Geopolitics reinforced this instability without ever delivering resolution. Hopes for a breakthrough in the Russia–Ukraine conflict surfaced repeatedly, only to fade as negotiations proved constrained by domestic realities on all sides. Markets, once hypersensitive to every headline, grew more selective, reacting briefly to the promise of progress, then quickly discounting it as another reminder that the conflict had shifted from a shock event to a persistent backdrop.

Towering over all of this was the one theme markets could not look past: the acceleration of AI-related capital expenditure. What began as a technology narrative became a macro variable, shaping earnings expectations, driving equity leadership, and influencing everything from energy demand to global supply chains. The scale and persistence of this investment cycle came to dominate market behaviour, increasingly anchoring broader risk sentiment.

This persistent unpredictability is precisely why it is worth looking past the immediate horizon to ponder some geopolitical, political, and monetary themes that will likely shape 2026.

The "Affordability" Midterms

One of the central forces in the US pulling on every policy lever in 2026 is what analysts have termed the "affordability debate". Despite some resilient headline economic figures, there is a profound and growing frustration among voters regarding the rising cost of living and the general uncertainty surrounding their economic prospects. This sentiment is not just a background hum. It is becoming a political tipping point as the midterm elections approach.

The stakes for the administration could not be higher. There is currently a projected 80% probability that the House of Representatives will flip to the Democrats in November 2026. Presidents are historically blamed when citizens feel insecure about their financial futures, and the current administration is no exception. To reclaim the narrative and avoid a crippling legislative deadlock in the final two years of the term, Trump must find ways to tangibly lower the burden on the average American.

Nowhere is this more critical than at the gas pump. Gasoline prices are arguably the single most important variable for how Americans perceive affordability, particularly for those living paycheck to paycheck. The president has clearly prioritized keeping these prices low as a key metric of his success. However, this necessity has forced the US into a delicate geopolitical balancing act.

Saudi Arabia has been a vital partner in this effort, maintaining high OPEC production that has kept global oil prices suppressed throughout 2025. Yet, this cooperation is not a permanent charity. Saudi Arabia has its own domestic requirements, needing Brent crude to eventually move back toward the USD 70-80 range to fund its massive national rebuilding projects. I suspect that any existing understanding between Washington and Riyadh may have an expiration date that precedes the midterms, creating a looming supply risk for late 2026.

This explains the sudden, intense urgency we are seeing on other fronts. The drive to resolve the conflict in Ukraine, for instance, is likely not only motivated by humanitarian concerns but also by US domestic goals. Ending the war would provide the necessary justification to remove sanctions on Russia, potentially bringing a flood of Russian oil back to the market to offset any future OPEC cuts. Similarly, the maximum pressure campaign on Venezuela likely serves a dual purpose: it signals strength, but more importantly, it seeks to unlock long-term productive capacity in a country with the world's largest oil reserves. For the administration, 2026 is a race against time to secure energy flows before the voter heads to the polls.

Monetary Policy and The Fed's Split Personality

With fiscal levers increasingly constrained and little political appetite for fresh deficit-expanding measures ahead of the 2026 midterms, the administration has turned its focus decisively toward monetary policy to additionally ease the economy’s affordability strain. That shift has sharpened the tension between political necessity and market reality now defining US rate policy. While the Federal Reserve has delivered a cumulative 175 basis points of easing since late 2024, internal cohesion is beginning to fray. A recent 9–3 vote, the most pronounced dissent since 2019, laid bare a growing split between officials wary of cutting further and a dovish minority pressing for faster accommodation. With 10 of the 19 FOMC participants now signalling discomfort with the current pace of easing, the Fed’s debate is becoming increasingly public, complicating the path forward just as political pressure on monetary policy intensifies.

This tension is likely to culminate in May 2026 when the Fed is expected to receive a new Chairman. Kevin Hassett has emerged as the clear front-runner for the position, and his potential appointment raises fundamental questions about the future of Fed independence. The prevailing discussion suggests that while Hassett is expected to align with the President’s preference for lower rates, the real challenge will be how he manages the rest of the committee. If Hassett enters as a perceived proxy for the administration, he may face immediate pushback from the other 11 voting members who may suddenly "find their spine" to protect the institution's non-partisan image. The risk is that if the Fed only begins to dissent once "Trump's guy" is in charge, the institution will look more partisan than ever, potentially unanchoring the very market trust they seek to maintain.

