2026 Market Outlook

The past year proved remarkably resilient for financial markets and the broader economy. Despite early turbulence from U.S. tariff policies, geopolitical uncertainties, and periodic concerns over inflation and labor market softening, global equities delivered strong gains overall. The S&P 500 index posted a total return of 18%, marking a third consecutive year of double-digit advances amid a broadening rally beyond U.S. mega-cap tech and AI leaders. Meanwhile, international and emerging market stocks outperformed U.S. markets and fixed income assets posted strong single digit returns as Treasury yields declined throughout the year. Investor sentiment significantly improved in the second half of the year as the tariff impacts proved less severe than feared, monetary easing supported growth, and AI-driven investment continued to fuel optimism. 2025 proved to us once again that disciplined investors are rewarded for having a plan and staying committed during periods of uncertainty. 

Looking ahead to 2026, expectations remain mostly positive, because overall conditions are healthy enough for this bull market to continue. In other words, the trends that drove the market in the second half of 2025 are expected to continue. Forecasts generally anticipate economic growth in 2026 bolstered by fiscal stimulus (from the One Big Beautiful Bill Act), ongoing AI productivity gains, and further interest rate cuts by the Federal Reserve (Fed). While volatility may pick up and returns could be more muted than the exceptional run of recent years, the underlying resilience of corporate earnings, technological innovation, and adaptive policymaking provide a foundation for cautious optimism in the year ahead. 

In our October commentary we discussed how investors will often become wary of extended market optimism, wondering how long the good times can last, and we emphasized the importance of removing emotional influences from our decision-making process.  We maintain a disciplined approach to investment management, a process that starts with your individual set of circumstances and culminates in a thoughtful investment policy statement which is the blueprint for how investment decisions are to be made. While it is normal to fear an inevitable market pullback, or correction, we understand that behavioral biases are costly and therefore we rely on practical tools for discipline. Specifically, establishing investment rules in advance, having robust systems-based portfolio management capability, conducting periodic reviews and maintaining proper portfolio diversification are all powerful tools used with our clients. Staying disciplined doesn’t eliminate emotion entirely but prevents it from derailing the building of wealth.

In this note we will also discuss some of the risks to the markets in 2026, such as the outlook for interest rates, the economy (specifically the path on jobs, wages and inflation), concerns over waning AI enthusiasm and ongoing geopolitical conflicts. While the probability of a U.S. recession in the next twelve months is generally perceived to be low, we know how quickly sentiment can change. In April 2025, when sweeping tariffs on imports were announced, recession fears spiked, and market turmoil ensued. Therefore, it is important we remain diligent in our approach and will rely on your specific plan to handle volatility when it returns.   

Source: Q4 2025 Total Return as of 12/31/2025, Bloomberg

• After posting consecutive above 20% returns in 2023 and 2024, the S&P 500 index finished 2025 with a strong 18% return. On the back of an election cycle and the Fed’s first rate cut since the pandemic, we entered 2025 expecting a slew of policy changes. By the spring, markets were reeling from trade and tariff uncertainty, experiencing a drawdown of 18.75%, as recession concerns ratcheted up overnight. However, as tariff concerns dissipated, the losses were reversed by May, and by July volatility was back at the year’s lows. Led by mega cap tech stocks, and those companies perceived to benefit from the nation’s AI and energy infrastructure build-out, markets rallied for the remainder of the year.[1]
  
• Small cap stocks continued to rally in the second half of the year (+10%), wiping out the -20% return through early April. Historically, small and mid-cap stocks are most negatively impacted by a recession, and this movement is reflective of the rising and subsequent receding recession fears that occurred in 2025.[1]
  
• International markets (both developed and emerging markets) outperformed U.S. markets this year, posting the largest outperformance since 1993. Drivers of these results included a weaker U.S. dollar, fiscal policy changes in some international markets, and relatively more attractive valuations to start the year.[1]
  
• Treasury yields declined across the curve in 2025 except for the long end (e.g. 30-year), which rose .07%.  The largest yield declines were at the short end of the curve with the 2-year falling 0.76%. The yield curve has been steepening for 2.5 years and this continued in 2025 with the 2yr/10yr spread increasing to 0.69%, 0.35% steeper for the year. A steeper yield curve should enhance returns as investors move away from cash holdings to longer duration securities with higher yields.[1]
• The Bloomberg Aggregate bond index returned an exceptional 7.3% in 2025. Agency MBS was a notable outperformer for the year, up 8.6% driven by positive supply/demand dynamics and lower rate volatility. Investment grade corporate bonds also had a big year returning 7.8% as spreads remained tight and we began the year at attractive yield levels. US Treasury bonds returned 6.3%.[1]

POSITIVE INVESTOR SENTIMENT

Current investor sentiment heading into 2026 appears cautiously optimistic to moderately bullish, particularly for equities. Many major institutions that publish expected returns are predicting positive equity performance, often in the double-digit range for global stocks. Meanwhile individual investor surveys also reflect renewed confidence in the markets as momentum from 2025 has carried over.[2]

Key Reasons For Optimism

Artificial intelligence remains the defining theme, with massive capital expenditures that are expected to fuel economic expansion and boost company efficiency. AI spending tailwinds should offset any near-term macro drags on growth. 

