2026 Market Outlook

Investors entered 2025 with lingering concerns, such as geopolitical tensions, policy uncertainty and elevated equity valuations. Despite a spring selloff triggered by “Liberation Day” tariff hikes, markets rebounded swiftly. As we approach 2026, uncertainty persists: stubborn inflation, questions about the Federal Reserve’s independence, a weakening labor market, the fate of tariffs in the courts, and debates over the sustainability of the AI cycle. Yet, there are reasons for optimism. The One Big Beautiful Bill Act (OBBBA) brings lower tax rates, larger refunds and reduced withholding, providing a boost to lower- and middle-income consumers. Business-friendly provisions, such as full expensing of equipment and R&D, should spur investment. A tepid labor market increases the likelihood of continued Fed easing and lower rates in 2026. History shows that the U.S. economy and markets are remarkably resilient—2025 was the latest example. As we move into 2026, investors should remain mindful of risks but not lose sight of the opportunities ahead.

Equities

• U.S. stocks have delivered three consecutive years of strong performance, but valuations remain elevated.
• Technology and AI-driven stocks continue to lead, yet other sectors with lower valuations may become more attractive.
• International equities outperformed U.S. stocks in 2025, and the drivers of this trend remain in place for 2026.

Major indices exceeded expectations in 2025, rewarding investors with robust returns despite an uncomfortable market drawdown in April following tariff announcements. However, markets quickly recovered and, by mid-December, the S&P 500 Index was on track for a third straight year of double-digit gains. Entering 2026, U.S. equities face a complex environment, as strong fundamentals are colliding with high valuations.

Reasons for optimism

Despite lofty valuations, several factors support a constructive outlook for stocks as the bull market enters its fourth year. For instance, the AI narrative remains a powerful driver of market performance.  In addition, weak December employment data supports the case for continued Fed easing and lower rates, although a strengthening job market or persistent inflation could delay further rate cuts. Fiscal stimulus from the OBBBA, in the form of lower tax rates and higher tax refunds, may lift consumer sentiment in early 2026. Technology stocks, especially the “Magnificent 7,” remain the engine of U.S. earnings growth, projected to rise 22% in 2026. Notably, the “Other 493” S&P 500 companies are also expected to post a robust 12% earnings increase.

International stocks dramatically outperformed U.S. equities in 2025—a reversal of the trend that has been in place since the 2008-09 global financial crisis. Key drivers included a weaker U.S. dollar, increased fiscal stimulus in Europe , corporate governance reforms in Japan, and attractive relative valuations. These factors are likely to persist in 2026. International equities continue to trade at a discount to U.S. stocks, and further weakness in the dollar is possible if U.S. monetary policy becomes more accommodative. Ongoing fiscal stimulus in Europe and reform momentum in Japan may also support international markets, as global trade realignment incentivizes pro-growth policies.

Equity market fundamentals

The outlook for equities may continue to be constructive: earnings are growing, profit margins are strong, and the potential for more accommodative U.S. monetary policy is rising. The AI theme offers the possibility of real productivity gains. However, valuations in U.S. markets have priced in much of the good news, limiting investor’s margin of safety—especially for large-cap growth stocks. Persistent inflation could constrain the Fed’s ability to cut rates, while midterm election uncertainty may add volatility. When appropriate, investors should consider strategies that enhance after-tax returns, such as direct indexing. Broad diversification may help minimize concentration risk and maintain exposure to attractively valued areas, including international stocks. These portfolio construction fundamentals are timeless and remain cornerstones of a thoughtful equity allocation.

Fixed Income

• Short-term interest rates fell in 2025 as the Federal Reserve resumed easing, while long-term rates stayed relatively stable, steepening the yield curve.
• A steeper curve offers opportunities to extend duration, seek higher yields and position for further rate declines.
• Investors should consider focusing largely on quality, as credit spreads remain tight.

Bond investors will continue to closely monitor the Fed’s actions in 2026. The Fed spent early 2025 assessing the economic impact of new policies. Rate cuts of 0.25% in September, October and December brought the Fed Funds rate to the 3.50%–3.75% target range by year-end. After modest returns through September, bonds rallied as monetary policy eased, with the Bloomberg U.S. Aggregate Bond Index returning over 6% year-to-date by mid-December.

Looking ahead, fixed income investors face a more nuanced environment. Higher rates, especially for longer maturities, offer attractive starting yields. A weakening job market may allow for further Fed cuts in 2026. However, persistent inflation and rising federal deficits are reasons for caution. The steeper yield curve suggests the bond market remains skeptical of the Fed’s ability to control inflation amid trade policy uncertainty and rising fiscal deficits.

While short-term rates have declined, the steeper yield curve supports diversification across maturities. Investors may consider using cash and appreciated short-term bonds to add longer-dated bonds, capturing higher yields that are available to long-term investors.

