2026 Outlook: Fading momentum,
Finding fundamentals

Key takeaways:

• Economic uncertainty—particularly around trade and tariff policies—is expected to ease in 2026, giving businesses more confidence to resume hiring and investment.
• Market volatility will likely persist in 2026, but strong fundamentals—driven by solid earnings—should help support the ongoing equity bull market.
• Investors should stick to long-term wealth-building principles: stay invested to capture compounding growth and keep portfolios disciplined to navigate market swings.

12/11/2025 — Financial markets posted solid gains in 2025, even as volatility and uncertainty persisted throughout the year. The equity bull market marked its third anniversary in October, supported by strong investor interest in technology and AI-driven sectors. Corporate earnings continued to outperform expectations, despite concerns that tariff-related pressures would weigh on profits.

The U.S. economy showed resilience in 2025, supported in part by substantial investment from major tech firms in AI data centers. However, it also faced headwinds from a softening labor market and persistent inflation. Markets benefited from a significant fiscal package passed in July and from renewed monetary policy easing in the second half of the year, as the Federal Reserve shifted its focus to employment risks and resumed interest rate cuts.

As 2026 begins, market volatility is likely to persist, but strong fundamentals—particularly robust corporate earnings—should help sustain the ongoing bull market. Policy-related uncertainty may ease, creating a more supportive backdrop for economic growth. Sizeable tax refunds are expected to boost household spending in the first half of the year, while expanded business tax incentives could encourage hiring later on. Meanwhile, investment in AI infrastructure is likely to remain strong as leading technology firms continue to compete for leadership in this emerging space.

In a climate dominated by short-term market swings, advisors may want to reinforce the long-term principles of wealth creation with clients: staying invested to capture the power of compounding and maintaining disciplined plans and portfolios to weather volatility. Ultimately, time in the market—not timing the market—remains the cornerstone of successful investing.

A hiring rebound should help the economy

Tariff and trade policy uncertainty, a key source of volatility in 2025, is expected to fade in 2026. As clarity improves, businesses are likely to resume hiring and investment beyond the technology sector. Employment growth may remain sluggish early in the year, particularly in cyclical industries such as manufacturing, retail, and construction. However, labor demand should strengthen by mid-year as lower interest rates and tax incentives encourage business investment. Nationwide Economics projects the unemployment rate will peak near 4.6% early in 2026 before easing to around 4.3% by year-end.

Looking ahead, consumer inflation is expected to peak in the first half of 2026, with only a modest impact from remaining tariff effects. Easing pressures in housing and services should help bring inflation down to about 2.5% by year-end. While still above the Fed’s 2.0% target, the overall trend points toward continued moderation.

After easing rates late in 2025, the Fed is likely to pause in the first half of 2026 to evaluate labor market and inflation trends. Two additional cuts are anticipated around mid-year, bringing the policy rate to a more neutral level near 3.0%. Despite this easing, long-term rates should remain relatively stable, supported by lingering inflation and concerns over fiscal deficits and debt. Nationwide Economics expects the 10-year Treasury yield to stay above 4.0% throughout 2026, resulting in a steeper yield curve.

The bull market keeps charging ahead

In financial markets, both bonds and equities are likely to trade within volatile ranges in 2026 as several factors carry over from last year, including mixed economic signals, cautious investor positioning, elevated valuations, and ongoing AI-related capital expenditures. While earnings growth appears resilient, uncertainty around labor markets and AI profitability underscores the need for disciplined portfolio strategies. On a positive note, earnings are expected to broaden across sectors, reinforcing the case for diversification.

Our base case for 2026 is that the equity bull market—now entering its fourth year—continues to advance, supported by strong fundamentals that should offset pockets of weakness. Historically, six of the last seven bull markets that reached their fourth year were higher a year later. Still, with the S&P 500® Index posting an annualized total return of roughly 24% since the October 2022 bear-market low, advisors may view the coming year as an opportune time to help clients reassess and rebalance portfolios to align with long-term goals and risk tolerances.

Our positive outlook for equities is built on several key pillars, starting with resilient corporate earnings. While S&P 500 earnings growth may face headwinds from margin pressures and uneven consumer trends, underlying fundamentals remain supportive. We expect earnings—rather than valuation expansion—to drive most of the returns in the year ahead. This backdrop reinforces our positive view on U.S. equities.

