Our 2026 Economic Outlook and Key Topics to watch
With the start of a new year, there are always predictions of how the market will perform for the year. Predicting the stock market is very difficult to do, and even the experts are frequently inaccurate. For instance, both 2023 & 2024, most major market performance predictions from Wall Street underestimated the actual returns of the S&P 500. Investors should be positioned for the long term and not let the noise of the current news cycle distract them. That said, staying disciplined can be easier when expectations aren’t too far from reality. If being informed helps you understand why the current headline isn’t worth panicking over, it’s worthwhile to look around assess expectations for 2026.
Recent history says the market isn’t as fragile as it feels
Let’s just remind ourselves where we’ve been recently. 2020-2025 has been a strange time in many ways for markets. The COVID-19 global pandemic made 2020 an extraordinarily tumultuous year. 2022 was the worst calendar year performance for the S&P 500 since 2008; Inflation exceeded 9% for the first time since 1981. Tariffs created uncertainty and turbulence through 2025, and S&P 500 was still up 17.88% for the year.
In historical terms, the stock market has performed incredibly well over the last 1, 5, and 10 years compared to the previous 50.
While we know projections aren’t always accurate, it’s important to have reasonable expectations. Given the relative outperformance of the market recently, many are projecting lower returns for the next ten years.
The return expectations shown below are derived from publicly available third-party capital market outlooks and represent long-term estimates, not predictions or guarantees. These assumptions are not specific to any individual investor, do not reflect advisory fees, taxes, or other costs, and may differ materially from actual future market results.
[1] Vanguard, Vanguard Capital Markets Model Forecasts, January 22, 2026
[2] Schwab, What’s the 10-Year Outlook for Major Asset Classes?, June 6, 2025
[3] Fidelity, Capital Market Assumptions: A Comprehensive Global Approach for the Next 20 Years, August 2023
[4} BlackRock, Capital Market Assumptions, November 13, 2025
Applying these projections to your retirement
These differences can matter for results. If you’re an investor saving for retirement, a minor difference in returns can have a compounding effect, as illustrated in table 3.
This hypothetical illustration is provided solely for educational purposes to demonstrate the impact of different assumed rates of return over time. It does not represent actual investment results, does not reflect the performance of any specific portfolio or client account, and does not include the effects of fees, taxes, withdrawals, or market volatility. Actual outcomes will vary, potentially significantly.
A PSA: the value of a financial plan
Historically, equities have served as a primary source of long-term growth, especially compared to other asset classes, but that growth may be less than what investors expect based on the recent past. If these lower rates of return manifest, investors will have to either save more, save longer, or spend less in retirement to achieve the same results in the same timeframe. Having a financial plan can help navigate the choices, and how impactful pulling on different levers are to achieving financial success.
A couple weeks in, 2026 is already full of surprises. The ouster of Maduro from Venezuela, the Justice Department investigating the sitting Chair of The Fed. There are always headlines that surprise and make investors and markets nervous. The important thing to remember is you are invested for the long term, and headlines of the day or week seem relatively small in the rearview mirror. Having a sense of what may be coming can help reduce the instinct to panic, so let’s review a few items that may impact markets significantly in 2026.
While there’s no perfect way to know what’s coming, having a sense of major items that may move markets can help us stay in the seat.
Three Topics shaping our view of 2026
Can The Fed maintain its independence?
The Federal Reserve (aka “The Fed”) is off to some drama for the start of 2026. The Department of Justice is investigating current Fed Chair Jerome Powell for testimony related to renovations to federal buildings for The Fed. Powell has stated this investigation is further pressure from President Donald Trump to lower interest rates. Trump has also sought to dismiss a Fed Governor, Lisa Cook, due to allegations she lied a mortgage application. The administration has made it clear they think interest rates should be lower than the current Fed has them. Politicians frequently prefer lower interest rates, because lower rates typically spur more economic growth and higher employment. The downside of lower rates is they can lead to inflation, because there’s too much money chasing too few goods.
