Impactful Decisions, Compelled Motion
The year 2025 exemplifies the prevailing regime — markets driven less by fundamentals and traditional business-cycle dynamics and more by fiscal and monetary policy influence. Today, policy decisions have emerged as one of the most impactful forces driving market direction.
What does that mean for 2026? We believe investors should remain patient and avoid overreacting to short-term sentiment swings — as policy and momentum-driven markets cause severe fluctuations in price, which can challenge behavioral biases. We saw this when stock prices swung wildly in 2025 and expect higher volatility to persist.
The good news is that we expect policy to be a tailwind for markets and for the Federal Reserve (Fed) to continue easing policy, as economic conditions downshift and inflation remains contained. Corporate earnings may help, though there will be little room for error. Core bonds will quietly offer some value, which should be aided by a more dovish Fed. In this policy and momentum-driven market, we strongly encourage investors to look at non-correlated alternative investments.
Please know that your LPL Research team constantly accounts for these market regime shifts. We use a multitude of tools to analyze momentum, policy inputs, sentiment, fundamentals, and more. The market has become increasingly more complex, so we invite you to lean on us. Thank you for the trust you place in us.
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
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.
Alternative Investments
Given the evolving market dynamics, we continue to favor strategies that offer enhanced diversification, downside risk mitigation, and the potential for excess returns less reliant on broad market direction — specifically equity market-neutral and discretionary macro approaches. We are also more positive on merger arbitrage and private equity, which could benefit from the recent pickup in corporate dealmaking. Within private markets, we remain constructive on infrastructure and secondaries, both of which have demonstrated resilience and steady growth throughout the year
Currencies
We remain respectful of the dollar’s long-term uptrend. The rebound in big tech leadership, pro-growth stimulus coming from the One Big Beautiful Bill Act (OBBBA), growing carry trade appeal in the dollar, and potential upside to economic and earnings expectations could keep the trend intact. However, the likelihood of additional monetary policy easing amid a slowing labor market, lingering trade policy uncertainty, and ongoing concerns over the sustainability of the deficit could limit upside to the upper end of the dollar’s consolidation range (107.50–110 area).
Commodities
We maintain a constructive view on commodities, while recognizing heightened uncertainty around global trade dynamics, monetary policy shifts, economic growth trajectories, and the durability of AI-driven infrastructure investment. We continue to favor precious metals, supported by our view that many of the same catalysts that drove outperformance in 2025 will continue. The administration’s shift to securing supply chains among a growing list of critical minerals should also be supportive of the broader metals market, especially for domestic producers.
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Disclosure
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All index data from FactSet.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
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