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Market Outlook - January 2026

10/02/2026

"The outlook for global equities in 2026 is positive. We expect an environment that supports risk assets such as equities and corporate bonds," says Chief Investment Officer Vincenzo Vedda.

Vincenzo Vedda

Chief Investment Officer

CIO of Western Europe Vera Fehling

Employees walking to work in the city at sunrise

DWS Market Outlook

Overview:

#1 Market & Macro

Promising year for equities in 2026 – but diversification remains important

"The outlook for global equities in 2026 is positive. We expect an environment that supports risk assets such as equities and corporate bonds," says Chief Investment Officer Vincenzo Vedda.
He cites moderate economic growth, favourable financing conditions and an overall neutral to accommodative monetary policy, especially in the US. Vedda also expects stable framework conditions for Europe, which would be supported by government investment programs – especially in Germany.
The slower price increases are also likely to prove beneficial. In addition to Europe and the USA, Vedda also sees positive developments in Asia: The major economies are increasingly relying on technology as a growth driver, incomes are rising, and the willingness to reform is growing. "We see double-digit return opportunities for equities overall,“ says Vedda. However, the high concentration on a few stocks in the USA warrants caution. "In our opinion, global diversification therefore remains a key element that should be taken into account in any investment strategy," says Vedda.
In the short term, the investment strategist sees two other possible risks: The cash ratios of fund managers have fallen to a record low level. In addition, optimism in the market is extremely high, both classic contrarian indicators. But over the course of the year, Vedda believes that the expected growth rates in corporate profits – he expects more than ten percent for the USA – should create a positive environment.
If the setbacks that have been hotly debated for several months regarding the major beneficiaries of the artificial intelligence boom occur, for example due to overcapacity or excessive investment spending, he sees these more as tactical entry opportunities rather than a signal for a permanent exit.

Topics driving capital markets

Economy: positive growth contributions expected from the United States and Germany

Thanks to artificial intelligence, we expect accelerating economic growth in the United States in 2026 with a plus of 2.1 percent (after 1.9 percent in 2025).
Growth of the Eurozone gross domestic product might turn in at 1.1 percent in 2026 (1.4 percent in 2025), with Germany leaving the doldrums and growing at a rate of 1.2 percent (0.3% in 2025).

Inflation: Eurozone close to its target rate while prices might continue to grow significantly higher in the USA

Inflation is expected to stay high in the United States in the year to come or even to climb slightly. Our inflation forecast is 2.9 percent (2.8 percent in 2025).
Price increases in the Eurozone are obviously under firmer control. In 2026, they are expected to fall to the target rate of 2.0 percent (after 2.1 percent expected in 2025).

Central banks: Central banks: United States – three further rate cuts expected

The Federal Reserve has a dual mandate: maximum employment and price stability. Even if price stability seems to be out of reach in 2026, the Fed is expected to cut its key rates in three steps by 0.25 percentage points each to 3.0 to 3.25 percent due to weaker job market data.
The European Central Bank is expected to leave its key rates unchanged on the current level.

Risks: artificial intelligence must deliver, political uncertainties

The Russian war of aggression against Ukraine continues to bear high geopolitical risk potential. If the latest round of negotiations fails, the crisis could be exacerbated, having a negative impact on the markets.
Markets are driven by AI, however, investors will take a much more differentiated view on AI stocks than in the past so that there is some scope for disappointment in some cases.

#2 Equities

Why the Dax should still have potential even after record high

New highs for the German leading index Dax: on January 7, it broke through the 25,000 point mark for the first time. In the past twelve months, the price increase thus adds up to 24 percent. How much further potential is there? "I still see significant price potential, despite the
considerable price gains we have seen recently“, says portfolio manager and expert on German equities, Sabrina Reeh. The price gains last year were characterised by a few stocks, similar to 2024.
"We also have a positive view of German equities in 2026. Among other things, because we expect more market breadth and depth, especially if there is an economic recovery," says Reeh. One decisive factor: the expected increase in profitability. The market consensus expects profit growth of around 16 percent for the Dax companies for the 2026 financial year. The largest contribution is likely to come from the automotive sector, followed by the industrial sector. A large part of the expected profits will be underpinned by cost measures that have already been initiated.
"We also see opportunities in companies that benefit directly from German stimulus and NATO spending. Industrial stocks and construction companies are likely to be beneficiaries of the government stimulus package, falling energy prices and the expected economic recovery," Reeh said. The financial sector also remains promising. The valuation of the Dax is no longer favourable with a price-earnings ratio of 16.
Nevertheless, the relative valuation remains attractive, as other European indices have also risen. In addition, it should be taken into account that the lower historical average valuation of 13 is due to the change in the index share of technology companies that is higher today, while classic, lower-valued sectors such as chemicals and automotive have lost weight," says Reeh.
If valuation multiples remain stable and earnings forecasts are met, corporate profits could fundamentally justify a price level of over 30,000 points in just two years. Despite all the positive prospects, there are of course also risks: delays in the implementation of the infrastructure package, a significant deterioration in the US economy and a further worsening of the geopolitical situation.

