Market and Economic Outlook 2026

Each year, we step back and ask a simple but important question on behalf of our clients: where are we, and what does it mean for your money? Heading into 2026, the answer is—on balance—encouraging. But it comes with an important asterisk.

The U.S. economy continues to grow. Corporate earnings are healthy and expected to expand at a double-digit pace. Interest rates are gradually moving lower. Both monetary policy (the Federal Reserve) and fiscal policy (the U.S. Treasury) remain supportive of risky assets—with the Fed expected to cut rates twice more this year, and Congress implementing aggressive tax cuts and heightened spending through the One Big Beautiful Bill. These are the ingredients that have historically supported positive investment returns, and our analysis suggests they remain intact heading into 2026.

That said, we’d be doing our clients a disservice if we painted an overly rosy picture. Valuations are elevated after three consecutive years of strong stock market gains. Tariffs and trade policy continue to inject uncertainty into the inflation outlook. The artificial intelligence investment boom, while genuinely transformative, carries the risk of over-investment in the near term. And the broader consumer landscape is a tale of two realities—higher-income households are spending with confidence, while middle- and lower-income households are feeling real pressure from elevated prices and borrowing costs.

Our base case over the next 6–12 months: growth holds up better than feared, policy remains supportive, and diversified investors are rewarded. The bottom line is straightforward—2026 should be a positive year for the patient, diversified investor. But this is not a year to be complacent.

Before looking ahead, it helps to understand where we’ve been. 2025 was a year that repeatedly tested investor conviction—but ultimately rewarded those who stayed the course. Here are the key developments that matter most as we turn the page to 2026.

1. US. stocks delivered a third consecutive year of strong gains. The S&P 500 returned approximately 17.9%, driven primarily by earnings growth rather than investors simply paying higher valuations. That’s a welcome result—but it also means the bar is higher heading into 2026. When stocks have risen this much for this long, continued gains depend on actual earnings delivery, not just optimism.
2. International stocks outperformed the U.S.—by a wide margin. For the first time in years, investors holding international equities were handsomely rewarded. The MSCI World ex-USA Index posted 32.6% total returns. European markets were the standout—the IBEX 35 (Spain) surged roughly 50%, the EURO STOXX 50 gained over 22%, and broad European equities returned over 36%.
3. Bonds had a quietly excellent year. The Bloomberg U.S. Aggregate Bond Index returned roughly 7.3%—strong results for an asset class many had written off. With interest rates still elevated by recent standards, bonds are earning their keep again. For 2026, carry remains valuable, though expect volatility if fiscal headlines reprice term premiums.
4. Gold surged to new highs, up 44% on average. Driven by central bank purchases, geopolitical uncertainty, and investor demand for alternatives, gold set records throughout the year. The forces behind those gains—policy uncertainty, sovereign debt concerns, and inflation hedging—haven’t gone away, though forward returns may be more range-bound in 2026.
5. Oil fell to its lowest levels since 2020. Brent crude averaged around $69 per barrel, providing a tailwind for consumers and helping keep inflation in check. Lower energy remains helpful in the base case heading into 2026, though geopolitical tails remain wide.
6. Tariffs became a major economic force. S. customs duties exceeded $195 billion in fiscal year 2025, averaging over $29 billion per month from June through October. Much of the cost has so far been absorbed by importers—but that’s beginning to change. How much flows through to consumer prices will be one of the defining questions of 2026.
7. The One Big Beautiful Bill (OBBB) reshaped the fiscal picture. Congress extended the expiring 2017 tax cuts and added new provisions representing roughly $3.4 trillion in tax cuts. The stimulus is real, but so is the price tag. Higher deficits could eventually push long-term interest rates higher—a meaningful risk we explore further below.
8. The AI investment boom accelerated. Spending on AI infrastructure—data centers, chips, power generation—surged through the year. The largest platform companies now account for roughly 27% of S&P 500 capital expenditure. The key 2026 question is diffusion: will productivity gains spread broadly enough to offset the intensity of that investment at the leaders?
9. Bitcoin reminded investors that crypto is volatile. After spectacular prior-year gains, Bitcoin posted roughly -6.3% in 2025. It’s a useful reminder that cryptocurrency, whatever its long-term potential, should be treated as a high-volatility sleeve—sizing and rebalancing rules matter more than conviction headlines.

