CICC 2026 Outlook: Bubble Acceleration! U.S. “Fiscal Dominance” Supports China And U.S. Equities As Well As Gold, Silver And Copper
Since 2025, policy actions by the Trump administration—ranging from DOGE measures to reciprocal tariffs and stricter immigration enforcement—have repeatedly disrupted the recovery of the U.S. nominal economic cycle. As 2026 begins and midterm election pressures mount, a tactical softening of foreign policy and a domestic reorientation are plausible, with fiscal expansion, monetary accommodation and financial deregulation becoming central policy levers. We expect such a fiscal‑led, monetary‑assisted environment to alleviate the three principal constraints that weighed on the U.S. economy in 2025: recurring negative shocks that depressed confidence, delayed small‑business expansion that weakened end‑demand, and subdued housing demand that restrained real estate investment. Concurrently, easier credit conditions should continue to underpin strong investment in AI and reindustrialization. Consequently, sectors that outperformed in 2025—technology, industrials and resources—are likely to remain leadership candidates in 2026, while consumer and financial sectors, previously held back by weak domestic demand, may experience catch‑up gains as the nominal cycle turns up. Following the December FOMC, the Federal Reserve initiated a normalized balance‑sheet expansion (see “Fiscal Dominance, Restarting Balance Sheet Expansion”), and we anticipate U.S. dollar liquidity will progressively ease next year. Together with improving fundamentals, this liquidity backdrop should support global risk assets, favor emerging markets, and benefit inflation‑sensitive commodities such as gold, silver and copper (see “Entering Fiscal Dominance, Positioning For The Global Bull”).
If the dollar weakens, the renminbi may retain appreciation potential. Recent RMB gains against the dollar have been driven by rising expectations of Fed easing and year‑end foreign exchange settlements. Under a Trump “Great Reset” scenario in which fiscal policy leads and monetary policy cooperates, dollar liquidity is likely to become ample and the dollar may enter a depreciation trend. In that context, accumulated foreign exchange settlement demand could provide continued support for the RMB.
A weaker dollar cycle that fosters synchronized global recovery, combined with inflows of long‑term domestic and international capital, would provide a meaningful boost to A‑shares and Hong Kong equities. Dollar weakness tends to lift export growth and corporate profitability, while looser global monetary conditions expand valuations. Capital will increasingly seek higher returns in emerging markets with stronger growth elasticity. Under the joint catalysts of a softer dollar and domestic policy support, we expect more overseas and long‑term funds to rotate into A‑shares, providing a funding‑side lift. Structurally, “new economy” sectors—technology and export‑oriented businesses—should continue to outperform on both fundamentals and returns. Moreover, policies to expand domestic demand, curb destructive competition and stimulate overseas demand could improve corporate earnings and drive catch‑up performance in consumption and other domestic demand sectors.
Overseas Markets: Bubble Acceleration
The principal frictions that constrained the 2025 cycle point toward a common policy response in 2026: fiscal dominance accompanied by monetary accommodation. In 2025 the U.S. economy displayed resilience, largely supported by robust AI and industrial equipment investment, yet the nominal recovery remained sluggish for three reasons. First, negative policy measures were implemented rapidly and dented market confidence, while supportive measures such as tax cuts and deregulation required longer legislative and implementation cycles to take effect. We assess that, under midterm election and intra‑party pressures, the administration is likely to moderate external tensions and introduce more domestic stimulus, increasing the probability of a cyclical trough and subsequent recovery in 2026.
Second, the lagging expansion of small businesses has constrained end‑demand. Small firms typically have weaker buffers and greater sensitivity to external shocks; although confidence has rebounded above historical averages, operating conditions have improved only gradually and cycle indicators remain below long‑run norms. ADP data indicate small businesses employ roughly 43% of the private workforce, so slow hiring and weak small‑business expansion have weighed on labor market recovery, wage growth and household consumption. Because small firms sit at the demand end of many supply chains, their investment and hiring decisions materially affect upstream orders. Addressing small‑business financing costs and increasing government procurement tilt toward small firms are likely to be policy priorities in 2026.
Third, the housing market has remained subdued. Both starts and sales have lingered at low levels since 2022. The core constraint is affordability: wage growth has decelerated to pandemic‑era lows while 30‑year mortgage rates remain elevated, and banks have maintained relatively strict underwriting standards since 2008. At the same time, underlying housing demand shows signs of bottoming, and vacancy rates remain low. Unlocking housing demand is therefore central to a recovery in the real estate cycle; feasible policy levers include lowering long‑term rates via Fed purchases or yield‑curve control, boosting wages through coordinated fiscal and monetary stimulus to spur small‑business hiring, and easing mortgage issuance standards.
Fiscal Dominance, Monetary Cooperation And Bubble Dynamics
The three structural pain points point to a policy mix in which fiscal expansion leads and monetary policy accommodates. We expect the deficit ratio to widen materially. CRFB estimates that the “Big And Beautiful” Act could add approximately USD 488 billion to the 2026 fiscal deficit, and accounting for tariff‑related revenue effects, the deficit ratio could expand to about 6.4% from 5.7% in 2025. If proposed tariff rebate checks are implemented, deficits would widen further.
