Capital Group’s Polak: Stock Market Risks, Catalysts, Opportunities for 2026

For many investors, the start of the new year is traditionally a time to reassess their portfolios and consider new risks. For a reality check, we talked to Capital Group investment director David Polak, a 41-year investment veteran who leads the firm’s equities team and represents a number of its global equity strategies.

With USD 3 trillion in assets under management, Capital Group is the world’s largest active fund manager. They believe the global outlook should steady this year, though geopolitical risk remains “elevated.” And Polak says there are plenty of opportunities in pharmaceuticals, defense companies, and artificial intelligence “picks-and-shovels” providers. This conversation has been edited and condensed for time and clarity.

Leslie Norton: Let’s set the table. What’s your outlook for the economy for 2026?

David Polak: We see 2026 shaping up as a year of resilience and an opportunity for an active manager like Capital Group to add value. With central banks pivoting toward easing, fiscal initiatives gaining traction, and trade uncertainty receding, the global economy is positioned for steady growth.

The United States should benefit from rate cuts and manufacturing incentives, while Europe and Asia should lean into infrastructure and supply chain investment. Corporate fundamentals look stronger, creating a broader set of opportunities across sectors and regions. That said, volatility and elevated valuations remind us that disciplined risk management and intentional diversification remain essential.

Geopolitical Risk Remains High

Norton: The US just invaded Venezuela. What are the implications for global markets and the oil sector?

Polak: So far, the markets have not strongly reacted, but we’ll continue to watch it. Capital Group held about USD 90 million in [energy] fixed-income securities at end of the third quarter, and less than USD 11 million at end of the fourth. We had no equity exposure.

Norton: Has geopolitical risk risen in 2026? What other risks should we watch out for?

Polak: Geopolitical risk remains elevated in 2026, and it continues to influence market volatility, even as global growth shows signs of resilience. This is where long-term stock selection matters. Rather than reacting to headlines, investors should view these risks as part of a broader macro landscape and incorporate them into disciplined long-term portfolio construction.

Key areas to watch include potential trade and tariff realignments that could disrupt supply chains, as well as regional tensions and policy shifts in emerging markets and energy-producing regions. Diversification within portfolios across sectors, regions, and asset classes remains the most effective way to mitigate these uncertainties.

I’m an equity guy, and I’m responsible for the equity business at Capital, so I’ll focus on equities. Most investors are looking for long-term returns. Some do it in chapters, some of them do it a book at a time. The beginning of the year is a good time to reappraise.

Norton: So where are we today?

Polak: Since 2009, the US market has had fabulous returns. Roughly speaking, it compounded at about 14% over that period. So 14% is roughly twice what you would expect for equity returns. We’re all taught that you should expect equity returns to be about 7%, and it’s compounded at twice that for a 15-year period, which is quite exceptional.

That was driven by two things. One is technological innovation, and the other was declining rates for a long period. Not so long ago, we had something like USD 17 trillion of sovereign debt that had negative rates. What’s changed is that rates are no longer declining at the same pace, and we’re getting more normalized rate expectations. We’re in a range of 3%-4% for the 10-year.

We’ve had 15 years driven largely by US growth. Technological innovation and a lower cost of money mean investors are facing concentration risk. The top 10% of the S&P 500 is now 40% of the passive benchmark and over 50% of more growth-oriented benchmarks. These are very profitable, cash-generative companies, but there are only 10 of them.

So we tend to take longer-term views, say the next five years. Investors increasingly recognize that they’re going to want to participate in any gains but also be protected in downswings. There are three ways to do that. One is to be dynamic with your growth allocations. Don’t just passively allocate to a concentrated benchmark. Secondly, be defensive with dividends. Third, diversify internationally.

