During an interview a couple of years ago, Coach K shared the “make sure you get on the right bus” anecdote and it stuck with me. Right before he started high school, his mother said this to him. She was not literally referring to a bus, but to the people you choose to hang out with. She told him, “because you'll never accomplish what you want by doing it alone, but you'll accomplish a heck of a lot more by doing it with great people.”

We are all continuously shaped by experiences and, particularly, the people around us.

The global economy is the same—often changing in a multitude of small ways that amount to bigger shifts. As the saying goes; “slowly, then all at once.”

And especially, the utility of social media, AI, and newsflow has changed how information flows through the markets. They are now faster than ever to realize future growth, and more punishing on even the smallest disappointment from expectations. Interest rate levels, the US deficit, and broader and growing participation in markets have diversified the movements underneath the surface. Money, and decisions about it, have more impact—and consequences. 

So as I reflect on the current market environment, a phrase one of my old swing trader clients, whom I used to speak to daily, bounces around in my head: “bulls and bears make money, pigs get slaughtered.” Violent sounding, but still useful. Because protecting gains has become as important as loss management. The downside potential after a strong rally of any particular stock can be so significant that trimming on a rally and adding on a dip (as long as your core thesis is still there) feels more necessary than ever. 

In addition, diversification, which can easily get over-used, will be a useful tool in 2026.

With that prologue, here are the buses we are getting on in 2026:

US Economy We expect stronger GDP growth than the average of the last decade and sticky inflation levels. 

There are four components of GDP: private investment spending (cap ex), net exports, government spending, and personal consumption. Each has shifted over the decades, temporarily and longer term. It’s easy to go down a rabbit hole, on the history of what caused the shifts on each of these. 

But in general, private investment spending growth shifted down materially starting in 1985. This was partially due to the 1986 Tax Act, which aimed to simplify taxes but closed loopholes for real estate tax shelters and removed the investment tax credit, directly dampening investment in infrastructure and property. This coincided with a strengthening dollar at the time, and again since 2009 (which increased imports, reducing demand for domestic goods and services), and the burgeoning use of technology and software. 

So while overall fixed investment slowed, investment in processing equipment and software surged, representing a structural shift in what constituted "investment." This type of investment has not stopped. Looking ahead though, we believe both technology and infrastructure investment will grow in 2026, lifting GDP to 3.5%, about 0.85% higher than the recent average.

This is because of the One Big Beautiful Bill. Passed in July 2025, it allowed for permanent immediate expensing of the full cost of equipment, property and R&D purchases in the year of investment, starting in 2026. This allows businesses to deduct the full value of their investments against income, preventing inflation from devaluing these business costs, and reducing tax bills immediately. Coupled with the commitments from many companies of capital expenditures in the US to the delight of the current administration, we see this as favorable to GDP growth.

Higher private investment, historically making up about 17% of GDP, should contribute to about 40% of our expected boost. The increased investment should contribute to a stable labor market and also raise consumption (historically 63% of GDP), contributing to 60% of our expected boost in GDP growth for 2026.

Labor market As we said, technology investment does not stop, and this continues in 2026. We believe AI will begin to seep into the so-called “application layer” (discussed here), leading to the start of productivity gains and less need for growth in jobs in certain sectors. But with the increase in capital investment described above, other sectors will experience a growth in jobs. So net-net, we expect limited job growth consistent with the “no net new hirings” phase of the labor market. In addition, less foreign-born workers should cap the unemployment rate at its current 4.5%.

Inflation With the higher expected consumption and private investment discussed above, plus the government deficit that is not expected to fall, especially if tariffs are limited in 2026 due to court rulings against them, we expect inflation to stay around where it is today at 2.8%. 

