2026 Outlook

As 2025 comes to a close and the holidays draw near, it is a good time to consider the economic and market outlook for the year ahead.  Let’s get right down to it.

The economy.  For the last four calendar years, markets have been bracing for the inevitable economic recession that never seems to arrive.  “The second half of the year” has been the recurring phrase assigned to when the recession would supposedly arrive heading into 2022, 2023, 2024, and 2025, yet the year would come and go, and the economy would continue charging along.  Expect more of the same in 2026.

Consider the Atlanta Fed GDPNow economic forecast for U.S. real GDP for 2025 Q3, which is projecting 3% to 3.5% growth during the most recently completed quarter.  No recession here.

Of course, it’s not about where we’ve been, but where we are going that matters most to financial markets.  And here, the news remains constructive.  Consider the latest forecasts from the New York Fed Nowcast, which is also data driven but historically has been a more conservative projection relative to the recently more accurate Atlanta Fed reading.  At present, the New York Fed Nowcast is projecting real economic growth in 2025 Q4 and 2026 Q1 of 1.8% and 2.2%, respectively.  Put simply, this is an economy that continues to hum along at a solid clip.

So what about the recession that has led to persistent hand wringing over the past few years?  It is important to remember that the U.S. economy is a sum of its parts.  And make no mistake, a number of segments of the U.S. economy have been struggling for some time now.  For example, the ISM Manufacturing Purchasing Managers Index has been mired below 50 going back three years now, signaling a chronic contraction in manufacturing activity in the U.S.  The same can be said for Industrial Production: Manufacturing, which has also signaled contraction remaining stubbornly below 100 for the last few years now as shown below.

But while segments of the U.S. economy are indeed weak, this is being more than overwhelmed by the robust growth from other segments such as technology, thus resulting in real personal consumption expenditures (consumer spending), real gross private domestic investment (business spending), and real government spending all still steadily rising in support of broader economic growth for the U.S.

So why do we as investors care so much about the economic growth outlook?  Because Real GDP growth is the primary determinant of corporate profit growth, which is the primary determinant of stock market performance.  And when it comes to projections for earnings growth in the upcoming quarters according to S&P Global, the outlook remains strong with projections in the mid- to high teens.  These are the type of fundamentals that, if realized, typically support high stock prices over time.

The markets.  The fundamental economic backdrop remains strong.  But what of the markets themselves?  Let’s start with the bond market before we get to the “good stuff” with stocks.

Bonds. 2025 was a surprisingly good year for bonds, as the Bloomberg Aggregate Bond Index has risen by +7.0% year to date with only a handful of trading days left to go in the year.  This comes on the heals of lackluster returns of +5.5% and +1.7% in 2023 and 2024, respectively, following the worst year in decades in 2022 when the core bond market declined by -13.0%.  But the positive result for bonds in 2025 must be taken in context, for there is a reason why this year’s returns are a lot better than most might think or feel.  For if we add 2024 Q4 to our bond market return measure through today, it is only up by +3.5%.  In other words, the bond market had a really lousy end of 2024 that helped tee up a solid 2025.

This highlights an important point about bonds as we move through the coming year.  Bonds have been rangebound dating back to the start of the AI boom in the summer of 2023, moving back and forth in a range between 3.60% on the low side and 4.75% to 5.00% on the high side (important note: bond prices move inversely with yields – higher yields, lower bond prices; lower yields, higher bond prices).  As shown in the chart above, we started 2025 with yields at or near the very high end of this range.  And we are ending the year toward the lower end of the range, as the 10-year U.S. Treasury yield has been hard pressed to move sustainably below 4.00% for more than a year now.  So while 2025 may have been a surprisingly good year for bonds, we should not be surprised if 2026 ends up being an unexpectedly disappointing year for bonds at they continue to travel back and forth in this trading channel, neutralized by easier monetary policy on the positive side being offset by persistent concerns about higher inflation on the negative side (inflation is the primary determinant of bond market returns – the outbreak of inflation in 2022 caused bonds to drop -13% that year, after all).  Returns are likely to be positive overall for bonds thanks to the +4% coupon income being clipped, but total returns may be marginally less in the 2-4% range for the year when it’s all said and done.  And if we do get an outbreak of inflation in 2026, all bets are off for bonds outside of short duration instruments.

Stocks.  The U.S. stock market continues to rise as we head toward 2026, but cracks are increasingly emerging.  Let’s start with a look at the charts for context.

The uptrend for U.S. stocks as measured by the S&P 500 remain intact.  Stocks quickly overcame the tariff induced turbulence in early 2025 to get back on track to the upside.  And as 2025 draws to a close, 7000 on the S&P 500 now seems less a question of if than when.  Stocks continue to respond well to technical support levels such as the 50-day moving average (blue line in the chart above) and 100-day moving average (orange line), and we should not be surprised if we are looking at an S&P 500 trading above 7200 by sometime in February.

But as 2026 progresses, we should be prepared for the following for stocks.

