From a macroeconomic perspective, we remain positive on the theme, while in equity markets we currently see valuations as fair overall," Vedda said in a note.

Although many expected 2025 to be volatile, not least because of the US government transition, the global economy stabilised, supported by steady consumer spending and technological innovation - especially AI. Inflation concerns eased, central banks acted prudently, and geopolitical tensions and tariffs slowed momentum less than feared.

With markets remaining volatile in recent weeks, a focus for strategists in the wealth industry has been to work out whether the strong performance of stocks, such as in the US, and particularly those of firms linked to AI, are sustainable. There have been worries that valuations are in bubble territory and due for a sharp correction. Even so, sentiment in certain quarters, as shown by DWS's Vedda, appears to be broadly upbeat.

Buoyed by this optimism, DWS enters 2026 under the motto “Rational Exuberance” - a constructive environment for risky assets. Vedda expects key drivers to include accelerating growth during the year, favourable financing conditions, and neutral to accommodative monetary policy. He believes that there will be three rate cuts from the US Federal Reserve . "Europe benefits from German fiscal policy, while inflation remains near the European Central Bank (ECB) target. China focuses on technology and rising incomes, Japan on fiscal measures," Vedda said. "Tariffs lose some bite, though structural effects persist. For investors, this could mean: selective investing becomes more important, major trends such as digitalisation and the energy transition shape capital flows, bonds are expected to offer a positive real returns through carry, and we also see gold as a good diversifier in the coming year."

Veddas optimism for equities remains, especially in the US. "However, the AI boom offers surprises both up and down, so we do not favour the tech-heavy US over other regions. Europe also offers earnings growth, and Germany stands out with infrastructure and defence investments. Japan benefits from reforms, and the rest of Asia from strong chip demand, a weak US dollar, and growing intra-regional trade. AI will continue to dominate headlines and, in our view, remains a key risk if expectations are not me," Vedda continued.

For bonds, Vedda's motto is “carry-on” - capturing high running yields. "Modest growth, falling inflation, and supportive central banks could create an almost ideal backdrop for bonds, if not for rising government debt, already visible in 30-year maturities. In the US, the end of quantitative tightening and planned buybacks reduce supply and support intermediate maturities," Vedda said. He expects 10-year yields between 3.75 per cent and 4.25 per cent. "In Europe, Bund yields should remain stable over the next 12 months, with potential curve steepening at ultra-long maturities due to financing needs and pension reform in the Netherlands. Given unattractive foreign exchange hedging costs, euro investors are likely to stay “at home," he continued. For corporate bonds, he remains neutral on investment grade, as record-low spreads are unlikely to tighten further. He is more cautious on high yield, as tight spreads no longer reflect sector-specific risks. 

Overall, Vedda expects a good investment year, especially for equities. Modest economic growth, stronger earnings growth, and non-restrictive monetary policy should create a favourable environment for many equities and corporate bonds. He views AI as a market driver, but the sector will likely be assessed more selectively, and high valuations of many AI leaders carry disappointment risk. For this reason, he remains broadly diversified and sees gold as a relative hedge.