The stock market appears poised to achieve double-digit gains for the sixth time in seven years. Only the inflation-driven pullback of 2022 has interrupted this exceptional run, leaving many investors with strengthened financial positions.
There’s a saying that anticipation exceeds reality. While strong portfolio returns are universally welcomed and support financial objectives, they can paradoxically increase investor anxiety. This is particularly true when major indices hover near record levels and valuations climb toward peaks last seen during the dot-com era. The positive news is that market strength has expanded beyond artificial intelligence-related equities, with international markets rebounding and fixed income providing portfolio stability.
The year 2025 marked inflection points across numerous issues that have challenged investors in recent years. Household inflation, though still present, has stabilized near 3%. Trade tariffs, despite reaching historically elevated levels and driving market volatility throughout 2025, haven’t triggered the economic disruption widely anticipated. Meanwhile, the Federal Reserve has maintained its rate-cutting trajectory as the economy continues expanding at a solid pace.
Taking a broader view, perhaps the most valuable insight for the coming year is that feared outcomes rarely materialize. The recession anticipated since 2022 never arrived. Historical patterns reveal that for every genuine market disruption—such as the 2020 pandemic or 2008 financial crisis—countless feared “black swans” fail to emerge. The true test for long-term investors lies not in forecasting specific events, but in sustaining perspective and discipline regardless of market conditions.
The investment environment heading into 2026 presents a mixture of potential and complexity. Expected headline topics include midterm elections, Federal Reserve leadership transitions, artificial intelligence developments, credit market concerns, dollar movements, and additional factors. Success depends less on predicting every market shift than on ensuring portfolios can withstand uncertainty while capturing growth opportunities. The following seven themes can help frame thinking about the year ahead.
Portfolio support comes from multiple asset classes heading into 2026
A notable development as 2026 approaches is the contribution multiple asset classes are making to portfolio performance. This marks a shift from much of the previous decade, when U.S. equities led global markets. Throughout 2025, international equities have exceeded U.S. market performance, with developed market stocks (MSCI EAFE) and emerging market stocks (MSCI EM) each climbing approximately 30% in U.S. dollar terms. Two primary drivers explain this: enhanced growth projections across numerous economies and dollar weakness, which amplifies returns for U.S.-based investors.
Fixed income continues fulfilling its stabilizing portfolio function. The Bloomberg U.S. Aggregate Bond Index has advanced 7% year-to-date as the Federal Reserve proceeds with rate reductions and inflation moderates. Higher-quality bonds have delivered on their promise by generating income and counterbalancing equity volatility during uncertain market periods.
Looking forward, these developments emphasize the value of balance and diversification. Though headline-driven portfolio adjustments may seem appealing, investors maintaining their financial plans are positioned to benefit.
Valuations climb toward dot-com
The sustained strong performance of recent years has pushed equity valuations progressively higher. The S&P 500 currently trades at a price-to-earnings ratio of 22.5x, nearing the all-time peak of 24.5x recorded during the dot-com bubble. This means investors are effectively paying more per dollar of anticipated future earnings compared to recent periods.
Valuation concerns typically arise when prices become detached from underlying fundamentals. During the dot-com bubble, for instance, valuations reached historic extremes far exceeding revenues and earnings, as investors rewarded any company associated with the “new economy.” Today’s elevated valuations stem from artificial intelligence enthusiasm and continuing economic expansion, yet corporate fundamentals remain solid. Earnings have advanced at a healthy clip, with consensus estimates from LSEG suggesting potential continuation.
Understanding what high valuations signal—and what they don’t—is essential. Valuations don’t necessarily forecast immediate declines, as markets can sustain elevated levels for extended timeframes. While some express concern about an “AI bubble,” not all bubbles burst dramatically. Some deflate gradually as fundamentals catch up, distinguishing the late 1990s dot-com collapse from the cloud computing expansion over the past decade.
Nevertheless, elevated valuations suggest potentially more moderate future returns, as markets have already incorporated expected growth. This can heighten market sensitivity to disappointments. Investors often characterize such markets as “priced for perfection,” where even modest earnings or economic data misses can trigger volatility. This underscores the growing importance of selectivity and maintaining balance across market segments—including asset classes, sectors, sizes, styles, and other dimensions.