First, the relentless S&P 500 upside that investors have been enjoying since Halloween 2023 is likely to encounter increasing volatility as the year progresses.  This includes periods of strong upside advances being followed by subsequent periods of consolidation and weakness.  This is being foreshadowed not only by the slowly fading Relative Strength Index (RSI) and momentum (MACD) as shown in the two lower charts above, but also the steadily fading percentage of stocks trading above their 50-day and 200-day moving averages.  In short, the market is looking increasingly tired, and this can even be seen in the price chart above of the S&P 500 itself, which is gradually fading into an upside down “U” pattern with the upside since the beginning of October far less pronounced than the gains from May to October.  Another troubling signal is the precipitous and sustained decline in cryptocurrencies over this time period.  It is worth remembering that sharp declines in cryptocurrencies in late 2017, late 2019, and late 2021 foreshadowed the prolonged periods of market turbulence or weakness that arrived for stocks in 2018, 2020, and 2022.

Next, the AI “Woodstock” euphoria that has sent all tech stocks at the party higher amid the mad dash to establish dominance in the ecosystem that promises to transform the world over the next quarter century is likely to increasingly give way to an AI “Altamont” where the massive and arguably indiscriminate capital expenditures, in some cases with leverage, into the intertwined and circular flow of capital AI ecosystem finally reach the threshold where winners and losers will start to be differentiated.  And because the flow of capital has been circular, as the losers begin to drop out, it has the potential to drag the margins (and stock prices) of the winners down with it.  As a corollary that may or may not apply when it’s all said and done, Cisco Systems today enjoys revenues and profits that are 3x to 4x higher than they were a quarter century ago, yet it’s stock price today is still lower today than it was back in 2000.  Cisco was a resounding dot com winner, but its stock price since 2000, not so much.

Lastly, we’ll finish on a positive note.  Not only can we not ignore the fact that the U.S. Federal Reserve is back to expanding the size of its balance sheet (if the last 16 years taught us anything, stocks love Fed interest rate cuts and asset purchases!), but stocks across the planet outside of the Mag 7 and friends are also trading at historically fair to discounted valuations.  This suggests the long overdue broadening of stock market performance may finally come to pass in the coming year.  We could even see stretches where the broader S&P 500 is falling at the same time that many of its underlying sectors are rising.  This is a boon for active management relative to passive index strategies.  And given the expectation that we could see further U.S. dollar weakening in the coming year relative to global currencies, developed international and selected emerging markets are well positioned to continue their 2025 outperformance of U.S. stocks, particularly given meaningfully attractive relative valuations and gradually improving economic fundamentals.

Risks.  Let’s quickly bullet point our key outlook conclusions so far:

Economic growth is set to continue at a steadily strong rate despite recent pockets of weakness.

Bonds are set up for more of a “meh” year in 2026 with risks marginally tilted to the downside (low single digit returns projection)

Stocks are poised to continue their gains into the start of 2026, but increased volatility and competition in the tech space could make for a more uneven road through the rest of the year (high single digit returns projection)

With all of this in mind, what are the downside risks that could derail this outlook (if we get upside risks, party on!).

Certainly, a number of risks could arise that could shock the market at any given point in time.  A geopolitical event could arise at any time (think China aggression against Taiwan as one of many possible scenarios), but it is important to emphasize that financial markets have historically shaken off such events in a matter of days in getting back to their regular business.  And while it makes for great theater and/or entertainment depending on how you view it, anything that happens in the political realm is not market moving in any meaningful way unless it is such an outlier that the market is taken completely off guard (think the tariff announcement back in early April – not because tariffs were being announced but because they were so far outside of the range of what the market was expecting).

Instead, as I pull the broken record from its sleeve and put it on the player, the primary downside risk for the economy and financial markets as we move through 2026 is once again . . .  wait for it . . . a renewed rise in inflation.  Why is this such a big deal from this Chief Market Strategist?  What is the primary driver of capital market returns more than anything else?  The flow of liquidity.  If capital markets are receiving liquidity (tax cuts, subsidies, interest rate cuts, asset purchases), asset prices (stocks, bonds, precious metals, etc) are set to rise all else equal.  Conversely, if capital markets are having liquidity withdrawn (tax increases, interest rate hikes), asset prices are set to fall all else equal.  If accelerating inflation rears its ugly head, policy makers have no choice, even if it means plunging the economy into recession, but to raise interest rates (fiscal policy makers are not going to raise taxes – it’s just a political reality in today’s age), thus withdrawing liquidity from the market and pressuring asset prices.  What if the Fed does not hike interest rates during an inflationary outbreak (or worse yet, continues cutting interest rates despite rising inflation)?  The market will likely increasingly revolt as the underlying economy buckles, thus making matters even worse.  Such a response would increase the probability for a dreaded stagflationary outcome, which is a trap that’s tough to get out of without a lot of monetary medicine (look up “mortgage rates 1981” to see what it tastes like).

Fortunately, inflation pressures remain fully in check as 2025 is drawing to a close, as shown in the chart below, as average inflation over the next five years is fading toward 2% and seemingly becoming less of a concern for the market, not more.

Bottom line.  It promises to be an interesting year ahead for capital markets, filled with more nuance and differentiation versus the tech driven straight line returns seen over the last few years.  Maintaining a focus on broadly diversified asset allocation dedicated for the long-term remains as sound an approach as ever as we enter 2026.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.

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Eric Parnell, CFA Chief Market Strategist

Eric Parnell is the Chief Market Strategist for Great Valley Advisor Group. Eric applies his expertise in finance and economics to manage multi-asset portfolios, mitigate risk, deliver advice that promotes informed decision-making, and facilitate investors achieving their short-and long-term investment goals. He leads the GVA Asset Management platform overseeing the management of asset allocation models for GVA advisors and their end clients.

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