Risks: The downside of deglobalization and the AI boom

Expectations for the economic viability of artificial intelligence are high. Companies and investors hope that AI will increase labor productivity and lead to cost savings. This would increase the profitability of companies that use AI. However, these high expectations also harbor risks. Investors may increasingly question whether AI actually delivers on its promises. For now, it remains unclear which business models will benefit from this development.

In our base scenario, we do not anticipate a major correction in AI stocks. However, if investors doubt the prospects for AI, they could view the current (high) stock valuations as unjustified. This would lead to a decline in share prices. Such a correction would not only have a negative impact on the stock markets, but would also have far-reaching economic consequences. Among other things, AI investments, which are currently contributing to economic growth, would decline. Falling prices of AI stocks mean a loss of wealth for investors, which could reduce their consumer spending. This risk is particularly relevant in the US, but could also affect the global economy.

In the article “Opportunities,” we described how the trend toward deglobalization offers opportunities in the short and medium term, as governments make extensive investments in their own economies. In the long term, however, deglobalization carries risks. When companies in each country or region develop, produce, and distribute their own products, costs are higher than they would be with international cooperation. This could mean that companies' profitability declines in the long term, which would affect stock returns.

The massive spending planned by governments also has disadvantages. In order to finance investments in their defense apparatus, infrastructure, and AI, countries will have to take on even more debt. Investors are growing increasingly concerned, and not just because of the announced investments. In Europe, France's budgetary situation is cause for concern, as the French government's ability to act is limited due to the fragile political climate.

Investors are also closely monitoring the US government's ever-growing debt burden: US national debt has reached a staggering $38 trillion. The interest burden is now so high that the US spends more on interest payments than on defense. The refinancing of government bonds – at higher interest rates – further exacerbates the problem. This is one of the reasons why President Trump is interested in a low key interest rate.

The Fed's independence is currently under threat. Trump is keen to lower interest rates and is attempting to appoint Fed officials who share his views.

In our base scenario, we expect the Fed to remain largely independent. However, there is a possibility that Trump could expand his influence. The Fed's Board of Governors consists of seven governors. These governors are responsible for appointing the members of the Federal Open Market Committee (FOMC), the Federal Reserve's decision-making body. ¹During his first term, Trump appointed two Fed governors; a third was added during his current term. A fourth governor, who is not allied with Trump, faces allegations of fraud and could be replaced. In this scenario, Trump could secure a majority of four out of the seven Fed governors who are more or less loyal to him.

Such a majority could significantly influence the composition of the FOMC in 2026 and shift Fed policy toward more aggressive interest rate cuts. This could boost the US economy in the short term, but in the long term it could lead to an increase in inflation and force the Fed to raise interest rates again.

If Trump achieves his goal and the Fed aggressively cuts interest rates, this will also have consequences for Europe. A lower interest rate would likely weaken the dollar and strengthen the euro. This would undermine Europe's competitiveness as an export region, as a stronger euro makes European products more expensive. The timing of such an outcome would be particularly unfavorable, as European exports are already under pressure due to US import tariffs.

Both rising government debt and Trump's attempts to influence Fed policy are risks that could dampen investor sentiment in the coming year. These concerns could lead to volatility in government bond markets. We have therefore become more cautious on government bonds since the beginning of this year.

Deglobalization can also disrupt supply chains. The US and Europe fear that China is copying critical technologies developed in the Western world. A recent example is Nexperia, a Chinese chip manufacturer based in the Netherlands. As there were signs that Nexperia wanted to transfer technological knowledge to China, the Dutch government placed the company under state supervision in the Netherlands. Beijing responded by suspending exports of Nexperia chips from China, disrupting the supply chain for these chips, which are indispensable for the automotive industry, among others.

When countries view each other as competitors rather than trading partners, supply chain disruptions can occur more frequently. This is another risk we anticipate for 2026. Trends offer opportunities – but the trend toward deglobalization also brings friction.

^{¹The FOMC (Federal Open Market Committee) is responsible for monetary policy in the US, including setting key interest rates.}