Artificial intelligence fuels economic expansion and market returns
No trend has commanded more investor attention than artificial intelligence. AI infrastructure capital expenditures reached unprecedented levels during 2025, with aggregate investment easily surpassing trillions of dollars. This encompasses constructing data centers, acquiring equipment like GPUs, and recruiting AI researchers.
Certain investments involve seemingly circular arrangements. For instance, Nvidia invested up to $100 billion in OpenAI, which subsequently purchases millions of Nvidia chips. These interconnected relationships raise questions about ecosystem sustainability should enthusiasm diminish.
These patterns reflect the reality that AI infrastructure requires resources few companies can afford independently. The critical question is whether the technology will ultimately generate sufficient value to justify enormous spending levels. Currently, AI investment represents a substantial contributor to overall economic activity.
Surveys indicate businesses are increasingly integrating AI into operations. According to the Census Bureau’s Business Trend and Outlook Survey, the proportion of businesses reporting AI use more than doubled from 4% in September 2023 to 10% in September 2025. The share anticipating AI adoption within six months rose similarly, from 6% to 14% over the same timeframe.1 While these figures have jumped, substantial room for growth remains.
For investors, artificial intelligence presents both opportunity and risk. The Magnificent 7 technology companies continue driving market gains, propelled by infrastructure investment and expanding AI tool adoption. However, this concentration creates vulnerability. These companies now comprise roughly one-third of the S&P 500, meaning most investors have significant exposure, whether recognized or not.
The question isn’t whether AI will reshape the economy—it clearly will. Rather, it’s whether current valuations appropriately reflect realistic timelines for investment returns. Historical precedents from the 1860s railroad boom to the 1990s dot-com era demonstrate that transformative technologies typically follow similar trajectories: initial skepticism, rapid adoption, market enthusiasm, and eventual integration into the broader economy.
The critical lesson is that markets frequently overestimate profit generation speed. Most investors likely hold AI exposure either directly or through major indices, making awareness of this concentration essential. Maintaining an appropriate asset allocation aligned with long-term objectives will prove necessary in the coming year.
Economic expansion decelerates while remaining in positive territory
Economic growth trends have moderated but remain stronger than many anticipated. U.S. GDP experienced a modest negative dip in 2025’s first quarter, but recovered quickly as tariff uncertainty receded. The second quarter’s 3.8% growth rate not only surpassed expectations but ranks among the strongest quarterly performances in recent years.
Regarding global GDP, the International Monetary Fund projects growth could ease marginally from 3.2% in 2024 to 3.1% in 2026. Advanced economies are projected to expand around 1.5%, while emerging markets are expected to sustain growth exceeding 4%.2
Though positive overall, economic growth has been uneven across income groups and sectors. This concept is frequently termed a “two-speed” or “K-shaped” economy, as some experience expansion while others face challenges.
In the current economy, this divergence primarily stems from technology trends, as those positioned to benefit from AI growth may experience superior job prospects compared to those in traditional industries. However, factors beyond AI—including consumer debt, auto loan delinquencies, and other financial pressures—affect whether individuals benefit from economic expansion.
Concerning long-term economic growth, the most significant question is whether productivity will rise due to recent technological advances. Productivity measures worker output, either in quality or quantity, over a given timeframe. Historically, improved equipment, training, and education have driven productivity gains, which fuel genuine economic growth.
As illustrated above, productivity growth averaged merely 1.2% annually during the 2010s. The promise of AI and emerging technologies is enhanced worker output. However, this often requires more time than expected and won’t necessarily benefit everyone equally. For investors, greater productivity promises improved profit margins, supporting the broader economy and portfolios.
Tariff implications remain unclear
Though tariffs drove stock market volatility throughout 2025, their economic effects have been mixed. In fact, one ongoing puzzle is the limited immediate impact tariffs have had on inflation and growth. Despite tariff costs rising tenfold compared to prior years’ average levels, Consumer Price Index measures have increased only marginally.