The United States

The U.S. economy enters 2026 in better shape than many feared. Growth is positive, corporate balance sheets are healthy, and the labor market—while cooling at the margins—continues to support consumer spending. But the picture is more nuanced than any single number can capture.

Growth is expected to follow a ‘cold, hot, cold’ pattern. The economy likely slowed modestly in late 2025, weighed down by tariff uncertainty and the lag effects of higher interest rates. We expect a pickup in the first half of 2026 as fiscal stimulus kicks in—tax refunds, restored business investment incentives, and new spending provisions should provide a meaningful boost. By the second half, that impulse is likely to fade, and growth should moderate toward its longer-term trend. For the full year, we estimate GDP growth in the range of 2.0–2.5%.

Inflation remains the fly in the ointment. Prices are no longer rising at the pace they were in 2022 and 2023, but inflation remains stubbornly above the Fed’s 2% target—hovering around 2.7–3.0%. The culprits include tariff-related costs being passed to consumers, tight housing markets, and ongoing supply chain adjustments. This limits how aggressively the Fed can cut rates.

The Federal Reserve is expected to cut rates twice more this year. This is welcome news for borrowers and rate-sensitive parts of the economy like housing and small business lending. However, a single hot inflation report could change the calculus quickly. Markets have priced roughly 50–75 basis points of cuts through 2026—but the path is headline-driven, and the timing is uneven.

The consumer picture is split. Higher-income households, buoyed by rising home values and investment portfolios, continue to spend with confidence. Lower- and middle-income households are feeling more pressure from elevated prices and higher borrowing costs. This ‘K-shaped’ dynamic—a term used by J.P. Morgan in their 2026 outlook—means the economy can keep expanding even as meaningful pockets of stress develop. For investors, it reinforces the value of diversification over concentrated bets on consumer-facing sectors.

The Global Economy

Outside the United States, the economic picture is one of gradual improvement against a backdrop of structural challenges.

Europe is turning a corner, slowly. Growth across the Eurozone remains modest but improving, driven by lower ECB interest rates and a significant ramp-up in government spending on defense and infrastructure. Germany is the key swing factor. Broader European defense and infrastructure commitments—roughly 5% of GDP in several countries—should begin translating into real domestic activity in 2026. European equities still trade at a meaningful valuation discount to the U.S. and offer dividend yields roughly twice what U.S. stocks provide.

China is managing, not surging. The Chinese economy is projected to grow around 5% in 2026, supported by monetary easing and government-directed spending on infrastructure and domestic consumption. However, trade tensions with the U.S. continue to create headwinds, and trade patterns are shifting—not collapsing—creating regional winners and losers across emerging market supply chains.

Emerging markets benefit from a weakening dollar. When the U.S. dollar declines—as we expect in 2026—it tends to benefit emerging market economies by making their exports more competitive and reducing the burden of dollar-denominated debt. Combined with faster GDP growth than developed markets and lower valuations, select emerging markets present an attractive opportunity, particularly in Asia.

Every portfolio decision comes down to weighing opportunity against risk. Here is how we see both sides of the equation as we head into 2026.

Top 3 Upside Drivers

• AI moving from hype to productivity: The next phase of AI isn’t about who’s building the infrastructure — it’s about who’s using it. American companies across banking, healthcare, manufacturing, and retail are beginning to deploy these tools in ways that could meaningfully move the needle on margins and earnings. If adoption accelerates, corporate profits could surprise to the upside well beyond the handful of names that have driven returns so far.
• A Fed that sticks the landing: If the Federal Reserve manages to bring rates down gradually without tipping the economy into contraction, it would be a genuine win for American households and businesses alike. Lower borrowing costs would provide relief for consumers carrying debt, give smaller U.S. companies room to breathe, and keep the broader expansion intact.
• American consumers staying resilient: The U.S. labor market has proven more durable than most forecasters expected. If employment holds and wage growth continues to outpace inflation, consumer spending—the engine of the American economy—could keep powering growth even as other parts of the global picture remain uncertain.