US interest rates With growth on the rise, and both inflation increases and decreases limited, We expect a Fed rate cut in Q1, potentially even in January, by 0.25% to 3.5%, and then hold. As for quantitative easing (QE), the Fed announced the end of quantitative tightening (letting bonds owned mature instead of buying more, QT) as of December 1. They also announced buying about $40B of treasury securities a month.This may look like quantitative easing, but it’s not. Between the size of treasury issuance from the Federal government and the liquidity needs of the growing banking system, the Fed had to add liquidity to keep the whole system functioning properly. We provided some more information on this here. 

As for longer term bonds, since we expect inflation to remain at current levels, and our deficit is just as sticky, we expect the 10 year yield to trade in a range of 4-4.5%, similar to 2025. 

So with the Fed on track to reduce the policy rate close to the estimate of neutral, the “normal” upward sloping yield curve supports the small bank credit channel

Risks of a US recession Right now, we see a small risk of a US recession. From the data we track below, the leading indicators have been stable. With the incentives for growth, we believe they could move higher. 

Though, what would be an outlook without the risks? They include:

• Tensions in one or more parts of the world—in the Middle East, in Asia between Taiwan and China, between Ukraine and Russia—rise to a level the markets can no longer shrug off. This could spike oil prices, or reduce global trade, causing inflation. For example, 8 of the 10 largest companies in the world by market cap depend on supplies from Taiwan Semiconductor and 20% of US semiconductor imports come from Taiwan. China inserting themselves in Taiwan would impact access to this crucial tech input.

• A disappointing earnings quarter for technology stocks, or indeed the emergence of more competition, could trigger a correction given the weight of the sector in the global market. In the US alone, it accounts for more than 40%.

• It starts to become clear that the profits earned on $1.3 trillion in hyperscaler (the major cloud computing companies like Google, Microsoft, Meta, etc.) capital spending and R&D since 2022 will not be enough for the foreseeable future. Similar to the above, this causes a market correction given the weight of the companies in the indexes. This could happen either because the technology will not cut costs for a broader set of companies, or improve productivity, as much as predicted and/or power generation is just not enough to support their potential. 

• Tariffs are ramped up to the point it materially curtails growth. In turn, company cost-cutting increases to protect margins. According to the BLS, on average, wages account for around 70% of total employer costs. So, the labor market would likely soften. 

• The deficit expands, raising interest rates to a level that growth slows to a recession. The expansion could come from tax cuts from the One Big Beautiful Bill combined with continued required spending (Social Security, Medicare, and Medicaid, which makes up 45%). Interest payments as a percentage of government spending then rises (currently 15%), worsening the problem. Our deficit is at $1.8 trillion. According to the CBO, the Federal deficit is expected to rise to $2.7 trillion by 2035. 

• Private credit “cockroaches” surge. Multiple large loans fail, causing a crisis in the credit markets, increasing risks in the economy, forcing corporate interest rates higher. The private credit market has grown to over $1.7 trillion in credit funds and quite a bit of money committed but not yet invested. Fund managers run the risk of structuring deals poorly going forward in order to boost internal rates of return, and ultimately causing restructurings.

Equities No matter what region of the world, three things tend to matter for the stock market: 

• Earnings growth expectations

• Sentiment 

• The direction of interest rates 

We’ll provide our view within the context of these three things.

US With a base case expectation that long-term interest rates will again stay within the recent range, this factor should be less impactful, and leaves the other two.

Considering earnings growth expectations, sentiment, and valuation multiples, we have an S&P 500 base target of 7500 for 2026, with a bear/bull range of 7200 to 7700. We got there as follows:

Current consensus S&P 500 earnings growth expectations are 14.6% in 2026 and 15% in 2027. After five consecutive years of positive earnings growth and two years in a row of double digit earnings growth, we start to get a little skeptical. 

Looking through the details by sector, and taking in to account our economic growth expectations, the Tech sector’s 2026 consensus earnings growth, at 27%, is higher than we believe they will actually end up being, while earnings growth in financials, healthcare, consumer discretionary, and industrials will be higher than their much lower expectations. Note, tech is 34% of the S&P index while these other sectors are 8-13% each. Making our view-based adjustments, we arrive at a lower expected earnings growth of about 13% for both 2026 and 2027.