Global growth is expected to continue in 2026 and very few economists have even discussed the possibility of a U.S. recession in the near-term. GDP in the U.S. advanced at annualized 4.3% in Q3 2025, the most in two years. Resilient consumer and business spending, reduced tariff impacts over time, plus stimulus and deregulation from the OBBBA support stability in the near-term.[3]

Analysts expect double-digit earnings growth for S&P 500 companies and importantly expect this growth to broaden beyond the mega-tech companies that have disproportionately outperformed over the past few years. For the “other 493” stocks in the S&P 500 (excluding the Mag 7 mega-cap stocks), the projected earnings growth for 2026 is now expected to reach 12.9%, narrowing the gap with the 17.1% growth expected from the tech giants. This diversification could extend the rally with less concentration risk. [2]

Expectations for further interest rate cuts (currently anticipating 2 cuts of 0.25% in 2026) create easier financial conditions. Investors believe the Fed can justify its dovish stance with inflation holding near current levels and the labor market softening. 

Investors with exposure to fixed income assets anticipate another year of earning attractive levels of income. The yield on the Bloomberg US Aggregate Index was 4.32% at year end. A steeper yield curve should enhance returns as investors move away from cash holdings (due to declining short-term rates) into longer duration securities with higher yields. 

WHAT TO EXPECT IN 2026

One thing we know for certain about the financial markets is that they rarely move in a calm orderly fashion. Even in bullish environments we should be prepared for meaningful volatility along the way. Historically, the market experiences a pullback of at least 10% every 1-2 years, including years with significant positive returns (2025 was a perfect example of this). Smaller market declines of around 6-9% happen nearly every year. On the heels of three very strong years for equity market returns we should expect volatility to increase. Rising optimism is driving higher expectations for strong performance, increasing the odds of more pronounced reactions to shifting sentiment. However, pull backs can remain short lived with a positive macro backdrop.[4]

Drivers of Investor Sentiment In 2026

The AI boom has fueled an unprecedented surge in capital spending, but doubts are emerging about whether the returns will justify the scale of investment. If they fall short, the result could be a sharp pullback in spending, a reset in valuations, or even a broader correction across mega-cap stocks. Concerns about a potential tech and AI-driven bubble are poised to dominate the narrative this year, especially given how heavily market performance is concentrated in a handful of companies. 

As the Fed considers interest rate policy within its dual mandate, inflation and the jobs market will be amongst the most important economic headline data points this year. Inflation has cooled but remains above the Fed’s desired target, which means the Fed is comfortable at current levels but will be carefully assessing incoming data and will be prepared to reverse course on interest rates should it reaccelerate. The labor market reflected gradual deterioration throughout the year with signs of weaker hiring and consumer spending pressures. The unemployment rate increased to 4.4% in December, up from 4.1% at the beginning of the year.[5]

Midterm elections, new Fed leadership, fiscal stimulus conflicting with inflation control, or perceived erosion of central bank independence are all headlines that could introduce volatility. Broader geopolitical fragmentation (or broader deglobalization) and any significant policy shifts (including government shutdowns and a Supreme Court decision pertaining to tariffs) add uncertainty. 

A potential Fed pivot to raising interest rates in the second half of the year is a less discussed market risk. The concern would be that a reaccelerating economy brings back inflation worries. It is unknown if pent up business and consumer spending following tariff uncertainty in 2025 or policy stimulus both domestically and across the globe will accelerate growth beyond current expectations. 

STUDY ON ACTIVE MANAGER UNDERPERFORMANCE

When we talk about maintaining a disciplined approach to wealth management, we often refer to the common pitfalls investors make, specifically timing the market and making concentrated stock investments. While it is true that at any point in time, investors and/or managers can outperform a benchmark, it is often unrepeatable and requires accepting higher levels of risk. The table below compiles data from S&P’s SPIVA studies, which report on the percentage of active managers that outperform their benchmark. This data specifically looks at managers who invest in large cap stocks, noting that over a 1-year, 5-year and 15-year period active managers only outperform their benchmarks 27%, 13% and 12% of the time, respectively. While results can change when you analyze less efficient markets (such as small cap stocks and fixed income), we highlight this information to emphasize a core tenet of our investment philosophy, that asset allocation decisions, proper diversification and time invested in the markets will have the greatest impact on your longer-term results.

Furthermore, a disciplined approach should also incorporate dynamic portfolio rebalancing, robust tax-management capabilities, and must include a feedback loop of information so you can always monitor and assess how your plan is performing relative to the stated goals.

Source: SPIVA US Scorecard: S&P Dow Jones Indices LLC. Data as of June 30, 2025.

SUMMARY

Towards the end of last year, we wrote about having to see through the headlines from market analysts calling for a sudden and sharp market correction. As we head into 2026, investors are navigating more rosy outlooks for the year and possibly feeling exhausted by the back and forth.  

The fundamental backdrop remains encouraging to start the year. Corporate earnings growth remains healthy, economic growth is expected to continue, and the Fed has been lowering interest rates. On the heels of three consecutive years of significant market appreciation, skepticism is understandable, and we reiterate that volatility could pick up in 2026 due to the lofty expectations priced into the market. 

APPENDIX

Chart A: 2025 Total Return of Major Asset Class Indexes

Source: Bloomberg; 2025 Total Return, MSCI EAFE, MSCI Emerging market, S&P 500, Barclays Agg & Barclays Muni index; 12/31/2025

1 – Bloomberg: S&P 500 Total Return Index; Emerging Markets Stock Index = MSCI Emerging Markets Net Total Return Index; International Markets Stock Index = MSCI EAFE Total Return Index. Bloomberg Barclays Aggregate Bond Index 

2 – Bloomberg consensus EPS forecast and S&P500 target estimates; https://tradingeconomics.com/united-states/consumer-confidence 

3 – Source: https://tradingeconomics.com/united-states/gdp-growth

4 – Bloomberg: S&P 500 Total Return Index historical returns 

5 – Source: https://tradingeconomics.com/united-states/unemployment-rate; https://tradingeconomics.com/united-states/non-farm-payrolls 

IMPORTANT DISCLOSURE

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