The New Global Economic Order: How Trump, China, and Artificial Intelligence are Shaping the 2026 'Goldilocks'

Decmber 2025 by Luís Sancho

The implementation of Donald Trump's agenda marked a new stage in the political, strategic, and economic relationship, where 'old alliances' lost relevance and unbalanced bilateral relations favoring the stronger party gained prominence. Strangely, where probably only China is in a position to challenge the US on equal terms, the rest of the world has adapted well. In a mix of pragmatism and subservience, the various interlocutors managed to reach agreements that allowed the world economy to continue on the path, albeit weak, of economic growth, surprisingly minimizing the effects of the tariff escalation imposed by the American Administration.

In this context, it seems to us that the inflationary effects resulting from the introduction of the tariffs will not be as pronounced as initially anticipated, and that, although it is expected that throughout 2026 some of the price increases resulting from these measures will be passed on to the final consumer.

Interestingly, the weakening of the US labor market at this stage may be more related to the integration of Artificial Intelligence into the organization of production processes, leading to a decrease in the demand for workers by companies. This, in itself, could ease upward pressure on wages and create room for interest rate cuts by the Fed. It seems reasonable to assume that the US economy could grow at levels similar to those of 2025, around 1.8%.

The Eurozone, particularly its manufacturing sector, will inevitably suffer from increased US tariffs and increasingly fierce competition from China. Even so, and being heavily dependent on the much-anticipated virtuous investment cycle to address the challenges of defense and energy independence/transition, it may end up surprising with growth slightly higher than in 2025, around 1.3%. The ECB itself, largely freed from inflationary concerns, could, if necessary, provide further interest rate cuts to boost the economic cycle.

China will continue to face difficulties in achieving the 5% target set by its authorities. Indeed, the scars left by the housing crisis, coupled with a demographic pyramid that is beginning to put serious pressure on the segment of the population available for work, are complicated challenges for which finding a sustainable solution has been difficult. The excess capacity resulting from the introduction of tariffs could also cripple its phenomenal manufacturing industry, even though we continue to see the rapid development of industries where China has taken the lead, such as electric vehicles. Our projections indicate growth of 4.2%, which would still be the slowest pace in recent years. A strong reorientation towards the dynamics of domestic consumption could likely be the key to putting China on a new path of more robust growth.

Unsurprisingly, our scenario for 2026 presents a line of continuity, where we again assume the 'goldilocks' scenario (moderate economic growth rates and relatively contained inflation). However, strong enthusiasm surrounding the valuation of technology sector stocks, especially those most closely linked to AI, could lead to higher levels of volatility. Although we recognize that the relative attractiveness of investment-grade bonds has decreased, we continue to believe that the remaining coupon values compensate for maintaining this type of investment.

We also maintain the view that the new investment cycle projected for Europe may continue to boost the valuation of many companies exposed to it, such as those in the financial and industrial sectors. Part of this rationale also continues to support our directional bet of greater exposure to the euro currency relative to the dollar.

We reiterate that the risks we identified at the beginning of the year have gained strength and that a globally expanding world could lead to a significant deterioration in regions such as the US, France, and the UK. Current expenditure costs are excessive in France, and a lack of political will and coordination is an obstacle to any kind of fiscal consolidation that shouldn't be too difficult to achieve. The Trump administration's plan to finance tax cuts with tariff revenues is bold, but it depends on the price elasticity of demand (or lack thereof) for imported goods to maintain the desired revenue level and trigger a strong growth cycle with the fiscal stimulus resulting from the tax cuts, especially since the need to issue debt with longer maturities currently clashes with excessively high real interest rates. Finally, the United Kingdom demonstrates a willingness, albeit with much indecision, regarding the appropriate mix of tax increases that might present some degree of credibility to investors.

2025 was a year in which bond investors saw emerging countries give lessons in fiscal consolidation compared to their developed counterparts, a trend that could continue in 2026, rewarding this asset class with higher levels of profitability.

Given the above, in which we are once again faced with a Goldilocks scenario, and which will still involve several major Central Banks contributing to the easing of their monetary policy, we believe that investment funds that combine the universe of bonds with the universe of equities are quite valid options for 2026.