Applying a price/earnings multiple of 21.5x, about 1 turn less than current valuations of 22.3x, arrives at our base case target. However, should certain risks come to fruition, a lower multiple of 21x gets to our bear target, while better than expected economic data, policy or impact from AI, should command a higher multiple of 22x getting to our bull target. 

At the sector level, we expect the 2026 acceleration in economic growth will boost EPS growth most in the same sectors we upgraded earnings growth in: Industrials, Consumer Discretionary, Healthcare, and Financials. We also expect AI investment spending will support earnings growth in Tech and Utilities but to a lesser extent than is already discounted. 

A word on sentiment: It’s not low.

The median 2026 S&P target from 21 major financial institutions is 7521, a 10% return from December 31, with a range of predictions between 7100-8100 (4-18% return). Only 6 institutions predict an end to the year below that median (many like us are at the median) and no one believes the market is already at fair value relative to earnings growth expectations. This along with some of the risks outlined above is why my S&P 500 target isn’t higher at the moment.  the bar is high, there is less room for error.

But it’s still a stockpickers market With a widening of earnings growth away from the top 10, and elevated interest rates that ensure there is a cost to borrowing, we believe large-cap index investing alone will again leave out opportunity. Company management decisions matter more now and there will be greater differentiation between stocks within sectors and industries. In fact, we’ve already gotten back to the pre-Global Financial Crises (GFC) era of S&P intrastock correlations; dropping from the post-GFC average of 0.38 -- to an average of 0.21, supportive of stock specific fundamentals driving returns.

The benefit to stockpickers also applies to the Magnificent 8 (7 plus Broadcom). Analyzing them individually vs. as a group should be more rewarding. Part of this is because we see the US markets in a search to find confidence in AI between capex, cash burn and returns, in addition to the Fed, rates, tariffs, and political shifts. With this price discovery mode, we also expect two-way volatility in 2026, like we saw in Q4, with some crowding and subsequent unwinds to happen again. This is why diversification will be more important this year. 

Outside the US

Europe In Europe, we expect modest returns, with the Eurostoxx 50 ending the year with around a 6% return, or 6200 for the Eurostoxx 50 Index (ended 2025 at 5850 in euros).

Both earnings expectations and valuation multiples are lower than in the US, as typical. However, the valuation multiple spread for 2026 is wider than the historical average. So we expect some multiple expansion in European stocks. The current forward P/E is 16.5x (vs 22.3x in the US as of this writing), while history, along with evidence of greater defense spending in Europe, would say it should be closer to 18x. 

Consensus earnings growth for the Eurostoxx 50 Index for 2026 and 2027, respectively, are 11.6% and 12.9%. With the average earnings growth going back to 2012 at 6%, these growth numbers already discount a strong future. 

We expect lower earnings growth than estimated, closer to the 6% average (but much higher than the median of 0.6%). In addition, since roughly 60% of the earnings in European companies are generated outside of Europe (for context 40% of the S&P 500 has revenues outside the US), they are more sensitive to currency movements. We expect limited differences between the US and the Euro in 2026, so a limited currency boost for US investors vs 2025, but risk of volatility from currency fluctuations are still there. 

Japan Japan is in a dichotomy this year. Split between still new inflation after years of deflation, with the need to potentially raise interest rates, and the new prime minister’s focus back on stimulus-driven Abenomics 2.0—now called “Sanaenomics”.  We expect the Japanese stock market (indexes include TOPIX and Nikkei) to deliver around a 14% return to 3885 on the TOPIX.

In the short-medium term, we think the corporate reforms and economic stimulus side, launched in October, will bear more weight on outcomes. Corporate earnings are normalizing after last year’s tariff impact, and we expect increased investment and productivity under the new government to further drive growth. We expect better earnings growth at 13% than currently discounted (9%) and a mildly higher multiple. 

