As 2025 drew to a close, global financial markets demonstrated a resilience that caught many forecasters off guard. Despite geopolitical tensions and a sharp but brief sell-off following former President Donald Trump's tariff announcement in April, stocks trended higher, bonds remained stable, and private assets avoided a widespread meltdown. This buoyancy has fostered a consensus that the good times may roll straight through 2026.
The AI Juggernaut: A Potential Fault Line
However, professional money managers are paid to look beyond the optimism. Among the most significant and quantifiable risks for the new year is the overheated artificial intelligence trade. While soaring tech revenues and massive infrastructure spending justify some of the sector's outperformance, critical questions remain unanswered.
The durability of U.S. Big Tech's competitive edge is uncertain. The rapid rise of models like China's DeepSeek in January 2025 shows the global field is competitive. Furthermore, today's leaders, like Nvidia Corp., face challenges from rivals such as Alphabet Inc., and it is unclear whether end consumers will ultimately generate enough revenue to justify the colossal capital expenditures.
Ignoring these questions is dangerous due to the sheer size of Big Tech in global portfolios. Nvidia alone retains a valuation above US$4 trillion despite recent setbacks. A dramatic industry-wide correction would severely impact the U.S. market and send shockwaves through equities globally.
BlackRock's Stark Warning for Portfolios
In its 2026 outlook, asset management giant BlackRock Inc. underscored this precise threat. Its analysts warned, "If the AI theme stumbles, the impact will likely dwarf any seeming diversification away from it." They stress that while this is a big "if," portfolios require a clear Plan B and the agility to pivot quickly.
The firm casts doubt on strategies claiming to diversify AI risk by investing in Asian markets, energy infrastructure, or tech-related resources. BlackRock views these as integral parts of the same AI value chain, meaning they would likely fall in tandem during a sector downturn.
The Inflation Wildcard and the Fed's Dilemma
The second major risk for 2026 is a potential revival of inflation, partly fueled by exuberant AI-related spending. U.S. consumer price inflation remains stubbornly around three percent, with the Federal Reserve's preferred gauge also sitting above target.
While investors are broadly betting on a continued cooling that would allow for at least one more interest rate cut in 2026, some analysts warn that tariff-led price pressures may still be lurking in the pipeline. The question of what the Fed does next presents a volatility trigger.
If persistent inflation forces the Fed to raise rates, equity markets would likely suffer. Conversely, if the central bank holds steady or continues cutting—a possibility after Chair Jay Powell's term ends in May 2026—the pain could instead manifest in the bond market and weigh on the U.S. dollar.
In summary, 2026 enters with market confidence high but underpinned by two substantial risks: the concentrated, frothy AI trade and the unpredictable path of inflation and interest rates. For the worried investor, the lesson from 2025's resilience is not complacency, but the necessity of preparing for the volatility that is never far away.
