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The S&P 500 was up 16% last year, despite the many concerns we had this time last year. If you recall, we entered the year concerned about how the market would respond to Trump’s proposed policies (import tariffs, immigration crackdown, a Bitcoin Reserve, etc.). Some of the concerns we had at the time were warranted, though some were not.
Concerns about what tariffs would do to the global economy and markets were overblown. Tariffs did provide an economic headwind, yes, but the full burden of the price increase was not passed along to the end consumer. It turns out that, of those imported goods affected, 1/3 of the cost was absorbed by the manufacturer (the exporter), 1/3 by the importer, and 1/3 by the end consumer. As a result, year-on-year inflation is expected to be flat in 2025 (near 3%), and I wouldn’t be surprised to see it fall to the lower 2% range as the impact of tariffs diminishes next year.
The AI boom continues to drive mega-cap stocks higher. People are worried that this is a repeat of the internet tech bubble of the late 1990s/early 2000s. But the difference with today’s boom is that AI-related companies are printing money, whereas internet companies basically had no revenue. I wrote about this topic more here.
With what happened in 2025 as a backdrop (solid equity returns, diminishing inflation levels, etc.), let’s take a look at what 2026 has in store for us. The market spent much of last year trying to price in risk that ultimately failed to materialize. As we head into 2026, the more relevant question is not what we are worried about, but what actually matters.
Here’s my 5 for 2026.
1. The Bulls Outweigh the Bears
Being bearish in this economy means you are ignoring the fact that the Federal Reserve will likely continue to cut interest rates. It means that you are ignoring the fact that we are witnessing a transformative AI arms race. That tariff pass-through effects will likely continue to diminish. And that we will probably see a steeper yield curve, which will result in asset price appreciation. That we have supportive financial conditions, both from the Federal Reserve and from fiscal policy. Don’t ignore the fact that all of these will probably continue to put upward pressure on risk assets.
Could a material change alter all of this? Of course. Black-swan events are always a possibility. The challenge is that repositioning risk assets requires acting before those events occur, which assumes a level of precision most investors simply don’t have. We all know how foolish it is when trying to predict the future and time the market.
2. The Labor Market Looks Vulnerable
We have seen the number of unemployed people slowly creep up over the past few years, especially among younger workers. In short, the AI revolution is wreaking havoc among young people trying to enter the workforce. I suspect this trend will continue as companies focus on productivity and margin expansion. I really do feel for new college graduates as they try to establish their careers.
3. Inflation to Subside
As of the latest Bureau of Economic Analysis release, core PCE inflation stands at 2.8% year over year (official 2025 figures to be released in January 2026), suggesting that the tariffs’ pass-through effect is diminishing. According to Goldman Sachs, US tariffs have added +0.53% to Core PCE inflation in 2025, and about +0.41% yet to come in 2026.
If inflation moderates in 2026, I would expect short-term rates to follow, steepening the yield curve.
4. Stocks To Perform
There is a greater than 50% chance that U.S. stocks will post positive returns this year. In fact, the S&P 500 has finished the calendar year positive more than 70–75% of the time. Of course, there are an infinite number of factors that influence the US stock market, but the fact remains that year-over-year returns tend to skew positive.
Looking forward to 2026, we are in a late-cycle expansion, which typically produces positive returns (but not always). The labor market remains relatively tight, economic growth is slowing, but still positive, and inflation is still moderate. All of this sets up a stable foundation for positive returns.
Most importantly, though, is that we expect corporate earnings to continue to expand. Thank you, AI revolution. That said, stock valuations remain extremely elevated, and there are still meaningful macro risks worth paying attention to. Considering all this, I believe earnings growth will matter more, leading to positive returns overall. But as you all know, forecasting equity returns is near impossible, which is why it is better to stay invested and buy the dips rather than sit on the sidelines in cash waiting for an entry point.
5. Precious Metals
It is easy to ignore gold and its performance. After all, the great Warren Buffett thinks very little of the metal.
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffett
I largely agree with this sentiment. If you are looking for asset growth, precious metals are not where it’s at. Gold is often touted as an excellent inflation hedge. Most of the time, this is wrong. However, there is one very important exception: when inflation is elevated over long periods (think decades). Read more on this topic here.
But that doesn’t mean that gold isn’t worth watching, or even allocating a small percentage to (we do). Gold, and other precious metals (and I would also argue Bitcoin), can be excellent hedges against the risk of rising government debt and U.S. dollar debasement. We are seeing both of these risks in ample supply. As mentioned earlier, I don’t think inflation will rise much in 2026, but that doesn’t mean that I’m right, nor does it mean that currency debasement isn’t happening.
The biggest factor, in my opinion, is that we are witnessing a meaningful shift in how some countries manage their reserves. More and more countries are reducing their reliance on the U.S. dollar. The US dollar’s share of global foreign-exchange reserves has declined to its lowest level since the mid-1990s (JP Morgan).
This doesn’t mean the dollar is disappearing or being abandoned. But it does suggest that global central banks are increasingly diversifying rather than concentrating their exposure in a single currency.
If countries are deciding to reduce their exposure to the US dollar, what are they buying instead? A lot of this demand has been pointed towards gold. China and India, notably, have added to their gold reserves lately, and central banks globally have been buying gold at or near record levels.
This helps explain the sharp rise in gold and silver prices in 2025. Be forewarned: precious metals have a nasty habit of quickly reversing their trend, leaving retail investors in their wake. This is why sizing your bets is always a good idea, especially when considering commodities.
The Big Picture
So, 2026 looks to be a year driven by moderating inflation, strong earnings growth (primarily from continued AI investment), a labor market that continues to soften, and elevated equity valuations. Because inflation will likely continue to soften, the Federal Reserve will also probably keep cutting interest rates, which should be a tailwind. But unknowable risks are real threats, and a black swan event can happen at any moment. The game can change on us at any moment. So, instead of trying to time the market, have a well-thought-out plan and stick to it. Be intentional about where you get your information and how much of it you consume. There is a lot of noise out there, especially in today’s media-driven age. Consuming constant noise rarely improves outcomes, financial or otherwise. Focus on the long term, protect your peace, and trust the plan. Wishing you and your families a healthy, happy, and prosperous 2026!
