The Resurgence of Dollar Carry Trades: Outperforming Global Stock Markets in 2026

The dollar carry trade, long a staple of global macro strategies, is staging a remarkable comeback in 2026. With risk-adjusted returns outpacing global equities and macroeconomic tailwinds aligning in its favor, investors are reallocating capital toward this historically volatile but now refined strategy. This resurgence is driven by a combination of improved risk management techniques, divergent central bank policies, and structural shifts in global capital flows.

Risk-Adjusted Returns: Carry Trade's Sharper Edge

Recent academic analysis underscores the carry trade's enhanced risk-return profile. An equally weighted USD carry trade strategy historically delivered a Sharpe ratio of 0.76, but incorporating forward discount timing and volatility timing boosts this metric to 1.07-a 41% improvement, according to a 2021 study in the Journal of International Money and Finance. By contrast, global equities, while offering diversification benefits, have historically lagged with Sharpe ratios between 0.37 and 0.42, as noted in a 2025 analysis by MeB Faber. This gap highlights the carry trade's superior efficiency in generating returns per unit of risk, particularly when dynamically adjusted to macroeconomic signals.

The key lies in timing. Forward discount timing-leveraging expectations of future currency movements-and volatility timing-scaling exposure based on market turbulence-have transformed the carry trade from a high-risk speculative bet into a disciplined, data-driven strategy. These refinements are critical as investors seek alternatives to traditional equity markets, where valuations remain stretched despite lower interest rates.

Macroeconomic Tailwinds: Divergent Central Bank Policies

The Federal Reserve's gradual easing path, with the federal funds rate projected at 3.4% by 2026, as detailed in a JPMorgan analysis, contrasts sharply with the European Central Bank's cautious stance. The ECB's prolonged high-rate environment has left the euro undervalued, creating fertile ground for carry trade strategies. J.P. Morgan Global Research forecasts the EUR/USD pair to reach 1.22 by March 2026, driven by U.S. growth moderation and German fiscal stimulus, as outlined in a JPMorgan research note.

This divergence is not isolated. Emerging markets, while grappling with inflationary pressures (e.g., Argentina's 140% YoY inflation, as noted in a 2025 Investing.com analysis), are seeing capital inflows due to the dollar's weakening trend. A softer dollar reduces foreign exchange risk for EM borrowers and enhances the real value of dollar-denominated liabilities. Meanwhile, U.S. equities benefit from lower WACC, enabling corporations like Amazon to aggressively reinvest in AI infrastructure, as described in the same analysis.

Capital Reallocation: Valuation Gaps and Fiscal Shifts

Capital flows in 2026 are increasingly influenced by valuation arbitrage. EM equities trade at a 40% discount to U.S. markets, with a P/E ratio of 15.5x versus 22.5x for S&P 500 next-12-months earnings, as noted in a JPMorgan analysis. However, fiscal policies are reshaping this dynamic. Colombia's 2026 tax reform, which introduces a 15% surtax on financial institutions and raises corporate tax rates to 50% for high-income firms, as described in a 2025 EY tax alert, exemplifies the risks embedded in EM equities. Such reforms, while aimed at closing budget gaps, could deter foreign investment and compress profit margins.

Conversely, U.S. tax reforms under the One Big Beautiful Bill Act (OBBB) are recalibrating corporate behavior. By increasing the Net CFC Tested Income rate and aligning with global minimum tax standards (Pillar 2), the U.S. is curbing profit-shifting incentives for multinationals, as detailed in a 2025 bipartisan policy brief. While this may raise costs for firms with international operations, it also creates a more level playing field, potentially stabilizing equity valuations in the long term.

The Outlook: Carry Trade as a Macro-Driven Alpha Generator

The carry trade's 2026 resurgence is not a fluke but a response to structural macroeconomic shifts. As central banks diverge in policy, and fiscal reforms reshape corporate profitability, the carry trade's ability to exploit interest rate differentials and currency movements becomes increasingly compelling. For investors, this means a strategic shift away from overvalued global equities toward a more nuanced, risk-managed approach.

However, caution is warranted. While the carry trade's Sharpe ratio has improved, it remains sensitive to sudden volatility spikes-such as those triggered by geopolitical shocks or inflationary surprises. Diversification and dynamic hedging remain essential.

In the end, 2026 is shaping up to be a year where macroeconomic clarity and disciplined execution outperform traditional market narratives. The dollar carry trade, once a relic of the 2000s, is now a sophisticated tool for navigating a fragmented global economy.