Investors place big bets on 2026

Around this time last year, investors were bullish on the prospect of lower interest rates and a market-friendly Trump presidency. The S&P 500 had just touched a record high.

Much has changed since then, yet optimism for the year ahead remains similarly strong. The S&P 500 is once more touching record highs and cash holdings among global asset managers has fallen to a record low, according to a closely-watched Bank of America survey. Despite fears of an AI bubble, a net 42% are overweight equities, the highest level since 2022. Expectations of global corporate profits are at their highest level since 2021. 

Wealth creation

The threat of a prolonged period of stagflation looks to be receding, US President Donald Trump has shown willingness to temper his more extreme economic policies in the face of market pressure, and a weakening jobs market has given the Fed more leeway to cut rates next year. 

Granted, some investors will see this as a sell signal, and it's easy to see how this goes wrong. Low levels of cash holdings will fuel volatility as sentiment inevitably ebbs and flows. Every quarterly earnings report from a listed AI pioneer will feel like judgment day for the entire sector, as we saw with Nvidia's quarterly results last month. And while the Fed may well cut rates, long-term borrowing costs are likely to remain elevated. 

Nevertheless, those with the most at stake are betting that the rally has further to run, which suggests 2026 will be a strong year for wealth creation. This will quickly feed through to the upper rungs of global residential markets, which are already performing strongly. Globally, annual sales of homes worth at least US$10 million are running at a pace not seen since the post-Covid surge in 2021. 

Too high, too long

The UK's annual rate of inflation fell sharply to 3.2% in the year through November, down from 3.6% the previous month. That's the slowest rate since March and is well below the 3.5% economists had expected.

This follows the release of official figures showing the rate of employment rose to 5.1% in the three months to October, the highest rate since the beginning of 2021. Pay growth is running at the weakest level in nearly five years. 

The Bank of England is expected to cut the base rate to 3.75% when it meets tomorrow, and some economists are now questioning whether policymakers have held rates too high for too long. It'll be interesting to see how the voting pans out. The last vote split 5–4 in favour of holding rates, with Governor Andrew Bailey now seen as the most likely – and perhaps only – policymaker inclined to shift his vote from a hold to a cut. 

A reduction will provide a boost to sentiment among UK businesses that is already recovering after the Budget. The private sector economy regained momentum in December, supported by the strongest upturn in new work since October 2024, according to a new Purchasing Managers' Index. 

"December’s flash PMI surveys brought welcome news on faster economic growth at the end of the year, with businesses buoyed in part by the post-Budget lifting of uncertainty," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. "It’s a big relief that business confidence has not slumped in a repeat of last year’s post-Budget gloom. Instead, companies have ended the year on a slightly more optimistic note amid signs of improving demand."

Densification

Changes to the National Planning Policy Framework proposed by the government yesterday include a default yes to homes around train stations. The proposals would also implement a minimum density of 40 dwellings per hectare around all stations, rising to 50 around 'well-connected' stations. 

Other amendments include streamlining standards on energy efficiency and Biodiversity Net Gain, encouraging a more diverse mix of housing, such as rural affordable homes and accessible homes for older people and those with disabilities, and introducing a new ‘medium site’ category for sites between 10 to 49 homes "so SME builders face proportionate rules and costs for their site size."

You can read the consultation here. The changes have broad industry support, as evidenced by supportive comments from the HBF, Berkeley Group, Urban & Civic and more in the announcement.

“The changes signal a strong commitment from Government to push forward with planning reform, aiming to cut complexity and speed up delivery," says Knight Frank Head of Residential Development Research Ollie Knight. "Proposals such as a ‘default yes’ near transport hubs and clearer guidance on urban intensification could help reduce uncertainty, restore developer confidence, and unlock much-needed housing. The emphasis on small and medium-sized sites is particularly welcome, as is the introduction of a new ‘medium development’ category, which should support SME builders and diversify supply. Overall, the changes are a positive and bold shake-up of the system which is urgently needed to reverse declining consent rates and accelerate delivery.”

Student housing

It has been a year of not taking anything for granted in student housing. There’s noise in the headlines, nuance in the data, and if you know where to look opportunity in the fundamentals. 

For a new edition of Intelligence Talks, Katie O’Neill speaks to Knight Frank's Head of Student Housing Capital Markets, Merelina Sykes, and Head of Student Housing Valuations, Neil Armstrong. She asks; how are investors navigating the current investment landscape? What’s really happening with rental growth, and how is it shaping occupancy? And importantly, what does the student think?

For those of you operating in the Living Sectors, I highly recommend signing up to Katie's newsletter Capital Clarity: Living Sectors. You can sign up for the first edition, coming this week, here. 

In other news...

Go zone — New York is building, baby, building (FT).