The bond market, however, is not waiting for a change in leadership to voice its concerns. We are currently seeing a rare and aggressive steepening of the yield curve. Despite the Fed's series of cuts, the 10-year Treasury yield sits roughly 55 basis points higher than when the easing cycle began. This divergence signals the re-emergence of the "bond vigilantes," who appear to be reacting to a fiscal reality where massive government deficits are becoming structurally inflationary. The market seems to be signaling that the current pace of government spending, fueled by USD 2 trillion deficits, is a greater driver of inflation than the Fed’s interest rate policy can offset.

There is a compelling argument that the Fed’s current path may be counterproductive. By continuing to cut rates while long-term yields rise, the Fed may actually be encouraging further deficit spending, which in turn pushes inflation expectations higher. In this environment, a more restrictive or cautious stance might actually be the wiser path to anchor the 10-year yield lower. If the Fed continues to prioritize political optics over the signals coming from the repo and funding markets, they risk a scenario where inflation remains stuck above 3%, leaving the bond market in a permanent state of revolt. For 2026, the real test will be whether the Fed can reclaim its role as an inflation fighter or if it will be viewed simply as a mechanism for financing an ever-expanding national debt.

Echoes of 1998

As the year closes and attention turns toward 2026, an uncomfortable historical parallel is beginning to surface. One plausible framing is to view the trade and tariff shocks of 2025 as a modern analogue to the 1997 Asian Financial Crisis, an episode that quietly but decisively altered the architecture of the global trading system. If that comparison holds, then 2026 increasingly resembles 1998: not a year of calm normalization, but one defined by volatility, policy stress, and the exposure of latent structural fault lines. In 1998, the Russian default and the collapse of Long-Term Capital Management did not emerge in isolation, but rather as the consequence of pressures that had been building beneath the surface. The resonance with today’s environment is difficult to dismiss.

This fragility is magnified by the political calendar and a long-standing empirical pattern that has rarely been kind to equities. Since 1930, more than two-thirds of U.S. midterm election years have experienced drawdowns exceeding 15%. When political stakes rise and legislative options narrow, policy often becomes more reactive and less predictable. With affordability concerns elevated and fiscal space constrained, the incentive structure favours confrontation, whether through trade policy, regulatory pressure, or rhetoric aimed at perceived sources of price stress. The result is a policy backdrop that injects volatility into markets even if headline economic activity remains superficially resilient.

The most challenging tension in this outlook lies in the bond market. On one side of the ledger, persistent fiscal pressures and supply-side inflation risks argue for higher term premia and upward pressure on yields. On the other, a volatility shock consistent with the late-cycle dynamics of historical analogues would likely trigger a flight to safety, pulling long-dated yields lower. The distribution of outcomes appears increasingly bimodal: either yields rise as confidence in policy discipline erodes, or they fall as growth expectations reset. What appears least probable is the benign middle ground currently embedded in market pricing. This asymmetry helps explain the unease around investment-grade credit, where spreads remain near cycle tights despite an environment in which leverage and borrowing have become the default response to both public and private sector challenges.

Against this backdrop, the durability of U.S. exceptionalism is likely to be tested. For much of the past decade, global asset allocation has been anchored to a narrow consensus favouring US equities and the US Dollar. Looking ahead, the risk of a rotation toward less crowded exposures is rising. Emerging Markets and parts of Europe, long dismissed on structural grounds, are beginning to benefit from a policy shift that prioritizes industrial competitiveness and strategic resilience. Historically, such inflection points have coincided with periods of relative outperformance versus US equities. At the same time, the valuation and positioning embedded in the US Dollar leave it exposed should policy choices tilt toward accommodating debt burdens through looser financial conditions.

Goldilocks meets Stagflation

Ultimately, the defining theme for 2026 is likely to be the rising cost of policy error. In an environment where economic management is increasingly politicized, authorities face strong incentives to support demand even as supply constraints persist. That bias raises the probability of a regime characterized by robust nominal activity alongside stubborn inflation pressures. The more challenging tail risk remains stagflation: a scenario in which protectionism and geopolitical fragmentation offset productivity gains, leaving inflation elevated even as labour markets soften. In such a world, market leadership is unlikely to rest on growth narratives alone. Instead, more practical attributes such as balance-sheet strength, pricing power and the ability to adapt to changing rules are likely to matter most, as the conditions that supported the past decade gradually give way to different, less predictable market drivers.