UBS is Bullish on AI in 2026 But Flags Bubble Risks
Can the AI rally sustain through 2026? UBS believes so but stresses that investors should watch out for the risk of a bubble.
Artificial intelligence (AI) and technology should «fuel further gains in 2026», according to report by UBS Global Wealth Management's (GWM) chief investment office.
The bank recommends that investors allocate up to 30 percent of a diversified equity portfolio to structural trends including AI, longevity, as well as power and resources. This includes China’s tech market, which it called a top global opportunity with strong liquidity, retail flows and earnings growth.
Sustaining the Rally
On a continued AI rally, UBS warned investors to be wary of bubble risks, noting that two critical factors will determine the outcome: the sustainability of capital expenditure trends and continued investor confidence in the long-term returns on these investments.
And while valuations are high, the bank said that this may not be enough to end the bull run.
«For example, warnings about 'irrational exuberance' in 1996 came years before the Nasdaq peak, and concerns about a 'QE bubble' in 2013 were followed by further gains,» the report said. «Elevated valuations can point to more modest long-term returns, and the S&P 500 may struggle to match its 9.7 percent average annual return of the past two decades. However, markets can continue to advance as long as profit growth and liquidity remain strong.»
For the broader equity market, the bank expects 15 percent returns in 2026 with a preference for the US, China, Japan, and Europe. Its base case is for the S&P 500 to reach 7,700 at the end of the year.
Commodities, Income, FX
Outside of stocks, the bank favors commodities including copper, aluminum, agricultural commodities and gold. For income, it advises investors to blend quality bonds and higher yielding strategies with income-generating equities and structured investments. In currencies, it prefers the euro, Australian dollar, and Norwegian krone are preferred over the US dollar.
Top Four Risks
Despite the optimism, UBS also highlighted four major risks that could prevent markets from moving higher to «escape velocity».
First is the potential disappointment in AI progress or adoption. Second is a resurgence or persistence of inflation. Third is a more entrenched phase of US-China strategic rivalry. Fourth is the reemergence of sovereign or private sector debt concerns.
«As we look ahead to 2026, the question is whether the powerful forces of AI, fiscal stimulus, and easing monetary policy can propel global markets beyond the gravity of debt, demographics, and deglobalization, toward a new era of growth,» said Mark Haefele, chief investment officer at UBS GWM. «Navigating these structural shifts demands that investors adapt their strategies by focusing on sectors and themes where capital is flowing and transformation is taking place.»