More accommodative monetary policy: While the pace and timing of policy shifts will depend on incoming data, the Federal Reserve is ending quantitative tightening—roughly equivalent to 25 basis points of easing. This move, along with expected rate cuts, should provide additional liquidity and support for risk assets. Monetary policy is likely to ease further, allowing short-term rates to continue to decline as the Fed engineers a more neutral policy stance. 

Rotation beyond the Mag-7: Easing by the Fed could create opportunities for more cyclical sectors across market caps and styles. While the continued dominance of mega-cap tech and potential labor market softness may slow this rotation, structural tailwinds—such as onshoring, business investment, and productivity gains—remain compelling. For advisors, earnings growth among the broader S&P 500 will be a key trend to monitor in 2026.

Unusually negative sentiment: Investor sentiment remained historically low through much of 2025—a level of pessimism typically seen only during periods of severe market stress. This backdrop could serve as a counterweight to concerns about excessive optimism, suggesting that sentiment may actually support, rather than undermine, the case for equities.

Opportunities to redeploy excess cash: With record levels of cash still on the sidelines, 2026 presents a meaningful opportunity to allocate liquidity across asset classes and sectors. As short-term rates drift lower and investors seek entry points, this cash could become a significant driver of equity performance throughout the year.

For bonds, remain active and diversified

Over the past three years, the 10-year Treasury yield has moved within a relatively narrow range, reflecting conflicting macroeconomic forces. We expect similar dynamics in 2026 as delayed data and an uneven economic cycle create uncertainty. These factors—combined with the Fed’s ongoing assessment of growth, labor conditions, and inflation—will influence the timing and magnitude of rate cuts and shape the path for longer-term yields.

In this environment, we favor strategies that prioritize income and maintain sensible duration exposure aligned with client objectives. The past year highlighted the benefits of diversification across fixed-income sectors, offering a welcome contrast to the challenging conditions of 2022. We believe 2026 will present equally compelling opportunities for advisors to help clients build resilient bond portfolios.

It’s also an opportune time to reassess liquidity needs and cash allocations. Today’s relatively high nominal and real yields provide meaningful compensation for inflation and market risk—advantages that money market funds cannot match over the long term. Aligning investment cash with strategic duration targets can optimize income and portfolio resilience. While maintaining some cash for flexibility makes sense, excessive cash positions may limit return potential over time.

Finally, we see significant value in active management within core fixed-income sectors given the uncertain economic backdrop. Areas such as investment-grade and high-yield bonds offer opportunities beyond what broad benchmarks like the Bloomberg U.S. Aggregate Bond Index can deliver. Credit fundamentals remain supported by strong earnings, resilient margins, and constructive leverage trends. Even with credit spreads near historical lows, elevated dispersion and rate volatility make active strategies essential for capturing incremental income and return potential while maintaining diversification.

Key ideas to share with clients in 2026

Reaffirm core strengths: U.S. large-cap stocks remain a cornerstone, supported by the relative strength of the U.S. economy and their ability to deliver earnings growth and operational leverage in an uncertain climate. Large caps are also well positioned to weather volatility given their resilient fundamentals. Advisors may want to explore diversification into value-oriented areas and complementary themes to balance concentrated exposure to mega-cap tech.

Focus on earnings quality: For clients concerned that the AI narrative could lose momentum or that big tech earnings revisions may deteriorate, a shift toward quality factors can help. Metrics such as earnings surprises, revision ratios, earnings yield, high return on equity, and free cash flow should be central to portfolio construction.

Consider relative valuations: The S&P 500’s forward P/E of roughly 22x is elevated by historical standards. While valuations alone are not a timing tool, they highlight the importance of diversification. Small caps offer a compelling alternative, with the S&P SmallCap 600^® Index trading near 15x forward earnings. Similarly, the S&P 500^® Equal Weight Index can help mitigate concentration risk.

Think beyond U.S. markets: Global equities provide diversification and attractive valuations, with international and emerging markets trading at or below historic averages. These markets may benefit from fiscal expansion, infrastructure and defense spending, easing monetary policy, and potential U.S. dollar weakness.

Identify sector opportunities: Cyclical and rate-sensitive sectors—such as financials, industrials, and utilities—could gain from tax incentives, infrastructure investment, and a steepening yield curve. For clients seeking defensive positioning or contrarian ideas, consumer staples may offer catch-up potential after underperforming in 2025.