State Street: 2025's market resilience will be hard to repeat next year

19 november 2025

Vooruitzichten

With less than two months remaining in 2025, Michael Metcalfe, Head of Macro Strategy at State Street, assesses key developments on the 2025 look-ahead topics and explains what will matter most for markets in 2026.

Will investors remain overweight equities? As we highlighted back in January, this easing cycle looked like it may be somewhat different, and that has proven to be the case 10 months later. This leaves the large overweight in equities as a continued point of caution for 2026. At present, however, investor appetite for equity over bond risk remains remarkably resilient.
Can the US and US tech remain exceptional? US equity exceptionalism was and is a well-earned narrative. However, strong earnings growth in Japan and emerging markets present alternative opportunities that should be closely watched.
Is there trouble ahead for Treasuries? Asset manager demand for Treasuries has remained below average, especially from non-US managers and particularly at longer-dated durations. The lesson from 2025 is that stronger Treasury demand from other sources like retail investors, commercial banks and leveraged investors has been sufficient to offset this weakness. So, it appears this will remain a potential risk for 2026 to the extent that asset manager demand is typically one of the more stable sources of demand for sovereign bonds. But with market hopes that the US Federal Reserve may resume its Treasury purchases in 2026 and issuance focused on the front end of the curve, these risks may be more modest next year.
Will US dollar strength persist? While 2025 began with what turned out to be excessive asset manager optimism about US dollar strength, 2026 will begin with a good deal of pessimism. This doesn’t mean there isn’t potential for the US dollar to weaken further. Non-US managers could still hedge a far higher proportion of their US equity holdings than they do today. But given expectations for further US dollar weakness are now somewhat built into investor holdings, the bar for the currency to surprise on the downside is now much higher.

'What has been consistent this year, apart from a brief period, is the willingness of investors to look past this [policy] uncertainty, even against a backdrop of large and relatively concentrated overweight positions in equity markets. This apparent resilience will no doubt form a big part of the market outlooks that are being penned for 2026. But resilience — even repeated resilience as in recent years — does not mean markets are invulnerable. [...] 2025 has been a terrific confidence boost for markets, but that success, or perhaps feat, may be harder to repeat in 2026,' Michael Metcalfe says.