NEW YEAR MARKET & ECONOMIC OUTLOOK

December 31, 2025

2026 OUTLOOK

Happy New Year! I hope you had a positive and fulfilling 2025 and have a wonderful year ahead.

For the 42nd time I am pausing to reflect on the investment markets of the year just ending and look forward with enthusiasm to the new year ahead. I had a mentor once who often said he had a crystal ball… but dropped it. Not sure who has had worse luck. Him or me? I have never had one. With respect to the common Wall St. adage that “No one has a crystal ball”, I would say he was luckier. So, it is with that handicap that I again write to share my outlook for the year ahead. Here’s a quick look back at ’25.

2025: A Year of Answers and Adjustments

In my last outlook, I labeled 2025 the “Year of the Question Mark”. We entered the year facing significant uncertainties regarding trade policies, tariffs, and a “data-dependent” Federal Reserve. As I reflect on the past twelve months, many of the questions were answered, though not without the “reactionary market behavior” I anticipated. While I viewed 2024 as a year of “HOPE” (Higher-highs, Optimism, and Positive Expectations), 2025 was a year of Adjustment. We saw the market grapple with the realities of transitioning from post-election optimism into concrete policy implementation. My 2025 price target of 6,480 for the S&P 500 was tested as the market navigated the “crosscurrents” of growth-positive tax cuts against the potential pressures of tariffs. The market tantrum after “Liberation Day” ended with the deepest and fastest bear markets and investor attitude adjustments since the Covid Crash of 2020. In a word, volatility. My 2025 S&P 500 target was reached by August 27. The running bull market exceeded my expectations along with most analyst’s forecasts for the year’s return. While it was a humbling year for many investors, 2025 can now be summed up as the year of the “Three-peat”. The S&P 500 gained over 15% 3-years in a row (almost 20% or greater for 3 consecutive years). This leads to one of the most common questions now being pondered by Wall St. as the new year approaches: Will the S&P 500 have a fourth big gain in a row? Many doubt it will. I say, not so fast. More on that below.

The 2026 Outlook: The Year of Calibration

As we look toward 2026, I am calling it “The Year of Calibration”. We are no longer guessing about policy direction; we are now measuring the actual impact on the “3-legged stool” of our economy: individual consumers, corporations, and the government.

Calibration is the necessary “fine-tuning” that happens after a period of significant change.

• Calibrating Policy into Reality: In 2025, the market lived in a state of “reactionary behavior” as it waited for data on tariffs and tax shifts. In 2026, we move from speculation to observation as we see the actual impact on the bottom line of American corporations.
• Rebalancing the “3-Legged Stool”: We are calibrating spending habits against the reality of current inflation and interest rates. While companies calibrate supply chains to account for the tariff landscape, we must remember that the individual consumer accounts for nearly 70% of total annual U.S. GDP.
• Regression to the Norm: A vital part of calibration is the regression to the norm. Since 1957, the S&P 500 has delivered an average annual return of about 10%. After the “eye-popping jaw-dropping performance” of AI-driven mega-caps since the end of 2022, 2026 is a year where we expect market returns to calibrate back toward those historical averages. This, though, DOES NOT NECESSARILY mean go down. Again, more on that below.
• Tuning the “Spirit of the P/E Ratio”: Investor confidence—the “spirit” of the Price-to-Earnings ratio—must also calibrate. With the S&P 500 historically “stretched” in terms of valuation, 2026 will test whether earnings can grow fast enough to justify these prices. I have said it countless times before, so one more time can’t hurt, “Earnings are the single most important determining factor of stock prices.”

Now some perspective on why I would not be surprised if the SP 500 advances further in 2026.

I was fortunate to also have another market teacher who liked to remind me that he had “parachuted” into the investment advise business in the 1970’s. His intent was to instill in me the lessons he learned in an economic period fraught with hyper-inflation, and a stock market now referred to as the “lost decade” for investors. As a “rookie” in 1984, I entered my profession at one of the best times ever. The table below shows my lucky timing.

While 3-year consecutive high-double digit gains didn’t occur in the ’80’s, they sure did in the amazing 1990’s “dot com” bull market. The internet mania market of the second half of the 90’s gave us 5 of those!…

Mark Twain has been credited for saying, “History doesn’t repeat itself, but it often rhymes.” I expect 2026 to “rhyme” a bit with 2023, 2024 & 2025. As I did with last year’s Outlook, I am again borrowing from Mr. Warren Buffett for a disclaimer and some additional wisdom on the future and the stock market: “The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

Here are the highlights of my expectations for 2026:

2026 U.S. Stock Market Outlook

My philosophy remains unchanged: the rise and fall of stock prices is mainly a function of earnings. I am bullish for another year of strong earnings per share growth for the SP 500 in 2026. Analysts’ consensus is also forecasting another solid year of earnings growth for the major U.S. stock index. If the predicted double-digit earnings growth is delivered, it will be the the 3rd consecutive year and the 6th year in a row of earnings growth. The Street’s 2026 earnings per share estimates range from $306 to $312. This infers a 15% increase in earnings over 2025. My analysis gets me to a 2026 price target for the SP 500 of 7,676. See anything historically relevant in that number? Think ’76… as in 1776. Next year will be America’s 250th birthday!