3 New Catalysts for Stocks

Polak: People weren’t doing this. What have changed are three catalysts. Catalyst #1 is that concentration risk has increased. Catalyst #2 is that interest rates have somewhat normalized, so people can start looking at dividends. Over the 98 years that we’ve had data, dividends have contributed about 37% to S&P 500 returns. Over the last 15 years, they were contributing in the mid-teens. People have looked elsewhere for their defensive posture.

Catalyst #3 is a whole host of international developments. The dollar stopped going up. There’s been a fiscal inflection in Europe, as they’ve realized they’ve got to pay for more things themselves, particularly infrastructure and defense spending. Germany is going to spend half a trillion euros on defense and infrastructure. The multiplier effect with banks, lending, etc. takes that over a trillion. That ripples out across Europe. Last year, the European markets went up, largely driven by multiple expansion and very little earnings growth. This kind of promised economic growth could add earnings growth for a lot of these companies.

Another longer-term development that has become more apparent is corporate governance reform in Asia, particularly Japan. We’re beginning to see the benefits of that as companies there look to be more shareholder-friendly. South Korea has a corporate value-up program. A similar program is the anti-involution push in China.

Why Drug Stocks and Defense Stocks Look Attractive

Norton: Goldman Sachs reportedly thinks the US stock market is likely to return 3% a year over the next 10 years, on the premise that valuations are very full.

Polak: The market as a whole has had such strong returns that if you’re looking for a reversion to the mean, all those years of 14%-15% growth probably mean the next five years would arithmetically come out at 3%. But if you look beyond the companies that have driven that return—meaning US large cap growth—you can find plenty of other companies that will probably show a higher return.

Let’s start with healthcare. We’re seeing more new drugs that have huge total addressable markets. Drug development pipelines are accelerating, yet healthcare valuations are near 35-year lows, trading at roughly a 35% discount to the S&P 500. That’s creating meaningful opportunity. The catalyst to unleash that valuation will be changes in pricing. Lots of CEOs have turned up at the White House and signed deals. GLP-1 manufacturers Eli Lilly and Novo Nordisk said they’ll reduce prices somewhat going direct to consumer and push to charge more overseas. We own positions in both. You’ll see more and more investors focus on healthcare, and that can get you a better return than 3% over five years.

Norton: What other sectors look attractive?

Polak: It’s not just Europe that’s going to have to spend on defense. We’re seeing accelerating demand, both in the US and internationally. A lot of demand will come to North American manufacturers because they just don’t have the capacity at places like Rheinmetall and Leonardo.

For financials, you’re seeing a deregulatory environment with lower capital requirements and pretty solid spending. There are risks, including private lending, but I can’t remember a start of the year when there weren’t risks.

Within large-cap tech, be selective. At Capital, we focus on the picks-and-shovels companies, the ones providing the equipment that will allow a Meta, Google, or Microsoft to do all the fabulous things AI can do. We’re looking at infrastructure leaders like Broadcom and Taiwan Semiconductor, which provide the critical hardware powering AI advancements.

If the S&P 500 sees low returns … well, if active managers like us can’t beat a mid- or low-single-digit bogey, then shame on us.

What if Russia and Ukraine See a Peace Agreement?

Norton: What would a Russia/Ukraine peace deal do to valuations?

Polak: Defense spending, particularly in Europe, reflects long-term structural commitments rather than short-term conflict dynamics. In a peace scenario, potentially increased defense budgets and capacity constraints would suggest that demand remain elevated, though valuations could experience near-term volatility.

Norton: What are investors overestimating for this year?

Polak: The market is assuming all AI participants will be winners, but not everybody will benefit. This leads to a Jekyll-and-Hyde fear for investors that they may have their investment wrong. It’s one of the reasons Capital prefers to invest in the companies providing chips and the equipment that makes those chips.

Additionally, the solid consumer trends of the moment might slow down from the bottom up. The low-income consumer seems to be struggling. What happens if that moves up through other income cohorts?

A greater degree of risk also exists in companies that have high multiples and very little cash flow, which depend on a lot of things going right to grow into the multiple.