Can the global economy maintain its delicate balance through 2026?

We see forces balancing toward growth re-acceleration, with support from fiscal and monetary policies. U.S. growth is expected to lead in 2026, as the Federal Reserve (Fed) eases and fiscal actions gain traction. Europe should expand modestly, driven by Germany’s fiscal stimulus and improving real incomes. China’s recovery could remain uneven amid property-sector strain and deflation pressures. 

Overall, the economy looks primed for a steady advance against a firmer economic backdrop, which also continues to shift. We remain optimistic and will closely watch the evolving signals.

What’s next for central banks?

With U.S. inflation projected to be just modestly above target, the Fed will likely emphasize supporting employment and growth, though upcoming board changes could affect the size and speed of rate cuts. The Fed will likely keep cutting rates next year until the economy and financial markets stop it, bringing the lower bound of the range to 2.5% by 2027.

The European Central Bank may ease slightly, while the Bank of England and Bank of Japan are likely to firm policy rates, with the latter negotiating a complicated government transition that leaves it open to domestic political pressure.

Appropriate Fed Funds Rate

Sources: Federal Reserve, Summary of Economic Projections, at https://www.federalreserve.gov/monetarypolicy.htm various quarters. Calculations by BNY Investments, October 24, 2025.

How are diverging rate paths shaping fixed income in the U.S., Europe and emerging markets (EM)?

After years of synchronized easing, monetary paths now vary. This dispersion is creating new opportunities in fixed income but also demands a more selective approach. In the U.S., the Fed’s renewed rate cuts and fiscal expansion could support front-end Treasuries and high-quality credit, though long-end risks remain.

The European Central Bank faces uneven growth and fiscal strain, especially in France where widening deficits and political gridlock over deficits make a resolution difficult. The Bank of England is navigating stubborn inflation and wage growth. Most countries in Latin America and Asia are in the process of cutting rates while retaining policy flexibility in case growth momentum slows. 

Opportunities are becoming more idiosyncratic and investors who stay nimble and selective across regions, duration and credit quality may be well positioned to capture them.

Is 2026 a turning point for the U.S. dollar?

As the world continues to shift toward a multi-polar balance of power, we think multiple reserve currencies will be used for trade finance, payments and store of value. As fiscal vulnerabilities across developed economies weigh on major currencies, the U.S. dollar’s safe haven status is on softer footing. We think investors will increasingly hedge their U.S.-dollar exposure. Demand for U.S. assets will also matter. Overseas investors are generally underweight the U.S., and given our view for U.S.-led growth in 2026, it is likely they may increase their exposure to U.S. assets while actively managing the currency exposure.

Are U.S. equity valuations too rich?

We see today’s valuations as part of a higher-multiple environment supported by stronger profitability and a larger index weight to tech. Economic and earnings growth remain resilient, with global earnings revisions trending higher and profitability broadening beyond big tech. Rising productivity and ongoing AI adoption should further reinforce record-level margins and long-term earnings growth. In our view, higher valuations reflect stronger fundamentals.

Who are the long-term winners of AI?

AI lowers the cost of accessing and transforming information, reducing the scarcity that underpins information-based competitive advantages. As a result, sectors whose advantages stem from physical assets, regulatory barriers or network effects may find their advantages preserved, and AI-related productivity gains in these sectors could more likely accrue to shareholders.

At the same time, AI’s impact extends beyond productivity to demand — as prices fall, more consumers can access previously out-of-reach goods and services. This dynamic may unlock new markets and drive broader profitability. AI’s winners will be firms that convert technological efficiency into enduring demand and durable market power.

U.S.: Rate of Generative AI Adoption

% of firms adopting AI

Sources: Oxford Economics and BNY Investments. Data as of August 31, 2025.