Investment Traffic Lights

1.1  Flat on the surface – turbulent beneath

The monthly outturn for November looked quiet, with global equities largely range-bound and the S&P 500 eking out a modest gain (+0.2%). But the apparent calm implied by that modest month-on-month rise hid a series of dramatic swings during the month, driven by policy uncertainty and geopolitical developments.

The month began during the longest U.S. government shutdown in history. The lockdown ended on November 12 but left unreleased economic data in its shadow. At the same time, shifting expectations around Federal Reserve policy dominated sentiment. Hawkish signals early in the month triggered the steepest equity drawdown since spring, only for dovish commentary and softer labor data to reverse the trend. Rate-cut probabilities for December swung from 24% mid-month to over 80% by month-end, underscoring how sensitive positioning remains to central bank signals.

Beyond the U.S., geopolitical headlines added complexity. Peace talks in Ukraine offered a tentative path toward de-escalation (in which we, however, believe less than the market consensus), while the UK budget and Japan’s policy stance under Governor Ueda and new Prime Minister Sanae Takaichi highlighted divergent global approaches to growth and inflation. Government bonds went in different directions across the globe, high yield spreads tightened, and the yen weakened. The continuing increase in Japan’s long-term government bond yields to their highest levels since 2007 seems to be worrying the market. The 10-year yield ended the month at 1.8% and has since advanced further, to almost 1.9%¹ 30-year yields look even scarier, having climbed to 3.6%. their highest since data began in 2000. The yen is suffering now but the impact of the trends in Japan might also become global. Japanese investors might be drawn to their own country’s higher bond yields and stop shopping abroad, especially in the U.S. Treasury market, for decent yields.

1.2  The market seems to be viewing the AI rally with fresh eyes

November brought a sharp focus on the technology sector, as mounting concerns over a potential AI bubble led to notable volatility among the market’s leading tech names. The so-called Magnificent 7 stocks,² previously the main engine of equity gains, posted a fall of -1.1%, their first monthly decline since March, despite strong earnings from Nvidia. The launch of Google’s Gemini 3 model intensified competitive pressures, raising questions about future AI leadership and sparking rotation within the sector: Alphabet’s share price surged (+13.9%), while Nvidia fell (–12.6%). Investor anxiety was further reflected in widening credit spreads for some tech firms.

As we look ahead to our strategic forecasts for 2026 the global macro environment appears characterized by modest but broad-based growth, easing inflation, and a supportive policy backdrop. Central banks in major economies are either holding rates steady or beginning to ease, while fiscal policy — especially in Europe — is turning more expansionary. The U.S. economy remains resilient while the European one is benefiting from increased infrastructure spending, and Asia continues to focus on technological advancement. Overall, we view macro setting as positive, and the tariff threats and geopolitical tensions that troubled the market greatly earlier in the year are causing somewhat less concern.

The macro backdrop also looks favorable from an asset perspective: Bull markets have rarely turned to bear markets without the intervention of recession. U.S. equities, powered by ongoing AI investment and robust earnings, are expected to remain a key driver and AI exposure could be considered going forward. However, given high valuations and the potential for sector rotation, diversification is essential. We see attractive opportunities in Europe, Japan, and Asia, where structural reforms and strong demand in sectors like semiconductors are providing additional support. Fixed income markets are likely to benefit from high carry and stable policies, while gold remains a potential hedge amid fiscal deficits and deglobalization. In this environment, selection and regional diversification are essential.

2.1 Fixed Income

Central banks remain the dominant force in fixed income markets. The Federal Reserve has ended quantitative tightening and is expected to maintain a dovish stance, with three rate cuts anticipated over the course of 2026. This is likely to bring down yields at the front end of the U.S. curve, while the long end is expected to remain relatively stable, supporting Treasury market stability. In Europe, the ECB has paused further rate cuts for now, and Bund yields are forecast to remain well-anchored, especially at the front end. Overall, global credit spreads are hovering near multi-year lows, leaving little margin for error. We expect modest widening if technical support (mainly demand outstripping supply) fades, but fundamentals are likely to remain resilient.

