Navigating uneven markets

AS investors scan the horizon for signs of turbulence in 2026, the equity market story remains one of confidence tempered by caution.

The mood music is not quite ominous, but certainly more complex than the straightforward optimism that characterised the early stages of the artificial intelligence (AI) boom.

And while comparisons with past market blow-ups begin to surface, the take from Schroders’ group chief investment officer Johanna Kyrklund suggests that the outlook is less about panic and more about planning.

According to Kyrklund, the anxiety over stretched valuations is apparent.

“As we head into 2026 there is a lot of concern about equity market valuations,” she writes in her recent note.

She flags that some commentators have begun glancing nervously at historical episodes, drawing parallels with the dotcom period as hyperscalers pour capital into data centres and cloud infrastructure.

At the same time, she points out that many AI startups are loss-making, with their valuations being boosted by vendor financing.

Kyrklund is blunt about where things sit today: “Firstly, equity valuations are expensive. They have been more expensive in the past and are not at extremes yet, but you could argue for taking some risk off the table.”

She adds that certain investors – such as mature defined benefit pension schemes – may choose to “bank some profit”, but emphasises that most people cannot afford to step back for long.

Inflation, after all, does not wait. As she puts it, “money has to be worked hard to deliver the funds required for retirement and other goals.”

One path is the simplest: stay in the index and let time do the compounding.

Equities deliver

Over two decades, she says, equities tend to deliver. But this is not a risk-free autopilot.

The dominance of a small cluster of technology giants leaves investors exposed to the very valuations that keep them awake at night.

She warns: “The challenge with this approach is that, due to the concentration of equity indices in a small group of technology companies, you are particularly exposed to the equity valuations which everyone is so worried about.”

Beyond that concentration risk lies the practical issue of oversight.

Kyrklund notes: “I worry that not all investors realise how concentrated their exposure is. It is not always clear, in the case of passive investment, who oversees that risk for them.”

The alternative is more deliberate: take active decisions to manage the risks rather than simply absorb them.

“As active investors, we take calculated risks based on a broad range of factors, knowing that over time our clients need a return,” Kyrklund points out.

For now, she argues, the broader market backdrop still supports equities.

Bond yields remain “well-behaved”, inflation is muted, and central banks retain room to ease a little more.

Her medium-term worries revolve around rising government debt and the potential for resurgent inflation, which could eventually push discount rates higher.

But she judges the next few months to be less fraught, adding: “We also see low risk of US recession: although the labour market is softening, unemployment is still low and private sector balance sheets are in good shape.”

In short, she concludes, “at market level, we still see positive returns from equities”.

Big names

Stock-specific risk does complicate the picture, especially when the market’s biggest names are spending heavily. Yet she remains constructive on their prospects.

“We still see the potential for the hyperscalers to deliver revenues,” Kyrklund says.

Her team is watching how their investment splurge translates into returns, while also monitoring how large language model developers and cloud companies perform as adoption widens.

In her words, “we still see opportunity at stock level,” but crucially this is risk taken “deliberately, backed by detailed fundamental analysis”.

Diversification, meanwhile, is making a comeback after years in which AI overshadowed everything else.

Kyrklund highlights that “2025 has shown the benefit of geographical diversification.”

Emerging market debt, she says, offers “better dynamics and higher real yields”, while income opportunities persist in areas such as insurance-linked securities and infrastructure debt. She also points to liquid hedge funds as a potential route to stay invested while spreading risk.

For the coming year, her stance is cautiously upbeat.

“For 2026, we see a low risk of recession, contained bond yields and momentum in company earnings, which leads us to stay positive,” she states.

Kyrklund stresses that the firm’s processes allow for rapid course-correction if the view changes, but today’s assessment is clear enough.

The message: conditions are uneven, but navigable. And as she puts it, “It is too soon to seek shelter.”