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The global fiscal stimulus party is underway, but a reality check awaits

Global fiscal stimulus is accelerating across the US, Europe and Japan, supporting short-term growth but raising longer-term inflation and debt risks. For investors, the renewed spending cycle may challenge traditional portfolio assumptions and demand more dynamic asset allocation.
Written by
Sebastian Mullins
Published on
February 23, 2026
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Apart from Argentina, fiscal stimulus globally is ramping up. And while it looks good for global growth in the short term, it may be a bit too soon to pop the champagne as a renewed era of global government spending could be a double-edged sword.  

In the US, President Donald Trump’s Big Beautiful Bill is all systems go, and will results in a lot of spending through this year.  Germany and the rest of Europe are investing heavily in defence spending, which will start at half pace this year and then double over the next couple of years and onwards. In Japan, Prime Minister Sanae Takaichi’s administration announced a substantial fiscal stimulus package, which will stimulate growth this year. So, we are seeing fiscal stimulus everywhere.

This will push global growth and earnings higher, but the flip side is that inflation will rise as well.

This is fine until inflation becomes too hot to handle. In this instance, you may have a high nominal GDP, but as inflation escalates the real GDP component might start to decrease.  

When this happens, it impacts certain assumptions about the behaviour of markets and asset classes, affecting asset allocators and savers globally.

“After a two- to three-year time period, you need to worry about what this higher inflation and higher debt dynamic means for the global economy.”

Sebastian Mullins
Head of fixed income and multi-asset at Schroders

While it’s in the immediate term, after a two- to three-year time period, you need to worry about what this higher inflation/higher debt dynamic means for the global economy.

Correlations between equities and bonds turn more positive when you have higher inflation. So the traditional asset allocation model of 60% equities and 40% bonds starts to fall short in this environment. While you may still see the returns, bonds will sell off at the same time as equities sell off and vice versa. Such a strategy will therefore be far more volatile as the dampening effect of lower inflation is gone.

In this environment, having a set asset allocation doesn’t work. Investors must be active and stay nimble. From a multi-asset standpoint, this means we remain bullish on equities overall, but are starting to broaden our focus beyond mega-cap tech US names and also further afield to other markets. From a diversification perspective, bonds no longer offer the same level of protection for portfolios, so investors must look elsewhere for diversification when it comes to defensive assets, like gold, or even other currencies like the euro. Credit is quite expensive across the board, and while we do not expect spreads to increase substantially, investors can still potentially earn carry.

Being dynamic and active is crucial to finding opportunities and generating alpha, but don't let the Trump narrative or other geopolitical noise keep you from investing.

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