As unpleasant as it can feel at times, an Independent Fed is a healthy influence on the US economy in the long run. Being willing to raise rates to slow economic activity in the short term to control inflation is an important and painful process. The Fed navigated this well in 2022 & 2023, raising rates in a way that brought inflation down from 7%+, while not causing a significant recession. If The Fed loses credibility that they are willing to raise rates to combat inflation, the risk becomes that inflation becomes sticky. If everyone assumes inflation is stuck at 10% and isn’t coming down, that expectation can create a positive feedback cycle that sends inflation spiraling upwards, only making inflation run higher. The great challenge of high inflation is it makes any cost today for gains in the future incredibly difficult to make feasible. The lowered investment eventually drags on an economy’s long term growth prospects.
The Fed is in a tricky position. Inflation remains at 2.68%, above The Fed’s long-term target of 2%. Normally The Fed would raise interest rates to slow the economy and bring inflation down. However unemployment, the other piece of The Fed’s dual mandate, has been rising June 2025, and at 4.60% is concerning. Normally The Fed would lower interest rates to speed up the economy and bring unemployment down. These contradictory forces make The Fed’s direction for 2026 challenging. The most recent rate cut in December 2025 had two voting to keep rates steady and one voting to lower rates even further. It’s unusual to see The Fed so conflicted about where rates should go. Add in the high pressure to lower rates from the Administration, and Powell’s term as Chair expiring in May 2026, there’s a lot of uncertainty around The Fed. Whatever 2026 holds, The Fed’s actions in 2026 will influence the results.
What will AI do to the economy?
No matter where you look, the biggest question for markets and the economy all center around AI. We recently wrote about why the AI boom is different than the dot-com bubble. We do know the upfront costs to build the infrastructure necessary for AI are large. The big concern for investors is the payoff of these AI related investments. If the costs are never fully recovered by increased revenue, companies that are booming today because of their AI investments may end up falling.
There’s a lot of uncertainty around AI related spending. There’s potential that the firms that spend and build out the AI infrastructure and the firms that fully capture the benefit of AI are different. Many believe the firms that capture the benefits of AI tools will get into a positive feedback cycle of outperforming their competitors that have failed to fully utilize AI, and therefore be hard to catch up to. This forces firms to make big bets and try to anticipate where AI is going, because they know being behind the curve could be extremely costly. Inevitably winners will emerge and losers will fade away. This is a time where indexing has its benefits. Broad market exposure can increase the likelihood of participating in long-term market growth, including exposure to companies that perform well over time you will end up owning the winners as they win.
What does a modern workplace look like?
Another theme looking at 2026 forecasts: The labor market is going to be an area to watch. With immigration slowing and the aging of the baby boomer generation into retirement, the workforce size is expected to hold relatively steady. The uncertainty of the tariff environment has made long-term decisions outside of AI difficult for companies to navigate. The promise of AI is to enable workers to do more, and so in theory a given company will need fewer people to accomplish a similar amount of work. All this has led to employers generally being less motivated to hire. There aren’t necessarily large layoffs incoming, but hiring may slow enough to increase unemployment slightly.
Our advice for investors is to stay disciplined
The last several years have been a very successful season for investors. Given that relative over performance, the expectation is for returns to be lower over the next 10 years. The economy seems to be slowing from a hiring/firing standpoint, but inflation remains high enough The Fed will have a challenging time navigating shifts in interest rates. If the AI boom turns out to be as or more successful than anticipated, investors may be in for a very pleasant surprise. If the AI spending ends up overblown compared to the resulting gains in revenue, we may end up seeing muted returns.
There is always uncertainty that makes selling seem attractive. The best thing you can do is remember you’re in this for the long run and stay invested. If you’ve managed to do that the last 5-10 years, you’ve had an exceptional run. Continue to let your assets grow by being comfortable with the amount of risk you take and staying invested in the market.
Disclosure: This material is provided for informational and educational purposes only. It should not be construed as investment, legal, or tax advice, nor does it constitute a recommendation or solicitation to buy or sell any security. Any market commentary, forward-looking statements, projections, or return expectations discussed are based on assumptions and current information and may not materialize. Investors should consult with a qualified financial professional before making any investment decisions. There is no guarantee that any investment strategy will achieve its objectives, and investing involves risk, including the potential loss of principal. References to market indexes, historical returns, projections, or economic conditions are illustrative only and should not be considered indicative of future results. Past performance is not a guarantee of future outcomes. Advisory services offered through Human Investing, an SEC-registered investment adviser.