Okay, there’s a bullish mix for 2026. Remember though, there is another animal that often frequents Wall St. – – the bear. Bear market’s are quantified by a 20% or more fall. While that is less likely than a correction (or corrections), which bite less with 10% or more drops, it can not be ruled out. A stingy Fed could act like the Grinch Who Stole the Bull Market if expected 2026 rate cuts aren’t delivered. Sticky inflation and surprise economic slowing could combine to bring stagflation and A Nightmare on Wall Street. Then there’s the Trillion Dollar Club members still on a spending spree in 2026. The heavy AI capex playbook by the mega-cap tech companies will have to show a big ROI before long. The market’s narrow leadership could become a liability, leading to a moderate down year for the S&P 500, with bigger drawdowns in the heavily owned mega-cap winners. Finally, after being in this business for more than 40 years, I have experienced geopolitics are always among the risks. There’s invariably the potential for a big surprise that will disrupt the market. Lastly, The Valuation Reality: The S&P 500 remains “not cheap”. For the market to thrive, investor confidence—the “spirit of the P/E ratio”—must remain resilient.

U.S. Economy in 2026

2026 – America turns 250! (as noted above). That coupled with the U.S. hosting the World Cup should provide some “soft” economic stimulus next year. The greater economic stimulus in 2026 is expected to come from the OBBB (One Big Beautiful Bill Act). My bull case is that there’s a lot of stimulus, and if the economy were to falter, the Fed has bullets in the gun. However, also noted above, a surprisingly “hawkish” Fed would not be bullish.

Balancing what we know about current economic conditions and what we think 2026’s U.S. economy will deliver, my view for the country’s economy in 2026 is positive. The US economy scored surprising numbers in 2025’s late quarters. Momentum favors a continuing trend. My Gross Domestic Product (GDP) forecast is a slight slip to 2.5% by the end of 2026. My anticipated economic expansion should rest on some stabilization as the market calibrates to the current interest rate environment. As the consumer goes, so goes the economy. The consumer is king and critical to U.S. economic growth. As long as the jobs market remains firm, the consumer leg of the stool should remain sturdy.

While stimulus from tax cuts, low unemployment, spending and AI investments are expected to boost the economy next year, we can not ignore the potential pitfalls. Inflation (which could trigger “stagflation), Fed policy and additional tariff impacts are economic vulnerabilities. Increasing tensions with China could disrupt trade, raise energy costs, and fuel FUD (fear, uncertainty & doubt). Investor and consumer sentiment remain paramount for sustainable economic and stock market growth.

With my current focus on the year ahead for the economy and investment markets after 3 consecutive great gains, I’m reminded of what the hall of fame investor Marty Zweig said. “Being right is the enemy of staying right because it leads you to forget the way the world works”. So, with Mr. Zweig in mind, here are my final thoughts about 2026…

Overall, these are my asset class expectations for 2026:

• Equities outperform bonds. A change of the guard at the Federal Reserve will likely bring more Fed rate cuts in 2026. Though history shows that monetary policy supports both equity and fixed income investments, stocks will beat bonds again (and come with more risk) in 2026.
• U.S. stocks outperform international and emerging market equities. I did not anticipate the past year’s outperformance of foreign stocks. With tough tariff talk, I was not alone in expecting weakness in economies and markets abroad. In 2025, international stocks significantly outperformed U.S. stocks after more than a decade of trailing behind, a shift driven by more attractive international valuations, a weakening U.S. dollar, and strong performance in specific regions like Europe and Asia. 2026 will deliver domestic dominance, but proper equity allocation should include both.

• Large cap growth stocks outperform value and small cap. Again.

• Quality, equity dividend payers will continue to provide a strategy for both less volatility and moderate total return.

• 2026 financial market volatility will benefit non-correlated asset classes. Commodities, especially silver and gold, were big winners in 2025. Next year should see further advances in copper and other industrial metals.

As always, we all must stick to portfolio management disciplines and investment rules. As the market dynamics change we must be flexible. This is consistent with a sound and suitable investment plan, and leads to My 6 P’s: Proper Portfolio Planning Produces Positive Performance.

At the start of 2026, investors should re-assess their portfolio positioning and assess their risk exposure. Too often investors are consumed by what the market will do and take their attention off how their investment plan is doing. A prudent and diligent investment plan will allow investors to withstand what will likely be a highly volatile year ahead in the investment markets.