Top 3 Downside Risks

• Tariffs re-igniting inflation: Trade policy remains one of the most unpredictable variables. If tariffs on imports from China, Europe, or elsewhere begin meaningfully passing through to consumer prices, inflation could re-accelerate just as the Fed attempts to ease. Slow growth paired with rising prices—stagflation—would be especially difficult to navigate and hedge.
• Geopolitical disruption hitting home: Overseas conflict can quickly translate into U.S. economic strain. An escalation in the Middle East could lift energy prices, squeezing consumers and corporations. Deteriorating U.S.–China relations—over Taiwan, trade, or technology—could disrupt supply chains, while continued instability in Europe leaves a key trading partner fragile. Markets have largely looked past these risks, but that complacency may not last.
• Concentration risk and an AI reality check: U.S. equity indexes remain historically top-heavy, with a small group of mega-cap tech stocks driving returns. If AI investment fails to deliver at the scale currently priced in, the unwind could be swift. It wouldn’t require a crisis—just several quarters of underwhelming results—to pressure the market’s most crowded trade.

Equities: Still Positive, But Pickier

After three years of exceptional returns, it’s natural to wonder whether the good times can continue. Our answer is a qualified yes—with an important caveat about where the gains are likely to come from.

U.S. Equities: earnings delivery is the story. Year-end targets for the S&P 500 from the major Wall Street firms range from roughly 7,100 to 7,800, implying total returns in the neighborhood of 4–14%. Analysts broadly expect S&P 500 earnings per share to grow 12–15%. That’s a healthy number—but the important shift from recent years is that returns will need to come from actual profit growth, not from investors simply being willing to pay more for each dollar of earnings.

Valuations are stretched by almost any historical measure, but today’s market is dominated by high-quality, asset-light businesses with strong balance sheets. The risk isn’t that valuations are high in a vacuum—it’s that they leave very little room for disappointment. The top 10 U.S. companies now represent roughly 40% of S&P 500 market cap. That concentration raises the payoff to diversification and the cost of being crowded into a narrow set of names.

We expect market leadership to broaden in 2026. The AI opportunity set is expanding from hyperscalers and semiconductor companies into ‘enablers’ and ‘adopters’ across industrials, utilities, financials, and healthcare. A wider range of companies should benefit—good news for diversified investors and active managers who can identify the next wave of beneficiaries.

International Equities: still plenty of runway. International stocks trade at meaningfully lower valuations than U.S. equities, offer higher dividend yields, and stand to benefit from a weakening dollar. We don’t advocate abandoning U.S. equities—they remain the core of most portfolios—but appropriate international exposure can reduce overall portfolio risk while adding return potential.

Fixed Income: Income Is Back

After years of near-zero interest rates, bonds are once again earning their place in portfolios. Yields across most fixed income sectors remain well above their long-term averages, which means investors are being compensated for lending their money in a way they haven’t been for over a decade.

We expect the 10-year Treasury yield to trade in a range of roughly 4.0–4.5% for most of 2026, with short-term rates in a 3.50–3.75% band. Income remains the anchor. Volatility around term premiums and fiscal headlines is the key risk. Here’s a quick overview of how we’re thinking about each sector:

Yield ranges are PCIS estimates as of February 2026, informed by Goldman Sachs Asset Management, J.P. Morgan Asset Management, Morgan Stanley Research, and Bank of America CIO outlooks. For illustrative purposes only.

Investment-grade corporate bonds look particularly attractive given the strength of corporate balance sheets. High-yield bonds offer generous income but require careful credit selection. Emerging market debt benefits from a weaker dollar. And private credit, now rivaling the traditional loan market in size, is yielding roughly 8–8.5%—but requires real diligence. Some analysis flags approximately 15% of private credit borrowers not meeting initial performance targets, so manager quality matters enormously here.