Monetary policy is likely to become more dovish under fiscal dominance. While inflation remains a constraint, current supply‑side pressures are limited and oil prices have been subdued, suggesting a slower inflation trajectory. This dynamic leaves room for additional rate cuts. Balance‑sheet expansion will increase liquidity and help lower long‑term rates. Under the December FOMC plan of roughly USD 40 billion monthly purchases, combined with the release of fiscal deposits, narrow liquidity could rise above the ample threshold in the first half of the year and approach about USD 3.4 trillion by year‑end, roughly 10.6% of GDP. This liquidity expansion should ease repo market stress and stabilize financing conditions, although purchases concentrated in short‑dated securities may steepen the yield curve. To suppress long‑term yields more effectively, the Fed could increase purchase volumes and extend maturities, potentially including long Treasuries and investment‑grade corporate bond ETFs. Such measures would relieve financing pressure for housing and corporate issuance, sustain AI and industrial equipment investment, and help stabilize the real estate cycle.
Fiscal dominance combined with monetary accommodation will both improve macro fundamentals and supply abundant liquidity, a combination that historically favors risk assets and weakens the dollar. This environment tends to lift equities, commodities and credit, particularly growth stocks and emerging markets, and to support inflation‑sensitive metals such as gold, silver and copper. At the same time, accelerating bubble dynamics can increase market volatility. Repo spreads and discount‑window borrowing remain elevated, indicating persistent financing stress; without sufficient balance‑sheet expansion, markets may experience episodic shocks. If rate cuts are paired with purchases concentrated in short‑dated securities, the yield curve could steepen and Treasury volatility could force deleveraging in highly leveraged strategies, amplifying cross‑asset sell‑offs. A second phase of balance‑sheet expansion that includes long‑dated Treasuries and corporate credit could materially compress 10‑year yields below 4% and narrow credit spreads. Ultimately, whether purchases target short or long maturities, the effect is debt monetization, which tends to create ample liquidity and place downward pressure on the dollar.
Domestic Assets: Currency And Equities
RMB appreciation has accelerated recently, with onshore and offshore rates approaching the 7.00 level, driven by Fed easing expectations and year‑end settlement flows. We view RMB strength as the product of both domestic equity improvement and dollar weakness. Under a fiscal‑dominant regime in the United States, the dollar is likely to enter a depreciation cycle as fiscal expansion forces monetary cooperation and liquidity becomes abundant. Concurrently, accumulated pending foreign exchange settlements and global capital rebalancing provide additional support for the RMB. Since 2020, aggregate pending settlements and exporter‑level pending settlements have reached historically high levels, and net settlement rates have recovered since Q3 2025, contributing to RMB appreciation.
A weaker dollar cycle that fosters synchronized global recovery will benefit A‑shares and Hong Kong equities across earnings, valuations and liquidity. Export growth and profit margins should improve, lifting EPS growth for A‑shares. Valuations are likely to expand under a global liquidity easing backdrop, and foreign capital flows tend to move into emerging markets when the dollar weakens. Historically, A‑share and Hong Kong inflows have been negatively correlated with the dollar index, and dollar weakness has coincided with increased foreign investment into these markets. Exchange rates will therefore be a key determinant of risk‑asset performance, with Hong Kong equities exhibiting greater sensitivity to currency moves due to closer alignment with U.S. rates and more fluid capital flows.
Stable inflows of long‑term capital, particularly from institutional investors such as insurance funds, should provide a durable funding base for A‑shares. Over the past two decades, annual inflows into equities have averaged roughly 2% of GDP, though recent years have seen lower inflows near 1.5%. Policy measures that encourage long‑term institutional investment—such as multi‑year performance assessments for state insurers and guidance to allocate a portion of new premiums to domestic equities—could materially increase marginal inflows. In addition, global asset allocation has been overweight U.S. equities since 2021 and underweight China; a rebalancing driven by new technological and geopolitical narratives could restore interest in undervalued A‑share assets.
Structurally, “new economy” sectors—technology and export‑oriented industries—have outperformed traditional sectors on both fundamentals and returns. Since 2020, indices representing new‑economy industries have materially outpaced old‑economy benchmarks, with particularly strong gains since late 2024. This outperformance is supported by improving profitability and valuation metrics, and by a stabilization of return on equity.
Policy measures to expand domestic demand and curb destructive competition may also support catch‑up performance in consumption‑related sectors. The central economic work agenda emphasizes expanding high‑quality goods and services supply, raising household incomes, and optimizing policies to support new‑economy firms while addressing “involution.” Continued implementation of consumption stimulus—such as trade‑in programs—could be refined in 2026 to improve timing, subsidy channels and coverage, further supporting domestic demand. Combined with a recovery in external demand under a weak‑dollar regime, corporate profitability and household incomes could improve, driving broader consumption recovery.
Current low nominal interest rates merit attention. Ten‑year government bond yields fell sharply at the end of 2024 and have since oscillated in a low range, with 2025 yields generally between 1.6% and 1.9%. Globally, sovereign yields remain low relative to historical norms. While sub‑2% yields have become more common in recent years, they represent an historically unusual regime concentrated in developed markets. Comparing the current domestic rate environment with historical episodes in developed markets suggests that domestic yields remain somewhat elevated relative to comparable troughs abroad. Given stronger real growth and lower inflation relative to those historical episodes, the present combination of higher growth, lower prices and relatively higher yields implies scope for further rate easing under policies that prioritize demand support.
Charts referenced throughout the analysis illustrate the dynamics described above, including confidence and cycle indicators, small‑business employment and hiring metrics, housing affordability and mortgage credit standards, projected fiscal impacts of proposed legislation, liquidity and yield‑curve scenarios, and historical episodes of fiscal‑monetary coordination and asset performance.
