by Patrick Fearon-Hernandez, CFA, Bill O’Grady, Thomas Wash, and Mark Keller, CFA

Summary of Expectations | PDF

The Economy

Economic Growth

• We expect these trends to be bolstered by stimulative fiscal and monetary policies, ongoing enthusiasm for the promises of AI, and less policy uncertainty.

Recession Risk

• Importantly, we do not expect a recession in 2026, although “tail risks” (e.g., geopolitical events), could trigger an unexpected downturn. However, it should be noted that policymakers have demonstrated they can act aggressively to counteract downturns, which suggests that investors should not over-index to such events.

After its big slowdown in early 2025, we expect the US economy to reaccelerate in the coming quarters, leading to good growth in 2026.

The New Techno-Industrial State

Policy Shifts

• We believe the economy is increasingly being dominated not just by the AI-investment boom, but by a broader policy shift in which government officials more enthusiastically wield influence over the economy, often using industrial policy to advance national security, resilience, or other goals beyond profit maximization.

Navigating a New Era

• With the dawn of this new techno-industrial state, investors need to pay closer attention to the goals and plans of powerful officials in order to understand the evolving investment environment.

Market Outlook

Our asset class expectations call for more moderate performance returns than in 2025, but with balances tipped to the upside, especially for US and foreign stocks.

Fixed Income

• SHORT-TERM
  Against the backdrop of a more interventionist techno-industrial state, the Federal Reserve will be under strong pressure to cut its benchmark short-term interest rate more aggressively in 2026 than in 2025. This is especially the case given that the US administration will likely replace several key policymakers at the Fed with more dovish officials. That will likely give a boost to short-term bonds, while weighing on obligations with longer maturities, putting some upward pressure on long-term bond yields.
• LONG-TERM
  Nevertheless, we expect the government will redouble its efforts to cap long-term yields. Longer-term bonds are therefore expected to produce returns similar to their current yields, while the yield curve should steepen only modestly.

US Equities

• BASE CASE FORECAST
  Incorporating our expectations for economic growth, financial conditions, and other factors, our quantitative models suggest that overall corporate profit margins should moderate in 2026 versus their record-high in 2025. We project that S&P 500 operating earnings will equal about 6.3% of gross domestic product, which would put S&P 500 operating earnings at $235.33 per share.
• CAPITALIZATION & GROWTH/VALUE
  Based on the strong influence of index investing, we expect large cap stocks and growth stocks to continue performing well.

Foreign Equities

• WEAKENING DOLLAR
  While our expectation for US stock performance is modest for 2026, we believe that the weakening US dollar and more stimulative fiscal and monetary policies abroad will bode well for foreign stocks.
• FOREIGN VS. DOMESTIC
  As such, we expect returns on foreign stocks will exceed those of US stocks. Among foreign equities, we continue to favor defense stocks.

Commodities

• We expect global central banks to continue buying gold aggressively, creating continued tailwinds for the yellow metal. However, our modeling suggests gold prices are already stretched, especially if the Fed’s interest rate cuts are backloaded until late 2026. Gold prices may not rise as fast in 2026 as they did in 2025.
• Other major commodities, such as oil, may also struggle against high levels of supply. On the other hand, we think the continuing AI boom will buoy natural gas and uranium prices as those commodities are essential to generating much of the electricity needed for AI data centers.

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