Government Bonds

We anticipate U.S. Treasuries to trade within a range of 3.75–4.25%, with our strategic 12-month forecast for the 10-year yield at 4.15% through December 2026. The curve is likely to flatten before steepening later in 2026, supported by reduced net supply and a dovish Fed, which should help stabilize the market. In Europe, Bund yields are expected to remain balanced, with our strategic forecast for the 10-year Bund at 2.70%. UK Gilts may see curve steepening as looser monetary policy could offset weak growth. Key risks include unexpected inflation and political uncertainty.

Government bond yields: sideways trading is the name of the game, apart for Japan

^{Source: Bloomberg Finance L.P., DWS Investment GmbH as of 11/30/25}

Corporate Bonds

Investment-grade spreads have remained near decade lows, supported by strong fundamentals, though technicals have softened, especially for the U.S. segment. We anticipate modest widening to a target spread of 85bps by December 2026 for EUR/U.S. investment grade, which could create selective opportunities. Our high yield outlook remains constructive, but dispersion has increased significantly, particularly in Europe. Heavy issuance and late-cycle dynamics require disciplined credit selection to mitigate idiosyncratic risks.

Investment grade still trading near record low spreads, while high-yield is showing some widening

^{Source: Bloomberg Finance L.P., DWS Investment GmbH as of 11/30/25}

Emerging Markets

Emerging market debt is benefiting from strong macro fundamentals and potential Fed easing. Spreads are tight, but marginal widening is likely as valuations normalize. Asia and Latin America offer relative value, though sticky inflation and global growth risks persist. Liquidity and currency stability are likely to be key performance drivers.

Currencies

The U.S. dollar is expected to stabilize as U.S.-related market fears have abated. We see the dollar trading basically sideways against the euro on a 12-month horizon. The Japanese yen could gradually appreciate as the economy recovers, and we forecast a rate of 145 to the USD over the next year. The British pound is likely to face headwinds from fiscal uncertainty and political risk. The Chinese renminbi should remain stable with a mild strengthening bias, supported by policies favoring a stronger currency. Since global growth remains rather subdued, broad-based appreciation in emerging market currencies appears unlikely, even though they usually benefit during a Federal Reserve rate-cutting cycle.

2.2 Equities

Global equity markets appear positioned to benefit from a diverse set of regional growth drivers. In the U.S., the outlook is being shaped by dynamic investment in technology and artificial intelligence, fueling strong earnings momentum and supporting elevated valuations -- but likely not for all AI-related companies and sectors. The differentiation that was already visible in 2025 may intensify as winners and losers become more apparent. Europe is expected to deliver steady, if more moderate, earnings growth, aided by fiscal stimulus and attractive valuations, even as the pace of digital transformation lags the U.S. The market in Germany, Europe’s industrial core, is expected to gain from a recovery in global demand and targeted fiscal measures, with particular opportunities in export-oriented and industrial sectors.

Emerging markets are forecast to be the outstanding performer globally in earnings growth, supported by robust domestic demand, digital adoption, and favorable demographics, especially across Asia. China’s growth is moderating but it remains a key pillar for the region. Japan, meanwhile, is benefiting from ongoing corporate and structural reforms, a supportive currency environment, and improving shareholder returns, positioning its equity market for a constructive outlook.

Overall, while the sources of growth and valuation support differ by region, the global equity outlook appears solid, with each market offering distinct opportunities based on local fundamentals, structural reforms, and sectoral strengths.

U.S.

The U.S. equity market is being powered by substantial investment in AI infrastructure and strong corporate earnings and is therefore helping to drive economic growth globally. S&P 500 companies, we forecast, are likely to see an earnings-per-share growth rate of around 10% through 2030, with the tech sector leading the charge. AI data center capex is projected to reach $350 billion in 2025 and $450 billion in 2026, supporting elevated valuations. The S&P 500 is forecast to reach 7,500 by the end of 2026, underpinned by resilient consumer demand, robust profit margins, and a supportive monetary policy backdrop, with the Fed expected to cut rates to 3.0–3.25%. Risks include whether the AI-driven capex spending is sustainable, and productivity gains continue, and potential margin pressures from higher chip costs.

