As 2025 closed, the landscape settled into an uneasy equilibrium. Inflation slowed, and interest rates edged down, helping markets regain their footing, yet confidence remained fragile. The UK avoided recession and auto sales stabilised, but caution still dominated boardrooms and households alike.

Conditions improved on paper. Behaviour did not reset.

Against this backdrop of stability without conviction, 2026 is shaping up not as a recovery year, but as a year of separation — where execution, not optimism, determines outcomes.

1. UK Macro: Stability Without Complacency

After a prolonged inflation shock, the UK enters 2026 with headline inflation trending towards 2%. Lower energy costs and easing supply constraints have done the heavy lifting. The Bank of England’s base rate now sits at 3.75%, marking the first step down after the fastest tightening cycle in decades.

But policymakers remain cautious. Services inflation remains stubbornly elevated around 4%, and wage pressures have not fully unwound. Monetary conditions are easier — but not loose.

Growth forecasts of around 1.2% for 2026 reflect this reality: progress without momentum. Fiscal constraints persist, public debt remains high, and political clarity has improved only marginally. There is neither capacity nor appetite for meaningful stimulus.

This is an economy where marginal decisions matter. Businesses that assume stability equals normality risk overextending. Those who use this window to reset cost structures, improve productivity, and strengthen cash discipline will emerge stronger. The separation will be clear: efficiency builders versus tailwind servers.

2. Automotive Retail: Scale and Capability Decide Outcomes

Automotive retail proved resilient in 2025 in terms of volume, but margins are tightening as supply increases and competition intensifies. In 2026, scale and capability — not volume alone — will determine winners.

Consolidation continues. Larger dealer groups are leveraging purchasing power, systems, and diversified revenue streams to protect returns. Subscale operators face rising pressure from thinner new-car margins, volatile used values, and structurally higher operating costs.

A second fault line is omnichannel capability. Dealers that invested early in digital retail, pricing intelligence, and integrated finance journeys are capturing demand from consumers who now expect convenience as standard. Those still reliant on walk-in traffic and legacy sales processes are falling behind.

Distribution models are also evolving. As OEMs experiment with agency and direct-to-consumer approaches, the dealer’s role shifts toward customer experience, service absorption, and used vehicle execution. Tight supply continues to support pricing, but only operators with strong sourcing and stock discipline will fully benefit.

In 2026, the dealer divide widens. Those that combine scale with execution defend margins. Those that don’t face strategic irrelevance.

3. New Auto Entrants: Volume Gains Force Strategic Choices

A new wave of automotive entrants — many originating from China’s EV ecosystem — is reshaping competitive dynamics. Their impact is no longer theoretical.

In Europe, emerging manufacturers nearly doubled EV sales in 2025 despite trade barriers, lifting their share to roughly 7.6% of the electric vehicle market. Their appeal is not limited to price; specification, software integration, and speed to market are increasingly competitive, even in higher-value segments.

The implication for incumbents is stark. Heritage and brand equity remain assets, but they are no longer sufficient defences. OEMs that cannot compress costs, accelerate EV programmes, and simplify portfolios will lose ground. Some will respond through partnerships, platform sharing, or consolidation. Others will retreat from marginal segments altogether.

The separation in 2026 will not be between old and new, but between manufacturers that adapt their operating models and those that attempt to defend legacy structures for too long.

4. AI and Productivity: Proof Replaces Promise

If 2023–25 was the era of AI optimism, 2026 will be the year of accountability.

AI-linked equities accounted for a disproportionate share of market gains in 2025, but questions about sustainability are intensifying. Not because AI lacks value — but because value has yet to show up consistently in earnings.

The reality is sobering: the vast majority of organisations have seen little measurable impact on profitability from AI initiatives to date. Pilots proliferated. Transformation lagged.

That changes in 2026. Companies embedding AI directly into workflows — pricing, inventory management, service scheduling, customer support — are beginning to deliver tangible gains. Early evidence indicates double-digit productivity gains in specific functions, not abstract “future potential”.

The separation will be clear. AI optimism remains justified only where it produces margin expansion, throughput gains, or capital efficiency. For investors and operators alike, AI moves from narrative to numbers.

5. Capital Markets: Optimism Above, Discipline Below

Capital markets enter 2026 in an unusual configuration. Public equities remain buoyant, supported by falling rates and AI-driven growth expectations. Valuations in select sectors reflect confidence that productivity gains will materialise.

Private markets tell a different story. Capital is available, but conviction is selective. Venture and private equity investors remain disciplined, backing businesses with demonstrable unit economics, credible paths to profitability, and strategic clarity. Valuations outside favoured sectors remain anchored.

This divergence may widen. Public markets will test assumptions as earnings catch up — or fail to. Private capital will continue to reward execution over exposure. Exit windows are reopening, but only for businesses that can withstand scrutiny.

The era of indiscriminate capital is not returning.

The Bottom Line: Execution Trumps Conditions

2026 will not reward optimism alone. The macro backdrop is calmer, but it offers no cover for weak strategy or poor execution.

Across sectors, winners will be defined by resilient margins, disciplined capital allocation, and operational clarity. Losers will be those still waiting for conditions to improve.

In a year without strong tailwinds, execution is not just an advantage — it is the strategy. 

Have a great week!