2026 Market Outlook
Well, in order to look towards the future, we have to look back and see what brought us to this port. So I always start by taking inventory of what actually happened in 2025.
S&P Style Boxes
2025 Annual Returns
Market Overview
Whenever I look at the markets, I start with these major markets. Now the names here may look familiar to you. We have the NASDAQ, the Dow Jones, and the S&P 500 right at the top, and these three indices are your typical large cap indices that tend to get the most attention on the news. The NASDAQ is more tech-centric. The Dow Jones is a list of 30 different companies and the S&P 500 is roughly 500 different companies that give us insight in terms of what’s taking place within the large cap space.
So you’ll see right off the bat that the NASDAQ was the best performer of these three domestic indices. That being said, the S&P 500 had solid returns with a 16.39% return for the year on a price return basis, so very strong performance for 2025.
Major Markets
2025 Annual Returns
Now, beneath that I have three other indices. There’s the Russell 2000, the MSEI World Index, as well as the MSEI emerging market index. And the reason why I like to include these as well is it gives you a greater perspective in terms of what’s taking place within the global market beyond just the large cap domestic market. The Russell 2000 is measure of small cap companies. The MSCI World Index is just that, it’s measure of the world. Now that being said, the largest single component of the MSCI World Index is the US market. And finally the emerging markets is the international components that are considered non developed like China and India, China, making up roughly 30% of the index. And you can see that that was the best performing segment of these six different major markets for last year.
Going back to the S&P 500, we can break this based upon different sectors. Now these are the broad sectors that make up the S&P 500, and of these 1110 ended positive real estate was the one sector that actually closed lower for 2025. Now you’ll notice that communication service had a very strong year with 32.41%. Now that sort of coincide with what we saw within the nasdaq, and truthfully, a lot of the companies that make up communication services are also traded on the nasdaq. These companies would be like Facebook or the parent company Meta as it’s actually traded as well as Google.
Now when you see those names you, you also think that they’re information technology and the truth is, is there’s a fair amount of similarities these days between those two sectors as these companies that could be classically considered tech companies have now moved into the communication services space. Communication services and information technology are probably two of the largest single components that make up the S&P 500. So they’ve had significant sway in the overall performance of the Greater index. And without a doubt, these are the companies that made a lot of the headlines last year as they were hitting record level performance.
Sector Weights
Country Weights
But the domestic market is more than just large cap companies. If we actually look at the style boxes, which breaks it down via different capitalizations where we have large cap, mid cap and small cap, and then also look at growth segments versus value segments, we can see different performance for the domestic market last year. So the S&P 500, it’s top middle of this list with that 16.39%, but you’ll notice that the growth oriented large cap companies performed even more favorably with a return of 21.39%, whereas the value counterparts added only 11% last year.
Don’t get me wrong, 11 percent’s still a pretty solid returns for a given year, but as we look lower and look at the mid cap companies and the small cap companies, we see that the smaller companies didn’t fare nearly as well as the larger cap companies did last year. And so there was a significant performance and balance just even within the domestic market depending on whether you were investing in large cap companies and growth oriented large cap companies at that versus smaller cap companies or other companies that may have had a value tilt to it.
People that are utilizing diversified asset allocation strategies tend to have a little bit of each of these different style boxes within their portfolios to give them a broad exposure to the domestic market. And so right off the bat, when you look at your performance in a given year, you may notice that it doesn’t keep up with the S&P 500 and that’s because typically portfolios have a lot more than just the S&P 500 type constituents that make up that portfolio.
A Closer Look
So that’s 2025. How does this compare to prior years? One of the ways of looking at the performance of various different assets is by taking a look at something like a quilt chart. It’s also known as a Callan chart. And what this does is this assigns years to different columns and within that, it effectively ranks all the members that make up this chart in order from top performer to worst performer. It doesn’t highlight whether the company was positive or negative in terms of magnitudes. What it simply does is says what’s the best performing asset in a given year.
