Three Predictions for 2026

“Lengthy, uninterrupted booms, like the one in the 1920s, produce a collective delusion. Optimism becomes a drug, or a religion, or some combination of both. Propelled along by a culture of hot tips, one-of-a-kind deals, killer sales pitches, and irresistible slogans, people lose their ability to calculate risk and distinguish between good ideas and bad ones.”  

– Andrew Sorkin, 1929 

The quote above from Andrew Sorkin’s latest book, 1929, may be read as pessimistic at first glance. I view it differently. Instead, it’s a warning to remain disciplined during periods of market euphoria. While the following three predictions for 2026 may sound cautious at the headline level, the substance beneath them is more nuanced than it first appears. Each view is ultimately grounded in the view that markets are transitioning, rather than deteriorating. My overarching recommendation for the coming calendar year is to keep a watchful eye on whether the market successes of 2023, 2024, and 2025 prove sustainable. 

The AI Bubble Evolves 

While the header of this paragraph is intentionally provocative, it should not be interpreted as a negative judgement on artificial intelligence. A “popping” AI bubble is less about collapse and more about maturation. Excess speculation gives way to discipline, capital will likely shift toward more durable business models, and the overall industry emerges stronger on the other side. In that sense, the next phase of the AI cycle may prove healthier, more durable, and ultimately more profitable than the one that preceded it. 

Financial news in 2025 could largely be characterized by two words: tariffs and bubbles. Focusing on the latter, headlines were filled with warnings that America’s largest corporations were propping up a market destined to implode. Much of this narrative has been driven by market participants who remained sidelined during a market that produced nearly 80% returns over the past three years. As frustration builds, FOMO sets in. Investors pile into the frenzy without a clear understanding of future fundamentals or whether the prices they are paying offer a reasonable risk-adjusted return. That behavior, more than valuations alone, is what inflates bubbles.  

Howard Marks’ recent podcast Is It a Bubble? provides a useful framework for thinking about market euphoria and the idea of an investment bubble. Marks references Ben Hobart and Tobias Huber’s concept of two interrelated market bubbles: inflection bubbles and mean reversion bubbles. Mean reversion bubbles tend to be the more destructive variety. They often revolve around financial fads, promising high returns with minimal risk, and have no explanation of meaningful progress. When these bubbles burst, the market reverts back to its prior state. There was no expectation that these bubbles would represent overall progress for mankind.  

Inflection bubbles, by contrast, are rooted in genuine technological advancement. Railroads and the Internet are classic examples. When an inflection bubble deflates, the world does not revert to its prior state. Capital may be repriced and excess speculation removed, but the underlying innovation endures. What looks like a pop is more accurately described as excess fat being shed, leaving behind a more efficient market that still benefits from structural progress. This framework best describes where we are today and where I believe we are headed in 2026. Will the major hyperscalers continue to flourish? Likely. Will the companies that rode the coattails of the winners without revenue or a viable business model fade into dead money? Almost certainly. A popping AI bubble does not imply a broad market drawdown of 20-30%. Instead, it suggests consolidation, differentiation, and efficiency within the AI trade.  

Capex is also likely to remain elevated in 2026, helping keep the broader AI narrative intact. With that being said, investors should grow increasingly mindful of how this spending is financed. With AI investment among the Magnificent 7 expected to surpass half a trillion dollars next year, it’s worth noting that these major spenders including Microsoft, Alphabet, Meta, and Oracle held less than $400 billion in cash collectively at the end of the third quarter according to the Financial Times. Debt issuance was always going to be part of this cycle, but its scale deserves scrutiny.  

The companies I mentioned previously are not necessarily the weak link. The more concerning behavior is occurring further down the food chain. Startups and marginal players with little revenue are borrowing aggressively to build data centers for other startups. Each link in that chain compounds risk. 

To be clear, I am not willing to bet against today’s dominant players like Nvidia, Google, or Meta. In fact, AI infrastructure and energy-related positions could have an exceptional year as bottlenecks emerge from insufficient buildout. What I do believe is that investors need to be more selective in their AI and AI-adjacent exposure. A rising tide does indeed raise all boats, but it will also sink ones with holes. 

The Fed Cuts Two More Times 

Shifting gears from markets to the macro lens, let’s start with what is effectively guaranteed at the Federal Reserve in 2026: a new Fed Chair. Jerome Powell’s final term as current Federal Reserve Chair will end in May 2026, and speculation around his successor has already become a focal point in financial media. President Trump is almost certain to nominate someone who broadly shares his views on the current interest rate environment and the state of the U.S. economy.  The emerging list includes Fed Governors Chris Waller and Michelle Bowman, Former Fed Governor Kevin Warsh, and National Economic Council Director Kevin Hassett. At the time of writing, Kalshi’s prediction market assigns a 43% probability to Hassett becoming the nominee, making him the clear front runner based on current wagers. 

Working off that assumption, it is worth examining what Hassett has said publicly in recent months. He has been careful to strike a balance between signaling independence and aligning with the White House’s broader economic priorities. According to a recent Wall Street Journal report, Hassett has emphasized that he would rely on his own judgement and resist overt political pressure when making rate decisions. At the same time, he has stated there is “plenty of room” to cut rates in the months ahead. In effect, Hassett has positioned himself as independent in process while aligned in outcome. That alignment is central to my expectation for two rate cuts in 2026. 