Europe

European equities are expected to deliver steady earnings growth as well, with the EuroStoxx 50 target set at 5,950 for December 2026 and projected earnings-per-share growth of 7%. The region is benefiting from improving macroeconomic conditions, fiscal stimulus, and a gradual normalization of monetary policy. While Europe lacks America’s AI-driven momentum, it offers potentially cheaper valuations and broader sector participation. The Stoxx 600 is forecast to rise modestly, by about 3.8% from current levels, to 600 by December 2026. We believe European Small and Midcaps have a good chance of staging a comeback if tariff uncertainties would recede and given that they may benefit particularly from the current wave of fiscal stimulus. A key risk for them, on the other hand, is that the fiscal spending plans are implemented more slowly than hoped. But the outlook remains constructive provided structural reforms and digitalization initiatives gain traction.

Germany

Germany, the largest economy in Europe, is positioned for moderate economic growth, supported by fiscal stimulus and a rebound in industrial activity. The DAX is forecasted at 26,100 by December 2026, a rise of over 9% from its current level. The German market benefits less from AI and tech than the U.S. but it stands to benefit from global supply chain normalization and increased investment in automation and green technologies. Earnings growth is expected to be solid, though lagging a bit behind the U.S. and broader Europe due to cyclical sensitivities and export dependence. Nevertheless, German equities may offer value opportunities, especially in industrials and exporters as global demand stabilizes.

Emerging Markets

Emerging markets are projected to deliver the highest EPS growth among major regions, with the MSCI EM index expected to grow its EPS by 13% and reach 1,480 by December 2026. Asia ex-Japan is similarly forecast to achieve 13% EPS growth, driven by strong domestic demand, digital adoption, and favorable demographics. We expect China’s GDP growth to moderate but to remain robust at 4.5% in 2026, supporting equity performance not only in China but the region as a whole. In Japan we see 7% EPS growth, with the MSCI Japan index targeted at 2,200. Japanese equities may see some tailwind from corporate governance reforms, a weaker yen, and improving shareholder returns, positioning the market for a solid performance relative to its historical trend.

Another strong year for equity markets with the U.S. catching up with Europe over the course of the year

^{Source: Bloomberg Finance L.P., DWS Investment GmbH as of 11/30/25}

2.3 Alternatives

Real Estate

We retain a positive outlook on real estate as the rate environment is likely to turn more favorable. Listed real estate is expected to benefit from a lag in new supply and improving fundamentals. Asia and Europe stand out, with compelling valuations compared to private markets, offering potentially attractive entry points. Non-listed real estate could also gain momentum, supported by strong occupier demand and resilient fundamentals. Residential and industrial sectors appear positioned for robust growth into 2026, particularly in Europe and the U.S. However, risks such as higher-than-expected interest rates, valuation pressures, or a sudden increase in supply warrant close monitoring.

Infrastructure

Infrastructure remains a core pillar of our alternatives allocation, underpinned by its ability to pass on inflation and the fact that these assets are a pillar of a functioning society. Lower yields are reducing the cost of capital, while fiscal stimulus in Europe and rising global demand could continue to support the transaction activity level. Non-listed infrastructure may offer particularly attractive opportunities in mid-cap segments, where liquidity challenges for large funds are creating pricing advantages. We see the potential for double-digit returns through 2026, though deteriorating corporate balance sheets and refinancing risks could pose headwinds.

Gold

Gold continues to shine as a potential alternative amid rising fiscal deficits and increasing worries with regards to fiat currencies. The debasement trade therefore remains intact, and it is reinforced by central bank buying and strong demand from Asian investors. We have raised our long-term price target, forecasting gold to reach USD 4,500 per ounce by December 2026, a rise of about 6% on its current level. Deglobalization and de-dollarization trends further support the case for non-U.S. assets, while lower interest rates should enhance the appeal of real assets overall. Key risks include policy shifts and volatility in global liquidity conditions, but the structural arguments for gold remain compelling.

Oil

Our oil price forecast has moderated substantially. With OPEC+ supply returning and China pausing strategic purchases, prices are expected to stabilize before demand growth resumes in the first half of 2026. We forecast the Brent crude oil price at around USD 60 per barrel by year-end 2026, slightly down compared to the current level. There are downside risks from weaker global growth but there may also be upside potential if structural buyers strengthen their positions, or geopolitical tensions disrupt supply chains.

Gold as unstoppable on the way up as oil on the way down, no matter what… so it seemed in 2025

^{Source: Bloomberg Finance L.P., DWS Investment GmbH as of 11/30/25}