December 3, 2025

 

(THE AI BOOM SHOULD DRIVE GROWTH IN 2026)

 

December 3, 2025

 

Hello everyone

 

It’s been a turbulent year marked by trade wars and policy shocks.  But according to Jonathan Shead, State Street Investment Management’s head of investments for Australia, global markets are poised for a more settled path in 2026.  He believes the AI boom still offers substantial upside.

State Street is an investment powerhouse with about $US3.6 trillion ($5.5tn) of assets under management across both active and passive funds. 

As US midterm elections loom in late 2026, Shead thinks US politicians won’t make any dramatic shifts, and the focus of trade policy is likely to be more about “realignment.”

For the US economy, he sees slightly above-trend growth, helped by the “one big, beautiful bull” fiscal stimulus package and easing monetary policy from the Federal Reserve.

Interestingly, Shead sees the Fed having to do some catch-up.  He thinks the Fed funds rate is too high given nominal growth, so he expects three or four cuts by 2026, possibly starting in December.

We all know that the Magnificent Seven have captured headlines, but the real story is unfolding beneath the surface.  Shead notes that there is “real economic output and productivity consequences and real investments being made in the underlying economy…[but] some of the productivity benefits from that revolution [will] take a little bit longer to filter through.”

State Street favours US small-cap stocks as the firm sees them as not nearly as fully valued as large caps.

The combination of an easing Fed, a recovering economy, and resolved supply-chain issues creates a supportive environment for smaller companies.

Beyond the obvious technology plays, Shead highlights three sectors benefiting from the AI boom: utilities, which are seeing surging demand for power generation from data centres; industrials, boosted by infrastructure build-out and defence spending; and communication services, where AI is driving efficiency gains in advertising and content.

For Australian investors who want to invest in US markets, there is a downside.

US dollar weakness is expected to persist in the medium to long-term, driven by the fiscal position, elevated valuations, and the likelihood of further rate cuts.

To counter this, look at hedging US dollar exposure.   One way to do this is to buy the Australian dollar (FXA).

On the Australian home front, Shead expects slightly above-trend growth, with inflation looking benign.  Furthermore, he sees the Reserve Bank set to remain on hold for the foreseeable future.

However, if the labour market weakens more than expected in 2026, there is a possibility the central bank will need to ease.

In summary, Shead maintains that calmer waters should return in 2026 after the volatility of 2025.

Thank you to all those who attended the final Jacquie’s Post Zoom Monthly Meeting of the Year.  The recording will be sent out shortly.

 

 

Cheers

Jacquie