As we saw earlier in the major markets chart, emerging markets equity on a total return basis performed 33.5% last year. So at a very strong performance. Now, the reason why these type of charts are valuable is you could see that just because one asset is a top performer one year, it doesn’t mean that it’s gonna be the top performing asset every year. So if we look back in 2024, you could see emerging markets added 7.5% and was fourth on the list. In 2023 it was fifth and in 2022, it was towards the bottom of this as it took a 20% loss that year.
Daily Yield Curve
In that same year of 2022, you see that cash actually was one of the best performing assets that make up this chart, given that most of the other assets were down that year. And so when you look at a diversified portfolio, this is a great way of seeing how there’s rotations that take place from year to year among asset class performance.
Large cap equity on a total return basis added 17.88% return last year. Again, very strong performance for 2025. It was actually the top performer in 2024 and 2023. And so you’ll see that large cap equity has been on quite a run the last couple years, whereas in 2022, it took roughly an 18% loss that year. And so when we look at asset classes and see the performance like this, it’s important to keep in mind that again, not everything is going to perform at the top of the list every single year. And then we also look to see when there’s rotation that takes place as the natural and market cycle emerges.
We’ve focused quite a bit on the equity markets up until now. Let’s take a look and talk about bonds.
Bond Markets
I’ll also say last year was a great year for bonds in terms of total returns, the Bloomberg Barclays aggregate bond index added 7.3%. That’s a very impressive return for a bond index in a given year. You could see across the overall durations as well as quality of bonds. We had varying amounts, but generally you see that a lot of the bond market in terms of different corporates or high yields and mortgages, they tend to do pretty well. Last year we had a range of somewhere between the high 8% as well as the five or 6% range in terms of returns for a portion of the portfolio. That typically makes up what you would refer to as your your safer money.
Looking back over the last couple years, you can see the daily yield curve here and it shows the yield of the various different durations. You’ll see that in 2022, we had what’s known as an inverted yield curve where the shorter term durations were actually paying out a higher yield than the longer term durations. This was exasperated in 2023 at the end of the year. Again, these are end of year numbers here. The three month actually was generating the highest yield, and that isn’t a good indication of a healthy market. When we see inverted yield curves, it gives us pause because it shows that there something isn’t working right. You should typically be rewarded with higher yields by going longer out in duration.
We saw some of that normalization appear in 2024. As you could see, it was a somewhat flattened curve, but at least the longer end of durations was generating higher yield. And we got more of a normalized trend in 2025 where the 10 year, 20 year and 30 year durations were being rewarded with better yield on that. Within the bond market, there’s been a fair amount of attention around the federal funds rate and understandably so, the Fed sets the policy for the shorter end of the yield curve in their effective fed funds rate. You may recall that as we were in 2223, interest rates were at the highest level that they’d been at in quite a while. And so it was challenging for bonds as those interest rates were getting raised post COVID.
Federal Funds Effective Rate
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But in 2024, we saw the first of a series of cuts to the Fed funds rate. It started with a 50 basis point cut at the September meeting and then subsequent 25 basis point cuts in November and December of 2024 and likewise September, October and December of 2025. And so we’ve seen significant pullback in the Fed funds rate the last couple years bringing us back down to what’s been viewed as a more normalized level.
If you actually look back to the history of the Fed funds rate, we see that there’s been periods of time where the interest rates have been significantly higher than what they’ve been the last 10 or 20 years. The big distinction here is that after the Great Recession, we saw interest rates drop down to effectively zero, and it’s been at that level for a long time creating imbalances in certain markets like real estate. And so it’s been challenging for investors as interest rates started creeping back up as the markets become accustomed to operating at much lower interest rates.
Part of the reason why interest rates were raised the way they were is because there was concerns about inflation. Looking back in time, we see that there was quite the spike of inflation post COVID. You can see where we had been right around that 2% level and it spiked considerably higher as measured by the CPI, which is the Consumer price Index, or the other measure, which is the producer price index or PPI.
Now post COVID, things began to normalize and as they were raising interest rates, we saw that inflation drop. And this has been something that the Fed has been paying close attention to in terms of the effective Fed funds rate, making sure that the interest rates aren’t too low and that inflation gets away from us like it did a few years ago. But at the end of the year, we saw inflation on the consumer price index sitting at 2.7%, which is closer to the more normalized range the Fed is after, which is right around 2%.
