As we turn the page into a new year, we are looking ahead to what indications are revealing about the economy in the coming year. LPL Research has published their 2026 Outlook: The Policy Engine, providing a comprehensive recap of the economy and market to date, plus a forecast into 2026. Here are some highlights:
Economy:
The U.S. economy is expected to experience a modest slowdown in early 2026 before rebounding later in the year. Underlying resilience from AI-driven investment and fiscal spending should help offset weaker household activity and steer the economy clear of a recession. A cooling labor market and softer consumer demand will help ease inflation, though price pressures are expected to linger. We anticipate the Fed will proceed with rate cuts gradually in 2026, balancing inflation concerns with a softening labor market.
Stocks:
The bull market appears poised to extend its run in 2026, fueled by ongoing enthusiasm around artificial intelligence and further easing of monetary policy from the Fed. However, with valuations running high and midterm election years often bringing more volatility, gains may be more tempered in 2026. Maintain current allocations and stay patient for pullbacks to selectively increase equity exposures. Our fair value target range for 2026 is 7,300 to 7,400.
Bonds & Cash:
Bonds continue to offer compelling income opportunities, with starting yields still elevated relative to historical norms. With 10-year Treasury yields anticipated to remain between 3.75–4.25% in 2026, investors should focus on income generation rather than price appreciation. As the Federal Reserve lowers short-term interest rates, returns on cash may continue to decline, making high-quality bonds with intermediate-term maturities more attractive for long-term investors.
To read the full outlook from the LPL Research team, click here.
Market Recap
December 2025 capped off a strong year for Wall Street, characterized by a "Santa Claus Rally" that pushed the Dow and Nasdaq to new heights before a minor late-month pullback. Meanwhile the S&P 500 saw a record-breaking winning streak come to a narrow end.
- The S&P 500 ended its multi-month streak of gains and was down slightly at -0.05% for the month. This brings its YTD return to 16.39%.
- The Nasdaq Composite Index posted a loss of -0.53%. The YTD return is at 20.36% for 2025.
- The Dow Jones Industrial Average (DJIA) saw its eighth straight month of gains, adding 0.73%. The YTD return is at 12.97%.
As always, if you have questions about how the economy may impact your investments, please don’t hesitate to reach out to us.
Sources:
https://www.morningstar.com/indexes/spi/spx/performance
https://www.morningstar.com/indexes/dji/!dji/performance