along with investing outside of the US, as investors seek cyclically sensitive exposures. While some of this is driven by concerns over AI, we continue to believe the global economy is strong and will benefit those linked closer to the real economy and those that can benefit from higher inflation.

Government shutdown temporarily impacts US growth

We have been vocal on the strong US economy for some time now. Real average hourly earnings remain strong at 1.2%, which is translating into continued consumption by households. Retail sales and food services, ex motor vehicles and parts, continues to be robust, which is being confirmed by the Johnson Redbook Same Stores Sales Index.

This is keeping the personal consumption expenditure component of US GDP strong. The main hiccup to the view came from a lower than expected fourth quarter GDP print, which came in at 1.4% quarter on quarter, far lower than the expected 2.8%.

However, the government shutdown detracted from the quarter’s growth, which is expected to be temporary and revert in the following quarter. Before the print, we calculated that the government shutdown would impact GDP by around 1-1.5% this quarter, similar to the initial survey. The Atlanta Fed GDPNow forecast remains strong with 3% expected currently in the first quarter of 2026.

Source: Supplied.

Payrolls finally rebound, but not without negative revisions first

The concern for many was that while real wages can keep consumption strong, this disappears if consumers start losing their jobs. The weak non-farm payroll prints seen ever since Liberation Day have caused many to question whether this was the start of a layoff cycle.

Whether it be high costs pressuring margins or the belief that humans can be replaced with AI agents, the lack of job growth has spooked the market. Our view was that corporates were merely waiting for more certainty over Trump’s protectionist policies.

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While there is unlikely to ever be certainty, corporates see a far brighter future than they did back in April 2025. We also saw 150k public-sector job losses in October 2025, which was the delayed impact of Elon Musk’s Department of Government Efficiency (DOGE) program.

However, in January this year we saw a market improvement with 130k new jobs being created, well above the 65k expectation. Pleasingly, this was mostly all in the private sector, showing a rebalancing of the economy from public to private and an improvement in private job needs.

While some will say most of the job gains were in the health sector (which is true), job growth was seen across all sectors, implying a broad-based recovery. We will continue to watch jobs in the US, but our thesis remains the US economy will be strong in 2026.

Source: Supplied.

Middle East tensions – the black swan event?

Despite our optimistic view of the world, we have been de-risking over the last few weeks due to concern over the large troop build-up in the Middle East and lack of progress on the Iran/US negotiations.

We do not believe the tragic, recent Iranian attacks will be the black swan the market has been worrying about for years. The conflict appears to be very much dominated by the US – reducing the risk of this spiralling into something more dangerous. For now, we are looking to deploy cash if opportunities present themselves.