Alternatives: A Growing Toolkit for Diversification

Alternative investments—private equity, private credit, real assets, and hedge funds—play an increasingly important role in well-constructed portfolios. In an environment where stock-bond correlations are less reliable than they once were, alternatives can serve as useful diversifiers. The key is sizing them appropriately and understanding their liquidity profiles.

• Infrastructure is one of our highest-conviction themes. The convergence of AI-driven demand for data centers and power, the energy transition, and aging physical infrastructure is creating a generational investment opportunity. For investors, infrastructure could offer attractive yields, inflation protection, and low correlation to traditional stocks and bonds.
• Private equity is entering 2026 with renewed energy. Financing costs have come down, pent-up deal activity is substantial, and the reopening of the IPO market in late 2025 provides an important exit route. However, valuations for high-quality private companies remain elevated—managers will need to create value through operational improvements, not just financial engineering.
• Real estate is entering a new cycle. After a painful reset in 2022–2024, we see the most attractive opportunities in residential properties, industrial and logistics assets, and specialized sectors like data centers and life sciences. Lower interest rates, if they materialize, would be a significant positive.

Bull Case (If Things Go Well)

• Soft landing plus easing supports both earnings and discount rates; breadth improves as cyclicals and international participate.
• AI capex remains durable and begins showing measurable productivity gains—supporting earnings rather than relying on multiple expansion.
• The dollar drifts weaker as rate differentials narrow, improving non-U.S. returns and supporting emerging markets where inflation is contained.
• Market leadership broadens—mid-caps, value stocks, and international equities contribute meaningfully to portfolio returns.
• Potential outcome: S&P 500 in the 7,500–8,500 range.

Bear Case (If Things Get Tough)

• Tariffs and policy uncertainty keep inflation sticky; term premiums rise and the curve reprices higher, tightening financial conditions.
• Concentration unwinds sharply on AI or policy disappointment; index downside is amplified by crowded positioning and elevated valuations.
• Fiscal concerns dominate: higher deficits and political risk elevate risk premiums and weaken the stock/bond hedge.
• The Fed surprises with a hawkish turn in response to sticky inflation—historically one of the most reliable triggers of market stress.
• Potential outcome: S&P 500 falls to the 5,500–6,500 range.

What This Means for Your Portfolio

• Stay invested. Timing the market is extraordinarily difficult. The cost of being out of the market on the best days could far exceed the benefit of avoiding the worst ones. A well-constructed portfolio, held through periods of volatility, has historically been the most reliable path to long-term wealth creation.
• Diversify deliberately. This is not a year to have all your eggs in one basket—whether that basket is U.S. large-cap tech, a single sector, or any one asset class. Spreading your risk across U.S. and international equities, bonds, and select alternatives gives you multiple ways to win and limits the damage from any single disappointment.
• Let bonds do their job. With yields at levels not seen in over a decade, fixed income is providing meaningful income again. Bonds can serve as both a source of return and a buffer against equity volatility—exactly the role they’re designed to play.
• Be thoughtful about alternatives. For qualified investors, private credit, infrastructure, and other alternative assets could offer attractive yields and diversification benefits. But these investments are less liquid than stocks and bonds, so sizing them appropriately within your overall portfolio is critical.
• Expect volatility—and use it. Policy headlines, Fed decisions, tariff developments, and geopolitical events will all create periods of turbulence. Rather than fearing these episodes, disciplined investors can use them as opportunities to rebalance and add to positions at more attractive prices.

• 2026 should reward diversification and active decision-making more than passive crowding in yesterday’s winners.
• Growth is expected to hold up better than feared.
• Earnings—not valuation expansion—will drive returns.
• And the margin for error is thinner than it has been in recent years.
• Plan for headline-driven volatility.
• The disciplined, diversified investor is well-positioned to navigate whatever comes next.