2026 Market Outlook
Balancing Divergences Amid Blind Spots
We expect 2026 to be a true balancing act, one where the trajectory of growth will hinge on how key divergences are ultimately resolved.
Balance
U.S. economy expected to grow near trend (~2% Q4/Q4 SAAR) in 2026.1 While the economy is at a delicate balance to start 2026, we think growth will be supported by AI investment, wealth effects, and supportive monetary and fiscal policy throughout the year.
Divergences
Growth vs. Labor: Labor markets slowed throughout 2025, despite economic data largely remaining resilient. We see early signs of stabilization, which we think will allow labor markets to recover and grow near the trend rate (50K).
K-Shaped Economy: High-income consumers remain resilient, while low-income households face affordability challenges. We expect some of these headwinds to subside, as the administration will focus on combatting these issues during a mid-term election year.
Policy Divide: Hawk vs. dove debate will undoubtedly persist into 2026, with the Fed likely to pause rate cuts, similar to 2025. Rate cuts seem like they will be back-half loaded as we will likely get a more dovish-leaning Fed Chair in May.
Blind Spots
Inflation: Services inflation firming and tariff pass-through risks could keep core PCE above 3%. We do expect inflation to trend back towards the Fed’s target, albeit more slowly than initially expected.
Tariffs & Deficit: Supreme Court review of IEEPA tariffs could add uncertainty to fiscal outlook and rates. Given the administration will have other authorities to implement their tariff strategy, we don’t see massive upside to rates.
AI Theme: Increased debt financing and depreciation schedules could potentially pressure GAAP earnings. While we should gain more clarity on these topics next year, it will be important for investors to be selective in their approach to the AI theme in 2026.
Market Leadership: Given this selective approach, the names that make up the market leadership could change in 2026. This is highlighted by the growing dispersion in the Magnificent 7 (Mag 7). However, we don’t foresee a sustain broadening and think rotations will be a more defining feature for markets.
Monetizing 2021-2022 vintages: Given the amount of capital deployed during 2021-2022, GP monetization is worth watching. While we expect the improvement in exit activity to continue into 2026, GPs may need to accept lower exit multiples relative to entry valuations for deals executed during 2021-2022.
Investment Implications
Equities: Expect mid-to-high single-digit returns, driven by earnings growth. We see the fair value for the S&P 500 near 7,200-7,400—assuming a modest multiple compression.5
Volatility: Midterm election years are historically volatile. We see an average return of 5.7% with a 17.5% average drawdown reinforcing the importance of being diversified across different asset classes.6
Rates: Ten-year Treasury trading range could be 4.0% to 4.5%. However, we think this range could widen in the second half of the year.
Private Markets: More policy clarity makes private markets attractive, especially as both front-end and long-end rates fall in 2026. However, selectivity is as critical as dispersion across vintages and strategies.
As investors navigate these divergences and blind spots, they should stay nimble and focus selectively on areas of conviction.
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Video Commentary
Authors
Sonali Basak
Managing Director,
Chief Investment Strategist
Kunal Shah
Managing Director,
Head of Private Asset
Research & Model Portfolios
Peter Repetto
Vice President,
Investment Strategist
Joseph Burns
Managing Director,
Head of Hedge Fund Research
Nicholas Weaver
Assistant Vice President,
Investment Strategist
Aaron Schwartz, CFA
Vice President,
Research & Education
END NOTES
1. Bloomberg, as of Nov. 25, 2025.
2. Goldman Sachs, as of Sep. 30, 2025.
3. Bloomberg, as of Nov. 20, 2025.
4. S&P Capital IQ, iCapital Investment Strategy, as of Nov. 17, 2025.
5. S&P Capital IQ, iCapital Investment Strategy, as of Nov. 25, 2025.
6. S&P Capital IQ, iCapital Investment Strategy, as of Nov. 25, 2025.
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