Corporate bond spreads remain tight. While corporate balance sheets are generally healthy overall, tight spreads provide little cushion if conditions deteriorate. In the current environment, investors should consider prioritizing high-quality bonds, as compensation for additional credit risk is minimal should credit conditions worsen. 

Bond returns are primarily driven by income over the long term—compounding “interest on interest.” A bond portfolio that is diversified across sectors and maturities may provide investors with multiple potential paths to success: if rates remain stable, returns will come from income; if rates fall, investors benefit from rising bond prices; if rates rise, today’s higher yields can help cushion price declines and provide cash for reinvestment at higher rates. The current bond market offers attractive starting yields not seen since before the financial crisis, allowing fixed income to fulfill its traditional roles of capital preservation, income generation, and diversification.

Alternative Investments

• Traditional portfolios face concentration and valuation risks; alternatives may offer access to differentiated returns and risk exposures.
• We believe that successful alternative allocations are usually diversified across sectors, strategies, managers and vintages, sourced through a rigorous due diligence process and feature institutional quality terms and pricing.

The case for alternatives remains strong in 2026. U.S. equity valuations are elevated, while indices are increasingly concentrated in a handful of stocks. In fixed income, tight credit spreads limit opportunities to add value by taking on more credit risk. Alternatives can provide access to diverse return streams and risk exposures, enhancing portfolio diversification and offering exposure to otherwise hard-to-access opportunities.

Private credit

Private credit may remain compelling despite recent concerns to the contrary. While direct lending is often synonymous with private credit, the asset class offers broader diversification. Asset-based finance (ABF) includes strategies such as residential and commercial mortgages, credit cards, student loans, and financing of hard assets (e.g., airplanes) or financial assets (e.g., music royalties). While direct lending strategies may be more economically sensitive due to their general reliance on the ability of companies to service their debt, ABF income streams are often structurally protected—through bankruptcy-remote vehicles, overcollateralization and diversification across thousands of credits—potentially providing attractive yields and features that may offer downside protection.

AI and alternative investments

Although the Artificial Intelligence (AI) theme dominates public equity markets, alternatives may offer ways to benefit from the AI opportunity while diversifying risk. Alternative investments can provide investors with multiple vectors with which to access the AI ecosystem -  by investing in companies that are directly developing and enabling AI, the infrastructure supporting it (data centers, power generation, grids), and the energy systems fueling the enterprise. As companies stay private longer, much of the value creation within this relatively nascent industry may accrue to investors through certain private funds. To participate in early-stage growth, investors typically need access to venture capital and growth equity funds. As the AI ecosystem matures, opportunities may shift from foundational models to enterprise-specific applications and companies utilizing AI to enable labor productivity and enhance profit margins.

Infrastructure

Investing in infrastructure—data centers, power generation, grid expansion, battery storage—can provide exposure to the “picks and shovels” of the AI buildout, without trying to identify technology winners. These opportunities may be enhanced by government deficits that create funding gaps for private capital to fill.

A strategic and meaningful allocation to alternatives, integrated into a comprehensive plan and guided by experienced professionals, can help enhance diversification, manage risk and provide access to attractive long-term returns. Alternatives could complement traditional stock-and-bond portfolios, enabling tailored solutions for unique investor needs and circumstances.

Conclusion

2025 was a year of navigating uncertainty with discipline and adaptability. Investors who embraced diversification—balancing exposure to technology with international equities, high-quality fixed income and alternatives—were rewarded handsomely. The overarching theme for the past year was resilience amid volatility, and the importance of positioning for rapid change and technological transformation. The outlook for 2026 appears similarly constructive: fiscal stimulus, supportive Fed policy, and the potential for growing earnings and strong margins. However, valuations have priced in much of the good news, leaving a limited margin of safety. Diversification, rather than attempting to time the markets, remains crucial, as U.S. equity concentration creates hidden risks. Fixed income offers attractive yields, and a thoughtful allocation to alternatives may provide enhanced diversification and return potential.

Navigating the crosscurrents of economic and market variables will be challenging. When ship captains face uncertain seas and difficult navigational challenges, they must use all the resources at their disposal. Modern technology such as GPS (Global Positioning Satellites), radar and AIS (Automatic Identification Systems) are important tools, but often they’re not enough. Captains must also rely on traditional methods, such as dead reckoning and celestial navigation, along with expert seamanship and a well-trained, disciplined crew to complement modern technology. These captains must constantly focus on situational awareness to overcome any failures in equipment, poor visibility and unexpected storms. Like ship captains facing uncertain seas, investors must use all available resources—modern tools like direct indexing and sophisticated alternatives, complemented by disciplined processes and expert advisors. By maintaining situational awareness and a steady hand, investors can better navigate uncertainty and steer their portfolios through both fair weather and storms.

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