So that’s a quick recap of what brought us to this point. Now let’s talk about what’s in store for 2026 and the forecast ahead.
A Look Ahead
Well, as I was mentioning about the Fed funds rate, one of the groups out there is the CME group and they have a Fed Watch tool which assigns probabilities of what we’re likely going to see with the Fed funds rate for future fed funds meetings. This chart lists out all the upcoming FOMC meetings for the year and going into next year. And we can see as highlighted in blue that the Fed funds rate was sitting at 350 basis points to 375 basis points going into this year. It also assigns probabilities for what the market anticipates interest rates to sit out at each of these different meetings. So you can see we’re already past January at this point, and lo and behold, at the January FOMC meeting, interest rates did stay at that 3.5 to 3.75% level.
Looking ahead, we see at the March and April meeting, the probabilities are still greater than not that we’re gonna stay at this elevated level, and it isn’t until we get to the June, July or September meeting that we begin to see odds shift towards another 25 basis point cut at one of these upcoming meetings. And if we look even further into Q4 or Q1 of next year, we see that that’s where we get back towards that 3% level on the Fed funds rate. So the market as a whole and bond analysts are anticipating that we’re gonna continue to see interest rates hold steady at this level for a little bit longer yet in 2026.
Now, one of the factors that’s unique this year is the fact that a new Fed chairman has been nominated. So Kevin Warsh has been nominated to replace Jerome Powell. Now, if you’ve read any of the news around the Federal Reserve, you’ve likely seen the president has been displeased with the performance of Jerome Powell. And so as a result, at the end of Jerome Powell’s term here, he’s being replaced likely with Kevin Walsh.
Regardless of what your politics are, the president has been wanting to see interest rates lowered even further to create more favorable conditions for the domestic market. Now, it’s also worth mentioning that one person doesn’t get to dictate interest rate policy. There’s a number of Fed governors that have voting rights across the country that determine where interest rates lie. And so as we look to 2026, it will be interesting to see what the general policy shift is with the new Fed chair and consequently what the response will be to both the markets as well as the Fed chair governors in terms of setting interest rates for next year.
When we go into a new year, just because the calendar changes, it doesn’t automatically mean that things are gonna be radically different from one year to the next. And so it’s not surprising that we’re looking to see some of the repeating themes of 2025 play out into 2026. One of the things that I spend a fair amount of time talking about my weekly market commentary videos last year was tariffs. The reason for this is because this president’s policies around tariffs have been largely unprecedented. We haven’t seen this level of action around tariffs, and then I don’t think in any living investor’s lifetime. And with that comes some pretty significant impacts to the economy based upon where goods and services are sourced.
If we want to see what the impact has been of that revenue going into the federal government, we could look at the taxes on production and imports from custom duties. And here we have a chart going from 1959 to present, and you can see that this chart went effectively parabolic at the end of 2025. The last rating we got was in Q3, and this seasonally adjusted number shows that revenue or tariff revenue more specifically was at $331.42 billion of new revenue to the federal government.
White House Impact
Regardless of what your politics are, we are seeing an increase in revenue from overseas into the federal government as a result of these tariffs. There was a fair amount of concern about what these tariffs would do to things like inflation, and as you saw earlier, we continue to see decreases in the year over year inflation rate as it ended at 2.7%. So despite a lot of analyst concerns, we haven’t seen rampant inflation as of yet, but certainly there has been impacts of tariffs on various segments of the economy.
So because of the policy changes of this presidency, there’s been a number of lawsuits that has made its way up to the Supreme Court, and this year there are a handful of cases that have been already litigated at the Supreme Court that we’re just waiting for a verdict on. One of these is the Learning Resources Inc via Trump, and this case specifically is about tariffs and what latitude the President has when it comes to setting tariffs across the globe. Beyond that is Trump v Cook and Trump v Slaughter, and these are two different cases that both deal with similar issues about the executive branch replacing sitting members of someone that was appointed into a federal agency.
