Monthly Economic Insights
2026 Economic & Market Outlook: The Next Move
As we complete the first month of the new year, many are asking what to expect in 2026 and how we’re positioning portfolios for what’s to come. While we believe that investment management is more about preparation than prediction, we do think it’s helpful to share perspectives on the economic signals we’re watching and the data guiding our portfolio decisions.
Our approach remains grounded in three enduring principles: Stay invested. Stay diversified. Stay disciplined.
These themes have long anchored our investment philosophy, and they continue to guide us as markets and the economy evolve. Below, we share more about what these themes mean in both theory and practice.
Markets delivered strong returns, but crosscurrents are rising
Financial markets rebounded meaningfully in 2025, with positive returns across all major asset classes, particularly in equities. Balanced and diversified portfolios were rewarded by staying invested.
However, strong markets can create complacency. Persistent inflation, divisive political dynamics, and uncertainty around artificial intelligence’s impact on employment have introduced competing crosscurrents and required discipline.
History also reminds us that volatility is normal. Over the last 30 years, the S&P 500 experienced an average intra-year decline of -15%, yet still produced an average annual return of +12 % over that period.
In any given year, the probability of a positive market return is 74%. In comparison, the chance of a bear market is 25%, but over 15-year horizons, the likelihood of positive returns approaches 100% for investors who stay invested.
Economic growth is steady, increasingly driven by productivity and AI
U.S. real GDP growth from 2020 to 2025 averaged 2.3%, similar to the prior decade, but the drivers of growth are shifting. With fewer workers entering the labor force due to demographic trends, future expansion increasingly depends on productivity, particularly corporate efficiency initiatives and AI investment.
Consumer spending continues to anchor the economy, historically representing 68% of U.S. economic activity, with higher-income households providing much of today’s consumption resilience.
At the same time, business investment made a significant contribution to GDP growth last year, reflecting expanding technology and AI infrastructure spending.
Labor markets are cooling, and inflation remains elevated
Total employment growth slowed to 0.6% over the past year. The unemployment rate remains relatively low at 4.6%, but has been rising steadily since mid-2023, particularly impacting younger workers and moderating income growth.
Inflation remains above the Federal Reserve’s 2% target. The Personal Consumption Expenditures (PCE) price index shows annual inflation at 2.8% as of September, driven in part by tariffs. Economists estimate roughly 20% of tariff costs are passed through to consumers in nondurable goods, specifically food prices.
While high-net-worth households continue spending, the average consumer faces mounting affordability pressure.
Corporate profitability and AI adoption remain strong
Corporate profit margins remain near the highest levels of the past 30 years. In the third quarter, 83% of S&P 500 companies reported earnings above analyst estimates, the strongest result since 2021.
AI adoption is accelerating rapidly. 79% of organizations now report using generative AI in at least one business function, with 31% actively scaling AI initiatives.
While the workforce impact is still unfolding, AI will be a durable long-term driver of productivity and profitability.
Valuations are high, making diversification critical
U.S. large-cap stocks, particularly technology leaders, now dominate market returns, and that concentration is something to watch carefully. The S&P 1500 trades at a 21.8x price-to-earnings ratio, well above the 30-year average of 17.0x. Elevated valuations suggest more modest future returns and reinforce the importance of diversification.
Outside the largest U.S. companies, opportunities are more attractively priced. Small- and mid-cap stocks currently trade at a 30% valuation discount to large caps. In contrast, international markets trade at 15.3x P/E in developed markets and 13.4x P/E in emerging markets, both well below U.S. valuations.
Bonds and alternatives regain appeal
With higher absolute yields, Treasury bonds are now more attractively valued relative to equities than at any time since the late 1990s. This improves portfolio risk-reward balance and provides stability should economic growth slow.
At the same time, tight corporate credit spreads signal caution. Alternative strategies, such as option-based income funds and tangible assets, are becoming more accessible and can improve portfolio resilience.
Our takeaways for 2026
Rather than attempting to forecast short-term market moves, we remain focused on preparation. The data continue to support the value of staying invested through volatility, diversifying thoughtfully across asset classes and geographies, and remaining disciplined with a long-term allocation plan. As we position portfolios for what’s next, we look forward to helping clients navigate 2026 with clarity and confidence.
Read or download the full 2026 Wealth Outlook here. You can also check out the latest episode of The Vault podcast featuring Rusty Vanneman, CIO, FNBO Wealth.
— Rusty Vanneman, CFA®, CMT®, Chief Investment Officer (CIO), FNBO Wealth
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