Happy New Year! I hope you had a nice holiday season and are ready to get 2026 off to a great start. As we enter the year, the investing landscape presents a setup that we regard as bullish. Drawing on the latest research and market data, here are some key themes shaping our outlook for the year ahead.
The S&P 500 has delivered robust returns in recent years, with equally-weighted indices posting gains of approximately 10–12% annually over the past three years and the market cap-weighted index at nearly double that, as market leadership has remained narrow, concentrated in select sectors. If you didn’t own the right handful of stocks, you probably didn’t realize the really high gains of the S&P 500 yet still managed very respectable returns. But as artificial intelligence (AI) matures and interest rates trend lower, we anticipate market breadth to improve, offering more balanced opportunities across sectors.
Our base case scenario envisions a “Goldilocks” environment—neither too hot nor too cold. We expect modest economic acceleration, with inflation trending lower. We project the 10-year Treasury yield is projected to end the year around 4.25%, with the Federal Reserve likely to cut rates once or twice, bringing the Fed funds rate to 3.00–3.25%. Corporate earnings per share (EPS) growth is forecasted at 10–15% across large, mid, and small caps, with the overall economy growing 2–3%—a more balanced pace than in recent years.
Our base case is that theS&P 500 makes it to 7,500–8,000 (roughly up10–15% over 2025’s close), with EPS growth in a similar range, maybe a bit higher for small and mid-cap stocks. The 10-year Treasury yield stays below 4.5%. This scenario benefits from continued AI adoption, lower interest rates, and potential tax cuts, though inflation could re-emerge later in the year.
There’s a chance that faster than expected economic reacceleration and higher bond yields could lead to a volatile S&P 500 (6,500–7,000, or anywhere from -5% to +5%), with small/mid caps down more. Market leadership would remain narrow, favoring many of the same sectors that have done well over the past 3 years.
If economic or AI momentum slows, the S&P 500 could range from 5,000–7,000, (or down as much as 25%) with EPS growth moderating. Defensive sectors would likely outperform, especially if rates fall further. But that scenario doesn’t have a high likelihood, in my opinion.
Large-cap stocks remain expensive on a price-to-earnings (P/E) basis and on a price-to-sales basis, while small and mid-cap valuations are closer to historical norms. Returns are expected to be driven by interest rate expectations and corporate earnings growth. Notably, valuations for the average stock are considerably lower, suggesting selective opportunities for investors who aren’t afraid to own stocks outside of the largest cohort.
There are a few risks I’m watching. The first is what is being called a “K-shaped economy.” Imagine the letter K, and that the highest income households are on the branch of the K moving higher and to the right, while the lower income groups are the branch of the K moving lower and to the right . We’re definitely seeing that with net worths, that the wealthy are getting wealthier (as asset prices move higher) and lower wealth households are becoming less wealthy as they tend to not own assets (like stocks) that are inflating. This will also allow high-income households to continue robust discretionary spending, while lower-income groups face pressure from rising costs in essentials along with slower wage growth. This poses a short-term risk to some consumer stocks, and to our economy on the whole over the long run. Additionally, the pace of AI integration and its impact on labor markets could make corporations more efficient, once again helping stockholders or business owners.
Elevated mortgage rates and affordability challenges persist, especially for middle-income households. Top earners benefit from asset appreciation and higher yields on savings accounts, while lower brackets face high credit costs and limited asset exposure. By some measures, housing is less affordable now than ever before. I suspect that the President will try to influence the Fed and market participants to bring down interest rates in order to alleviate this concern.
Our 2026 outlook is optimistic, with a base case for steady growth and improving market breadth. However, investors should remain vigilant, as alternative scenarios—ranging from overheating to slowdown—carry distinct risks and opportunities. Diversification across sectors and market caps, with an eye on valuation and macro trends, remains essential for navigating the year ahead. And a final warning…most investment firms are bullish on 2026, and when the consensus swings too far to the bullish side, that leaves a lot of room for downside surprises. I’m sure there will be some, so we’ll be keeping an eye out for trouble spots.
With the new year comes new required minimum distributions (RMDs), so be prepared to start those afresh. It seems that there were many tax law changes, too, so I suggest getting with your tax advisor on ways that you might benefit. And lastly, the markets and our offices will be closed on January 19 for Martin Luther King Jr. Day.