So while there’s less concern economically around Cook or Slaughter’s cases, the Learning Resources Inc Group could be noteworthy because if the Supreme Court comes back and limits the amount of latitude that the president has in setting trade policy specifically around tariffs, we don’t know yet what the ramifications will be when it comes to unwinding these tariffs, whether it’s paying money back or paying it to companies and what that means for the future. So more to come on this as the year plays out.
Now, another significant policy change in the second Trump presidency has been around energy, and this is something that I highlighted last year when Trump came into office, is that this change in energy policy was significant from the Biden presidency to his presidency.
One of the things that President Trump highlighted was refilling the strategic petroleum reserve. And I like to highlight this chart because what it shows is even though there was an executive order signed stating that the strategic petroleum reserve needed to be refilled, there wasn’t some massive change in the levels in the strategic petroleum reserve after that executive order went into place. And so it takes time for the impacts of those executive orders to make its way all the way through the economy and into its end goal.
At the end of last year, the reserves were sitting at 415 million barrels compared to the 387 million that had been in that at the time of that declaration. And so even though a president can make an executive order, it does take time for that to play out. As I mentioned earlier, we’re already a little ways into 2026 and we’ve already crossed January off the list, but January also saw something pretty noteworthy in the extreme temperatures that came down throughout much of the country. And when this arctic blast came down to even some of the southern states, it had a pretty significant impact.
As we saw from the EIA, the last week of January actually saw a record natural gas withdrawal as 360 billion cubic feet of natural gas was used up to heat the country last year. And this is something that has made headlines as there’s been concerns about the infrastructure around natural gas and shortages across the country when cold snaps like this emerge. And there’s been a lot of conversations about the energy infrastructure as it’s continued to age.
AI Data Centers & Power Infrastructure
Possibly the biggest thing that’s been highlighted about our current energy infrastructure has been the power infrastructure. And as the New York Times pointed out, big tech’s AI data centers are driving up electricity bills really for everybody. And this has been a significant factor, especially in the communities where these data centers are going into.
We have these companies that are building out these AI data centers and they have to pay for the energy, but their demand on the energy is having the knock on implication where other segments of the market are having to pay higher prices, and it’s having a negative impact on this. I know there’s been some talk about legislation being passed around this issue, but as of yet, it has been a real problem for the US as these data centers are going in as it’s having negative implications for other areas that are unattended.
A lot of conversations have been around AI the last year or two and probably one of the best infographics around AI that got spread quite a bit on social media as well as via email last year was this infographic created by Bloomberg. And what it shows is the size of some of these companies that operate within the AI space, and it also shows how they have relationships with each other.
Oracle, for example, spends tens of billions of dollars purchasing Nvidia chips for their hosting centers. Nvidia has been investing into OpenAI, which has been purchasing Nvidia chips, and OpenAI has in turn been leasing space on Oracle’s computers for their AI platforms. And so last year we saw a number of headlines around either Oracle or OpenAI or Nvidia and Microsoft and other players where they make an announcement about some key decision or partnership and their stock prices jumped.
Consequently, a week or so later, another one of these related companies had a similar posting and we saw another surge in those stock prices. And it’s led a lot of people to ask a very legitimate question: is AI in a bubble? As Bloomberg highlighted, AI’s probably a bubble, but does it really matter? And this is one of the biggest factors at this point in the markets that I think all of us that are investment advisors are trying to sort through. We could look at prior instances like the dot-com bubble or going even further back when computers first started going to people’s homes and how it changed the landscape of the domestic economy.
While it has had an additive benefit, as I mentioned before, there was a bubble with the dot-com companies. And so at this point, there’s certainly been a lot of exuberance and excitement around these AI companies, but we don’t know what the lasting power is going to be with these companies quite yet.
Top 10 S&P 500 Holdings
One of the reasons why this issue is of special concern is by looking at the top 10 holdings that make up the S&P 500. So what a lot of people may not realize is that the S&P 500 isn’t equal weighted. It isn’t 500 companies each getting a proportionate share. It’s 500 companies that are weighted based upon the size of these companies based upon capitalization.
