2026 Outlook

We begin 2026 with both greater optimism than we have seen in years, and yet greater risks than we have seen in years.  We remain optimistic that 2026 will be another positive one in the stock market as the recession risks fade and the Federal reserve begins its easing cycle. Yet the risks of both upside and downside risks are increasing.  In light of this outlook, let’s walk through our framework of what could go right and what could go wrong in 2026.

Let’s begin with what could go right

1. Lower interest rates

There is an old investing adage, “don’t fight the Fed”, which basically means that investors should align their investment strategy with Federal Reserve policy. When interest rates are falling it provides a tailwind to asset prices, positively influencing stocks, bonds, real estate, and commodity prices (e.g. gold).  After two years of raising interest rates to fight inflation, the Federal Reserve started lowering interest rates in 2025, beginning its lowering cycle. This should continue to provide a tailwind to asset prices in 2026.

2. Artificial intelligence

Artificial intelligence (“AI”) may be one of the most significant technologies of our lifetimes, dwarfing the productivity and investment gains of internet’s infancy during the 90’s, or it could be a smoke and mirrors boondoggle that has created a bubble in technology stocks. There are literally Trillions of dollars in investments in AI technology. For those of us who lived through the Tech boom of the 90’s we remember the huge run-up in stocks and also the terrible crash when it fell apart.  The similarities are remarkable.  In the 90’s the internet was going to revolutionize the workplace, a computer was going on every worker’s desk, and jobs were being lost as everyone became more efficient. Internet stocks went through the roof and huge amounts of capital was spent to deploy the technology. Now, Artificial Intelligence, we are told, is going to revolutionize the workplace, AI is going into everything, and even more capital is being invested. Like the 90’s it is very possible that bubbles form and the road may be bumpy. However, our base case is that AI does provide meaningful productivity boosts that are at least as significant as the internet. It is important that AI begins to provide real world benefits to the rest of corporate America, not just the tech companies. If that happens then the technology could really pay off. We are optimistic but wary.

3. OBBBA Refunds

The “One Big Beautiful Bill Act”, passed in July of 2025, included a raft of tax cuts, including a $12,500 (single) or $25,000 (joint) deduction for overtime pay, a $6,000 (single) and $12,000 (couples) for those over the age of 65 (subject to a income limit), a up to $10,000 deduction on interest expense on personal use vehicles, and more. Of course, many of these changes were retroactive to the beginning of 2025, but the withholding tables were not adjusted.  As  a result, the 2026 tax season, we are told, is expected to be one of the biggest tax refund seasons ever, estimated at $1,000 - $2,000 additional refund per household.  All those refunds represent a significant stimulus to the economy as cash is provided to the consumers.

4. Tariff Relief

Tariffs remain a significant unknown. In fact, the Supreme Court is poised to rule on the legality of Trumps tariffs any day. However, the recent action by the administration, postponing the implementation of major tariffs on a range of food imports and furniture, signals a new flexibility as the White House addresses the affordability crisis. They do not want to be perceived as increasing costs for American consumers. This retreat may be why the markets are paying little attention to the Tariff winds at this point.

What could go wrong?

The list of risks is always incomplete. The known unknowns are not usually the biggest disruptors to the stock market, but the unknown unknowns (think Covid).  It’s the surprises that create the biggest disruptions and it is always important to remember that we can never predict the future with certainty – risks always remain.  That said, let’s walk through the list of the biggest risks facing 2026.

1. Geopolitical Tensions

The United States just arrested the President of Venezuela, Iran is descending into chaos, the Ukrainian war rages, and China’s ‘mock’ blockades of Taiwan have become routine. These are just a few of the crises that the world faces. In the face of all this tension, worldwide defense spending has risen to a new record, and Trump just proposed a 60% increase in defense spending for the US.  The US hegemony appears to be over and global rivals like China and Russia are gaining influence as their economies grow. The world is a risky place and there are risks that any of these ‘tensions’ could boil over to a live conflict. Arguably, this is a key reason that Gold continues to rise as investors seek an insurance policy if the worst occurs.

2. Inflation’s resurgence

Lower interest rates, increased AI investment, stimulative tax refunds, are all positive for the economy but they could result in overheating the economy and bringing inflation back. If inflation rises the Federal Reserve may have to pause or even reverse course. Such a move could result in a pullback in the market. We are hoping for a Goldilocks economy that is not too hot or too cold. The risks are to the too hot side right now.

3. The AI Bubble

AI is on our list of what could go right, but it also warrants inclusion on our list of what could go wrong. If this technology does not result in real productivity gains then the trillions of dollars spent will not have an economic payoff and we could see a crash. This is not our base case, but we will be watching for signs that AI is being profitably implemented by the rest of America, not just the big technology companies.

So what?

We continue to be cautiously optimistic and are very pleased with how our diversified portfolios handled 2025. We continue to believe that the US economy is strong and resilient, and the potential for increased productivity could bring even greater profit growth and prosperity. There are certainly risks, but diversifying into Gold, smaller US companies, and international stocks could be critical to mitigating some of those risks. We continue to believe a long-term diversified strategy is the best course.