By Niket Nishant, Kanchana Chakravarty and Joel Jose
Jan 5 (Reuters) – Global investors will actively seek opportunities this year in undervalued pockets of financial markets as growing concerns over an AI bubble push traders to look beyond highly valued technology stocks, according to several analysts.
U.S. stocks were volatile in 2025, plunging to near bear market territory in April following President Donald Trump’s sweeping tariffs before eventually rebounding to record highs.
The upward momentum is expected to continue in 2026, analysts said, though investors may have to get selective about the assets they pick.
“This environment is ripe for active investing,” strategists at BlackRock Investment Institute said.
Metal prices were the standout winners in 2025 as the dollar slumped on expectations of interest rate cuts by the Federal Reserve, which also boosted emerging market assets.
But strategists are betting on a few other asset classes to gain traction this year.
After years on the sidelines, U.S. small caps may return to the spotlight as earnings prospects improve and borrowing costs fall.
“The big difference going into 2026 is that we finally are seeing earnings growth come back into small caps,” said Oren Shiran, portfolio manager at Lazard Asset Management.
Traders expect two 25-basis-point cuts from the U.S. central bank in 2026, according to estimates compiled by LSEG. Small cap companies typically carry higher debt, so they are among the first to benefit when interest rates move lower.
Jefferies equity strategist Steven DeSanctis expects the Russell 2000 index, which tracks small cap stocks, to climb to 2,825 points by the end of 2026, marking a near 14% gain from 2025.
Gold’s historic run in 2025 made it the best year for the yellow metal since the 1979 oil crisis. J.P. Morgan and Bank of America (BAC) forecast gold prices to hit $5,000 per ounce this year, compared with $4,314.12 in 2025.
Analysts at the Wells Fargo (WFC) Investment Institute expect favorable conditions to persist, but said the gains could come at a more measured pace.
Another source of support could come from buying by central banks, which have been diversifying their reserves beyond dollar-denominated assets.
Healthcare could be one of the standout sectors, powered by a wave of policy boosts. Morgan Stanley said the growing reach of weight-loss drugs could boost the industry.
Financials, particularly banks, are also expected to outperform as M&A activity accelerates and loan growth rebounds.
The sector’s valuation remains attractive, supported by deregulation and AI-driven efficiency gains, with mid-cap banks offering compelling early-cycle opportunities, Morgan Stanley said.
The U.S. dollar is poised for another bout of weakness in 2026, analysts said, as the Fed is expected to cut interest rates to cushion a cooling labor market. Political uncertainty, including the appointment of a new Fed chair, is also seen adding to the volatility.
Any selling would increase the appeal of alternatives in emerging market currencies such as China’s yuan and Brazil’s real, with currency moves increasingly shaped by diverging policy paths.
The Czech crown could get a fresh boost from the Czech National Bank’s rate hikes, ING economists said.
Meanwhile, commodity-linked currencies such as the Australian dollar and the New Zealand dollar could also benefit from an improving global growth outlook, MUFG analysts wrote.
Among G7 peers, the euro looks set to draw support from fiscal stimulus while Japan’s yen could remain vulnerable in the near term but recover, MUFG said.
Emerging markets are expected to sustain strong inflows due to a weaker U.S. dollar and relatively benign valuations.
“Emerging markets have become less volatile than developed markets,” strategists at BofA Global said.
“There is too much focus on the fact that emerging market growth is not as high as in the ‘good old times’. That’s true, but then again, macro stability indicators are better than in a long time.”
However, domestic politics could throw a spanner in the works, especially as several countries including Brazil and Colombia head toward elections.
High-yield and corporate bond markets could be busy in 2026, as robust dealmaking will raise demand for buyout financing and AI heavyweights will likely continue to seek capital to fund their data center investments, according to strategists.
As of mid-December 2025, high-yield issuance stood at $325 billion, 17% more than 2024 and the strongest showing since the pandemic-era record of 2021, according to data from PitchBook.
“We have a constructive view on high yield bonds in 2026. Over the past year, appetite for high yield bonds has been strong, comfortably absorbing what has been a relatively high supply year,” portfolio managers at asset manager Janus Henderson wrote in a note.
Event contracts, which let users wager on outcomes of real-world events across politics, sports and financial markets, are expected to become one of the fast-growing asset classes, fueled by surging retail investor demand.
They became popular ahead of the U.S. presidential election in 2024, and have spurred a wave of startups into launching event contracts.
“We’re in the early stages of a supercycle for this burgeoning asset class,” Robinhood CEO Vlad Tenev said at a conference.
Robinhood (HOOD) has become one of the biggest players in this field, while Coinbase is also attempting to gain a foothold in the industry.
Analysts at brokerage Citizens Financial estimated prediction markets were currently generating nearly $2 billion in revenue, which could jump five-fold by 2030 as institutions start participating.
The rapid growth, however, is drawing scrutiny from state regulators, which have accused the contracts of resembling sports betting and potentially encouraging speculative behavior.
(Reporting by Joel Jose, Kanchana Chakravarty, Niket Nishant and Siddarth S in Bengaluru; Editing by Vidya Ranganathan and Krishna Chandra Eluri)