S&P 500 Top Holdings
As we look at this list here with two of these companies, Alphabet Class A and Alphabet Class C, we have the same company being represented twice in two different voting shares. But if we look through this list, we see that every single one of the names on this list has some significant exposure to AI. Even Berkshire Hathaway has exposure to it because this company invests in other companies, some of which are on this very list.
As we look at this list here with two of these companies, Alphabet Class A and Alphabet Class C, we have the same company being represented twice in two different voting shares. But if we look through this list, we see that every single one of the names on this list has some significant exposure to AI. Even Berkshire Hathaway has exposure to it because this company invests in other companies, some of which are on this very list. And so of these top 10 names, they make up about 34 or 35% of the total weight of the S&P 500, and these carry significant exposure to AI. Now, up until now, that exposure to AI has been very favorable to the price increase of these indices.
In fact, if we compare the S&P 500 versus an equal weighted version of it where every company gets an equal portion, if we look at 20, 21, 22 and 23, we see that the performance of these two variations of the S&P were fairly similar. It wasn’t until we got to 2024 that we began to see some divergence in performance, to the point that from really 2024 to 2025, it resulted in a 30 percentage point difference in the performance of the equal weighted index versus the typical S&P 500 index that you see on the news.
Gold & Silver
That concentration in companies has really been driving the difference in performance within the large cap space. With less and less companies driving the S&P 500’s performance, that’s naturally gonna result in some volatility. Now, AI companies weren’t the only assets that seemingly went parabolic the last couple years. In fact, another thing that’s been catching a fair amount of attention the last few years has been the prices of gold and silver. If we look back from 2021 through 2023, we see that gold and silver prices really were hovering around unchanged for much of that time, and it wasn’t until we got into 2024 that we began to see prices go parabolic ending with gold at 120% gain over this five year period of time and silver up 158%.
Gold and silver are interesting assets because they can be tied to currencies, but they’re also commodities and they have industrial and commercial applications. And so as time has gone on, if we overlay the M2 money supply on this, which effectively represents the total amount of money in circulation, we can see that there has been more money out there, which can lead to concerns around inflation, which would justify more money going towards gold and silver and increasing the prices of that.
S&P GSCI SIlver
01/26/2026 - 02/06/2026
Furthermore, if we also tie this to the idea that inflation leads to a weaker dollar, and as central banks have been moving away from the dollar as the reserve currency, they’ve been buying up more gold and silver, which has further increased the prices. And so we have various different buyers that have been buying up large amounts of gold or silver that has caused the prices to increase. It’s also worth mentioning that gold and silver are both utilized in electronics and specifically in data chips. And so as AI has been purchasing more chips, they’re also out there purchasing gold and silver. And so this has led to a fair amount of attention in this gold and silver space as people have been buying it.
What we’re also seeing is when the headlines go up the way that they do, it leads to some of this investor mentality like a pump and dump that we saw with some of the meme stocks as Peloton and GameStop went parabolic a few years ago after it got a lot of attention on social media. And when these events take place, that naturally leads to volatility, which is why in the last week of January we saw a 30% drop in one day in the price of silver, and over the week a loss of 20% within that commodity.
So as these precious metals have increased in value, it’s also led to some volatility which plays into issues of diversification. When you include precious metals into a portfolio, you’re looking for something that’s non-correlated, and yet while we’re not seeing causation, we are seeing higher volatility at the same time as other assets that are in the equity markets.
2026 Market Forecast
I’ve covered a lot of different things for what has happened. Let’s boil this all down to some of the things that I think are gonna take place as we go into 2026.
To recap about the general market environment and the outlook, as I stated before, a lot of the key themes that were true in 2025 are likely gonna play out in 2026. And while the equity markets are likely going to continue to remain resilient, we are seeing volatility emerge and we need to expect that for the future, that there is gonna be different cycles of volatility as we get accustomed to this new normal.
I’ll also highlight that a lot of these charts that I’ve highlighted really look at the last year or maybe the last five years. And if you realize COVID was six years ago now in 2020, that being said, there’s been a lot of impacts that COVID has had that we’re still dealing with right now, and it’s disrupted the longer term market cycles when we look back over longer term averages. And so traditional indicators that we look back over a longer period of time are significantly distorted by spikes upward or downward based upon the unprecedented activity that took place by the economy and the government as a whole in response to the COVID pandemic.