Sanaenomics focuses on two pillars: (1) measures against rising prices (inflation control and consumer demand stimulus), and (2) strategic investment in sectors such as AI semiconductors, defense, energy, and security. And, given the country has focused on stimulus before, it’s a credible path. These policies are expected to stimulate corporate investment, government spending, and personal consumption, supportive of the equity market. In addition, according to JPMorgan, Japanese companies’ cash-to-total assets ratio is double that of their western peers. Sanaenomics could unlock this as part of corporate governance reforms, offsetting the Japanese government commitment to reduce equity holdings.

That being said, Japanese equities delivered a strong performance in 2025 given expectations for the new administration’s policies and tariff resilience. And bond and currency markets are watching for medium-term fiscal consolidation given the debt load the country carries. As such, risks of overinvestment in tech, a potential US economic slowdown, and global market uncertainties will remain in 2026, curtailing our positive outlook.

China In 2025, China grew an estimated 5.0%, as its export-driven economy proved resilient enough to weather tariffs. For this year, we continue to see a supportive position for Chinese stocks, and in particular, its technology sector. For the Chinese tech sector, we expect about a 20% return in 2026. We also like the diversity it adds to a portfolio as it tends to be lowly correlated to the S&P 500.

Given large parts of China’s domestic economy remain weak, we expect policy to support growth but also reinforce focusing on China’s competitive tech and export sectors. In addition, AI accounts for 33% of emerging markets, but with less demanding valuation relative to the US, particularly in China. We expect strong earnings growth, and valuations are currently at a discount to the US of 40%, well below historical levels.

In addition, China’s market share of 90% in magnet production and rare earth refining as well as 70% in rare earth mining gives them the ability to deter high tariffs on its exports, as seen in the trade negotiations. 

That being said, geopolitical risk continues and stands to be the key item to watch when investing here.

Other assets

Crypto We see the Q4 pullback in crypto, particularly in Bitcoin and other large cap coins as a flows-based retreat. From the peak on October 29, flows out of bitcoin ETFs totaled about $4.8B or 17% of the total inflows for the full year. Also, it was an easy place to take gains for the year and watch, given the volatility of the assets, and watch. 

Longer term fundamentals support the larger cap crypto markets. But in the near term, the best way we know how to analyze it is from a technical perspective. Right now, Bitcoin is hanging out at the low end of its channel, between 85,000 and 120,000, which started after the election in November 2024. It’s below its 200-day and 50-day moving average, and sitting right at its 20-day moving average. Based on this, we believe it’s close to bottomed. We wouldn’t be surprised to see it trade back up towards the top of the channel this year (around 100,000). Ethereum is similar but technicals are better because its 200 MA is still pointing slightly up.

Precious Metals In the first half of 2025, Gold-based ETF demand accounted for more than 60% or more than 200t of total US investment demand. That’s a sharp contrast to the 10-year quarterly average of 22%. North American gold ETF inflows reached $21bn in H1.

While ETFs carried demand, central bank buying has been strong since 2022 and remained elevated, albeit at a slower pace than in 2024. Based on the numbers below, central bank buying may not have peaked, particularly for China and India (note Russia’s total reserves are not reported).

So the question is whether this will continue. I believe gold purchases for investment reasons will be more steady in 2026, while central bank buying will increase further. This supports the current trajectory of the price of gold to $4,700 per oz, about a 9% return, but with greater volatility.

With gold continuing to march higher, silver prices could move higher in tandem, as the less expensive version of gold for investors. Supply is less limited in this metal than gold, and demand is not as robust from central banks. However, industrial demand can be greater for this metal. Technicals tell us it could fall towards its 20-day moving average, to around $66 per oz, before continuing higher. 

You made it to the end. Thank you!

That concludes our outlook. If you made it this far, I really appreciate it. I hope it helped get you clearer on what route you will take this year, and of course, what buses you’ll get on.