Equity markets historically highly valued
Price-to-earnings ratio based on expected earnings over the next twelve months

Equities USA

Positive outlook – Artificial intelligence is likely to remain a price driver

We are positive about the outlook for US equities. Our favourites include selected technology stocks, utilities and banks. Energy suppliers are likely to benefit from the increased demand for electricity induced by artificial intelligence.
The high valuations of some mega-caps, i.e. companies with very large market capitalisations, and the interest rate cuts already priced in by the market are potential risk factors.

Equities Germany

Upturn likely to continue

After a six-month period of stagnation, the Dax has risen to new heights. We think that there are good reasons why the positive development can still continue (see above).
The valuation discount compared to US stocks has fallen and is currently 35 percent. However, this is still well above the long-term average of 22 percent.

Equities Europe

Possible good complement to US stocks – promising small caps

We expect single-digit earnings growth for European companies, broadly distributed across all sectors. Europe cannot keep up with the pace in the USA. However, attractive valuations and a lower dependence on technology companies are advantages, especially from the diversification aspect.
Selected European small caps could particularly benefit from an improved economy.

Equities Japan

Temporary weaknesses could be buying opportunities

Japan is benefiting from solid wage increases, buoyant tourism demand and a central bank that is likely to continue its normalisation path in interest rate policy.
However, a possible appreciation of the yen and burdens from tariffs could affect the strongly export-oriented country. We see possible temporary weaknesses in quality stocks as potential entry opportunities.

#3 Multi Asset/Fixed Income

Broad diversification is a must in this capital market environment

Although the overall outlook for stock markets is rather positive for the year to come, temporary market stress can, of course, not be ruled out. How to deal with it? “A broad diversification of assets across but also within asset classes is extremely significant,” Henning Potstada, DWS Global Head of Multi Asset & EMEA Head of Fixed Income, states. Gold remains, in his view, the best instrument of diversification.
However, the benefits of diversification strategies strongly depend on the environment. In the fixed income sector, euro investors should focus on investment-grade corporate euro bonds since their risk/return ratio is good – absolute returns of three percent are decently attractive. With a view to high-yield bonds, however, he sounds a note of caution. Their risk of widening yield spreads versus sovereign bonds is higher, and these higher risk premiums will put prices under pressure. But risk diversification is also possible within the asset class of equities.
For example, should the hype around artificial intelligence wane unexpectedly, it could make sense to hold stocks from the healthcare sector since they would presumably weather such phases of market stress due to their defensive character. With a view to sovereign bonds, Potstada favors intermediate-maturity euro issues for domestic investors. For two reasons: Firstly, the yield spread between the United States and Europe should shrink – the Federal Reserve is expected to take three rate cutting steps to 3.0 to 3.25 percent in the twelve months to come. Secondly, euro investors still have to bear the currency risk of U.S. bonds which is expensive to hedge.

Figure 2. Corporate bonds with low yield spreads
Yield spreads in the last ten years

^{Sources: Bloomberg, DWS Investment GmbH, as of 31 November 2025}

U.S. government bonds (10 years)

Attractive returns

The yield on ten-year US bonds is likely to be in a range of 3.75 to 4.25 percent.
The yield level remains interesting.

German government bonds (10 years)

Yields could fall slightly

Yields on 10-year Bund bonds are currently slightly above our target of 2.70% (Dec. 26).
We expect a slight narrowing.

Emerging Market sovereign bonds

Higher risk, higher returns

Demand has remained high recently, and interest spreads have declined.
Nevertheless, the yield level remains attractive, with correspondingly higher risks.

Credit

Investment Grade

USA	Eurozone

High Yield

USA	Eurozone

#4 Currencies

Euro/Dollar: Dollar likely to stabilise against the euro

We do not expect the euro to continue to strengthen against the US dollar. The US currency is likely to stabilise, and the better US growth prospects are likely to support the dollar.
Capital outflows from the US currency to the euro have not yet occurred to the extent expected by some market observers.

#5 Alternative Assets

Gold: Demand is likely to remain high, but price momentum will flatten out

Gold is likely to remain in demand. Inflows into gold ETFs have continued after the US Federal Reserve cut interest rates in December.

The expected further interest rate cuts by the US Federal Reserve and the continued high interest from investors who see the precious metal as a risk hedge are likely to support the gold price. However, we no longer expect prices to rise as rapidly as they have in the past twelve months.

Legend The strategic view by September 2026 The indicators signal whether DWS expects the asset class in question to develop upwards, sideways or downwards. They indicate both the short-term and the long-term expected earnings potential for investors. Source: DWS Investment GmbH; CIO Office, as of 06 November 2025
	Positive return potential
	Potential profits but also risk of loss rather limited
	Negative return potential

Forecasts are based on assumptions, estimates, views and hypothetical models or analyses which may prove to be incorrect. Past performance is not indicative of future results.

DWS - Market Outlook January 2026

The entire document can be found here

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The information contained in this document does not constitute investment advice.

All statements of opinion reflect the current assessment of DWS Investment GmbH and are subject to change without notice. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical performance analysis, therefore actual results may vary, perhaps materially, from the results contained here.

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DWS International GmbH as of 12 January 2026 – CRC 090951_13.0 (01/2026)

Market Outlook - January 2026

Overview:

#1 Market & Macro