If I were to look at three primary macro forces for 2026, the three things that I think have gotten the greatest attention has been governmental spending, and we continue to spend at a level that was most similar to World War II. We’ve also seen significant investment in AI, and we don’t know yet quite how that’s gonna pan out in terms of a boom, a bubble, or just the new normal. And also, as I mentioned with the Trump presidency with these new tariffs, these are once in a generation type changes to global politics, and that’s a significant factor that’s gonna play into the future.
Additional macroeconomic conditions that are somewhat unique is the fact that growth has been fairly steady, but it’s been uneven. As you saw within the style boxes, large cap has significantly performed far greater than small and mid cap as of the last couple years. Similarly, consumer spending has been concentrated more at the high income households than it has at the lower and middle class households. And while inflation remains elevated, it’s still largely contained around that two to three percentage point target.
About the equity market and its general structure, the equity index concentration has increased, and as I highlighted in terms of the top 10 holdings, there’s a handful of companies that are really driving the performance of the large cap market in particular. These same companies are some of the strongest leaders in innovation and consequently performance when it comes to recent market returns. But as the market continues to get concentrated in just a handful of names, that inevitably is gonna lead to greater volatility because one significant event in one of these companies could have a significant impact to the S&P 500.
This general structural shift raises the potential for higher market volatility as a whole.
In regards to sector and capital allocations, as I highlighted, there’s some areas that have benefited more than others when it comes to the investment in AI infrastructure. And as a result, the sectors that are not as exposed to AI face different challenges, whether it’s competing costs as well as competing dollars or the opportunity cost as those dollars have been going towards the AI companies that have generated bigger headlines. And so capital has been somewhat elusive for other segments of the market.
What does this mean for your portfolio strategy and your risk management as a whole? As always, I highlight to other financial advisors as well as to investors that a disciplined investment approach remains critical. Regardless of your strategy that you’re utilizing, you need to be disciplined in how it is that you approach investing.
If you prefer diversification, then diversification across asset classes, market segments and global regions do help deal with the issue of concentration risk, and that asset selection is often most valuable when it feels out of favor. Now, not every investor prefers diversification. Some actually prefer strategic concentration because they wanna explore areas as they’re outperforming. Now with that comes greater risk as well as reward. And combining that with other alternative investments can also enhance portfolio stability so you have some non-correlation when we get into these periods of volatility.
When it comes to opportunities and long-term positions, these transitional market phases often create attractive entry points. The old Warren Buffett approach of buying quality companies that are undervalued is a great example of looking for these opportunities as they exist when the market goes through these rotations. I’ve talked quite a bit about volatility, I view that these periods of volatility should be viewed as a reflection point around long-term investment philosophy. So I’m not advocating short-term reactions to the markets, but when we hit these periods of volatility, it should be a time for you to ask yourself the question in terms of if this is the right philosophy that you wanna utilize when it comes to the markets and how it fits into your financial goals.
Depending on how you answer that will determine what our approach should be going forward. For some, this volatility, especially lower prices, presents an opportunity to put more money to work in the markets, and for others, this period of volatility highlights changes to their risk tolerance and they may have to decrease their risk exposure based upon what’s going on in their markets as well as their own specific financial plan. All that to be said, I’m optimistic about 2026, especially within the equity market, and I’m looking forward to the year ahead. I just want to thank you for the time that we spent together.
As I mentioned earlier, I produce a weekly market commentary video. This information is valuable as it was, but it’s gonna get stale as the days and weeks and months progress. And so in order to provide you with more information real time in a concentrated dose, I create this weekly market commentary to highlight some of the movements within the markets as well as some of the events, whether geopolitical or economic, that are reshaping the markets so that you can stay abreast of what’s happening.
I hope you enjoyed this video. I would encourage you to share it with friends and family that might find it valuable. I produce a lot of different videos, not just the weekly market commentary videos. And so if there’s other topical subjects that you’d like to see covered, I’d encourage you to reach out to me. Let me know what you’d like to see next.