Several potential explanations exist for why tariffs haven’t produced anticipated effects. First, many announced tariffs were quickly paused or reduced. Second, numerous companies absorbed initial tariff costs by maintaining stable prices and importing goods ahead of tariff announcements. Finally, robust consumer spending, fiscal stimulus, and healthy AI-sector growth helped offset negative impacts on overall expansion. Additionally, the Supreme Court may rule in 2026 on the legality of the economic justification underlying these tariffs.
For long-term investors, these recent developments, along with the initial 2018 trade negotiations, underscore that tariffs represent part of the government’s policy toolkit. Rather than viewing tariffs as a fundamental shift, they instead represent tools supporting broader policy objectives. While tariffs aren’t disappearing, their impact on day-to-day market activity may diminish.
Midterm elections and government debt will dominate 2026 discussions
Beyond trade policy changes, 2025 featured a historic 43-day government shutdown and persistent concerns regarding budget deficit size. Simultaneously, the recently enacted One Big Beautiful Bill Act (OBBBA) tax legislation has provided increased clarity for investors and taxpayers.
The new year begins with Washington uncertainty as the short-term funding bill expires at January’s end. This means another negotiation wave could trigger an additional government shutdown. Subsequently, some investors anticipate households and businesses will benefit from enhanced tax refunds due to OBBBA provisions such as full research and development expensing.
Looking further ahead, investor attention will likely shift to midterm elections and implications for tariffs, regulation, government spending, and more. The chart above demonstrates that midterm elections have historically generated healthy returns, averaging 8.6% since 1933, even if slightly lower than non-election and presidential election years.
Still, the ever-growing national debt remains the biggest concern for many investors. The reality is that the historically elevated national debt, hovering around 120% of GDP for total debt, or exceeding $36 trillion, is unlikely to be resolved soon. In fact, estimates suggest the OBBBA could increase national debt by over $4 trillion over the next decade. Currently, the national debt amounts to over $106,000 per American.
For long-term investors, recognizing what we can and cannot control is important. For example, the national debt has posed challenges for decades, yet investing based on these concerns would have resulted in inappropriate portfolio positioning. While U.S. federal debt sustainability may have implications for economic growth and interest rates, history demonstrates this shouldn’t primarily drive portfolios.
Instead, what investors can control in the near term is understanding key tax legislation changes and their impact on long-term planning. These include permanent lower tax rates from the Tax Cuts and Jobs Act, sustained higher estate tax exemption levels, increased SALT deduction caps, and numerous other provisions. It’s an ideal time to review tax strategies to ensure full advantage of these new rules.
Federal Reserve policy will continue supporting the economy
The Fed resumed rate cuts in September after pausing earlier in the year. Entering 2026, the monetary policy path may become less certain. This reflects a shift where runaway inflation risk may no longer be the primary concern as labor market weakness has gained importance. This requires policy rate adjustments rather than dramatic shifts like those witnessed in 2022.
An additional complication is Fed Chair Jerome Powell’s term ending on May 15, 2026, paving the way for new Federal Reserve leadership. The White House is expected to appoint a successor who may favor additional rate reductions to support the administration’s economic agenda favoring lower interest rates.
The chart above illustrates that the economy has performed well across Fed Chairs appointed by both parties. It’s important to note the Fed only controls the yield curve’s “short end”—interest rates closely tied to the federal funds rate. Long-term interest rates depend on numerous other factors, including economic growth, inflation, and productivity. Therefore, rather than tracking the Fed’s every move and analyzing every statement, investors should continue focusing on these longer-term trends to understand impacts on interest rates and bonds.
Sustaining perspective throughout 2026
Entering 2026, investors confront a familiar challenge: balancing concerns with the reality that markets have consistently rewarded patient, disciplined investors over time. The list of worries is perpetual, yet history suggests that for every crisis disrupting markets, many more feared events have failed to materialize. What distinguishes successful long-term investors isn’t predicting which concerns matter most, but maintaining balance throughout all market cycle phases.
The bottom line? Markets have delivered substantial returns, but elevated valuations and moderating global growth suggest more tempered expectations for 2026. Rather than timing the market based on any single concern, investors should focus on maintaining balanced portfolios positioned for various outcomes.
References
1. https://www.census.gov/hfp/btos/data_downloads
2. https://www.imf.org/en/publications/weo/issues/2025/10/14/world-economic-outlook-october-2025
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