Market pricing supports this view. According to the CME FedWatch tool, futures currently imply two cuts next year, with a 31% probability the policy rate lands in the 3.00% – 3.25% range. The next highest probability is that of three cuts, bringing rates down to 2.75% – 3.00%. One cut ranks third, with a roughly 19% probability that we land in the 3.25% – 3.50% range. 

At the Fed’s December meeting, officials signaled expectations for just one cut in 2026. I believe that guidance proves too conservative. The most obvious reason is inflation. While recent data may be distorted by the government shutdown, it is still directionally meaningful. November headline CPI came in at 2.7%, well below the 3.1% consensus estimate. Core CPI, which strips out food and energy, was even lower at 2.6%.  

On the other side of the Fed’s dual mandate, unemployment has begun to drift higher. The jobless rate rose to 4.6% from 4.4% in September. As with inflation, the data may be noisy due to temporary distortions from shutdown related effects and contract roll offs tied to DOGE cuts. Even so, the trend matters. Inflation is moving closer to target while unemployment is moving further. Combine that backdrop with a new Fed Chair who has repeatedly acknowledged room to ease policy, and the case for two cuts becomes compelling. The setup for 2026 is not one of emergency easing, but of incremental recalibration. In that environment, two rate cuts feels less like a bold call and more like a path of least resistance. 

U.S. Economy Grows at 4% 

The U.S. economy is currently growing at somewhere in the neighborhood of 3.5% – 4.5%. In the second quarter of 2025, GDP expanded by 3.5%. In the third quarter, despite delays and renewed debate around data quality, growth accelerated to 4.3%. Looking ahead to 2026, the combination of interest rate cuts, sustained AI and data center infrastructure investment, shrinking trade deficit, and increased onshoring should be enough to propel economic growth to at least 4%.  

The trade backdrop is already moving in a supportive direction. The U.S. recorded a trade deficit of $52.8 billion in September 2025, the lowest since June 2020. This compares to a $59.3 billion deficit in August and forecasts closer to $63 billion. Exports rose 3% to $289.3 billion, the second-highest level on record. While recent headlines around Venezuela have led some to assume a coming glut of oil supply, I remain skeptical of that conclusion.  

Significant increases in Venezuelan oil production are years away due to industry disrepair and the nature of the crude itself. Venezuela oil is extremely heavy and requires blending with lighter oil to be usable. Layer in regulatory uncertainty and infrastructure constraints, and the idea of a rapid production surge becomes far less convincing. According to OPEC data, Venezuela produced 934,000 barrels per day in November, less than 1% of global demand and nowhere near the more than 3 million barrels per day it produced in the late 1990s.  

The immediate market reaction may be a modest dip in oil prices driven by oversupply headlines, but once short-term noise fades, prices could just as easily grind higher over the next 12 – 18 months. That scenario would further support U.S. exports of crude, refined products, and liquefied natural gas, helping the trade deficit narrow further. 

I’ve already outlined the case for additional rate cuts and an improving trade environment. The final and most powerful growth driver is the AI infrastructure buildout. To illustrate the scale of this investment and its role as a global economic engine, consider the following: 

• Total global AI spending in 2026 is expected to approach $2 trillion. To give scale to this eye-popping number and remind everyone how much a trillion dollars is, if you received one dollar per second for the next 31,000 years, you’d still be just shy of trillionaire status. 

• According to PwC, 88% of executives plan to increase AI budgets in the next 12 months, and 79% report that AI agents are already being deployed within their organizations. 

• Hyperscalers have pushed 2026 capex plans well beyond the $400 billion baseline. Google has indicated spending will rise meaningfully above its 2025 range of  $91-93 billion, while Microsoft increased their Q1 spending by 74% to $34.9 billion. 

• The US defense budget for 2026 includes $13.4 billion dedicated specifically to AI and autonomy, marking the first year AI has its own standalone budget line. 

The purpose of highlighting these figures is simple. Regardless of how the first header in this piece may read, artificial intelligence is no longer a trend or a thematic trade. It has become one of the central pillars of the global economy. When combined with easier financial conditions and an improving trade balance, that reality makes a 4% growth outcome in 2026 not aggressive, but plausible. 

Taken together, these three predictions point to a market and an economy that is evolving, not unraveling. The AI trade becomes more selective rather than collapsing, monetary policy shifts to recalibration, and economic growth remains supported by structural investment and improving trade. None of these outcomes rely on speculation. They rely on durability. The risk for investors in 2026 is not that opportunity disappears, but that it becomes harder to find. In that environment, skepticism is not bearish. It is a competitive advantage. 

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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Evan Coffey Associate, Asset Management

Evan is an Associate on GVA’s Asset Management Team. He specializes in investment research and has a passion for finance and economics. Evan uses his strong work ethic and financial literacy to help manage GVA’s multi-asset portfolios, mitigate risk, and help coordinate wholesaler relationships.

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