In 2025, the S&P 500 delivered double-digit returns for a third straight year. Heading into the fourth year of the bull market, Raymond James Chief Investment Officer Larry Adam identifies 10 themes to watch in 2026. His message: The outlook remains positive, but a year that could present an array of uncertainties for the markets and economy calls for focusing on fundamentals and adapting to change.
1. The economy
Despite the turbulence of 2025, including trade conflicts and global uncertainty, the US economy continued to lead in growth, innovation and capital markets. Looking ahead, we remain constructive on the US economy. While near-term tariff-induced bumps may keep inflation elevated, we expect a longer-term disinflationary trend to take hold as shelter and oil costs ease. Consumers should see a boost from tax cuts, and companies will have fresh incentives to invest as the One Big Beautiful Bill Act (OBBBA) fully takes effect. These tailwinds support our forecast for gross domestic product growth of 2.2% in 2026, up from 2.0% in 2025.
2. Monetary policy
A new Federal Reserve (Fed) chair will take charge in 2026, as Jerome Powell’s term expires. The new chair will be tasked with maintaining credibility, managing inflation and supporting growth without triggering unintended consequences. The window for rate cuts will be narrow as near-term inflation remains stubbornly above the 2% target. We expect only one rate cut in 2026. More cuts could signal the economy is weakening.
3. Volatility
Despite the dramatic headlines of 2024 and 2025, market volatility has been surprisingly subdued – but that calm may not last. We expect volatility to intensify across most asset classes in 2026 as valuations sit at historically elevated levels, leaving markets vulnerable to disappointment. While sentiment appears confident about economic growth and return prospects, risks such as slower economic growth, sticky or unexpected inflation, earnings shortfalls, a disappointing public offering slate, abrupt political or regulatory changes, or geopolitical shocks could challenge performance. Flexibility will be essential.
4. Bonds
We do not expect dramatic bond market moves in 2026, with the 10-year Treasury yield likely ending the year in the 4.25% to 4.50% range. We recommend fixed income investors focus on income rather than capital gains. With long-term rates poised to rise only modestly, coupon payments – not price appreciation – will drive returns. In this environment, we favor high-quality corporate bonds and municipal bonds as the foundation of a resilient portfolio. Quality fixed income offers stability.
5. Equities
After an incredible run for the S&P 500 – six years out of seven with returns above 15%, a feat not seen since at least 1930 – the market’s identity is shifting. Valuations for the S&P 500 have climbed to the 95th percentile, meaning price-to-earnings multiple expansion has little more to give. Returns will need to rely squarely on earnings growth. The good news? We expect earnings to rise about 12%, supporting our year-end S&P 500 target of 7,250. That means the return profile shifts from double-digit gains to mid-single digits. That said, conditions remain favorable: solid economic growth, an easing Fed, stable long-term rates, and healthy buybacks and dividends. Compared to recent years, however, you’ll want to keep expectations in check for equity returns.
6. Artificial intelligence (AI)
Over the past two years, the driver for equity outperformance has been simple: AI. But the word is out, and the market is evolving. While we remain confident of AI’s transformative power, the next phase will demand greater discernment. The infrastructure build-out will continue, but leadership will broaden beyond the recent winners. Our focus now shifts to the enablers: the companies driving data collection, cloud applications and robotics, as well as industrials that provide the physical backbone of AI. Companies in the technology sector, such as semiconductor suppliers and enterprise software developers, will remain a potent force for AI mainstreaming, but we also expect the next wave of beneficiaries to emerge in two somewhat lower-profile sectors: consumer discretionary and industrials. While the AI revolution isn’t over, it is entering its next phase, which creates plenty of opportunities and risks.
7. Contrarian sectors
The sectors that attract the most attention aren’t always the best choices. We’re watching two that are relatively unheralded: consumer discretionary and healthcare.
- Consumer discretionary has struggled with headwinds from inflation-stressed consumers and tariff-driven margin pressures. It should benefit not only from its AI exposure (e.g., autonomous vehicles, robots, cloud computing) but also from a rebound in spending ignited by OBBBA tax cuts. A more confident consumer, improved supply chain management and moderating input costs could help this unloved, contrarian sector surpass earnings expectations.
- Healthcare has faced fears that earnings could be crimped by policy changes in Washington DC. The most attractively priced sector by our metrics, healthcare has already priced in worst-case scenarios. If regulatory threats end up being more bark than bite, the sector should move higher to reflect its favorable earnings trajectory.
8. Electrification
For years, oil was the primary driver of the energy sector. Now, the AI-driven data center boom has shifted the focus to electricity. And with electricity prices on track to outpace overall inflation, affordability is becoming part of the midterm election campaign trail narrative, just as “high gas prices” had been in the past. That might make the utilities sector seem like the obvious choice, yet heavy regulation and stretched balance sheets are reasons for pause. Instead, the more dependable electrification trends are found in the industrials sector – companies making the proverbial “picks and shovels” for this new energy era. This sector also includes defense contractors whose fighter jets, tanks and cyber-security solutions are helping keep us safe. Meanwhile, global oil demand remains sluggish, and with supply still abundant, prices are likely to hover near our 12-month target of $55 to $60 a barrel.
9. International markets
In the developed world, our top choice remains the United States, thanks to economic and earnings growth that continues to outpace the other G7 economies. That said, US market leadership could pause as tech stocks take time to digest their recent run. Equities in both Europe and Japan had a strong 2025, but we are proceeding with caution. Japan benefits from ongoing corporate reforms and AI-fueled earnings growth but faces headwinds from interest rates at multi-decade highs. The euro zone’s economic performance is uninspiring, especially in its two largest countries: Germany and France. Germany’s defense spending plans should help stabilize activity, but outperformance is unlikely. The wildcard: an eventual Russia-Ukraine peace deal could give Europe a boost.
In emerging markets, we maintain our preference for markets in Asia, especially India, which continues to post the fastest GDP growth among the G20 economies and should benefit from more reasonable valuations, favorable demographics and foreign direct investments. It is always important to be mindful of outsized risks with emerging markets, such as currency volatility.
10. The horizon
Strong portfolios aren’t built on a single investment – they grow through diversification, reinvestment and strategic compounding. Each asset class – stocks, bonds, cash – plays a unique role. Asset allocation is your blueprint for navigating market twists and turns. A diversified portfolio helps mitigate risk and weather market storms to maximize the probability of achieving your goals and objectives.
All expressions of opinion reflect the judgment of the Chief Investment Officer and are subject to change. Past performance may not be indicative of future results. This material is for informational purposes only and is not a recommendation. You should consult with your financial advisor for advice based on your personal situation, financial goals and objectives. Dividends are not guaranteed and will fluctuate. Investing involves risk including the possible loss of capital. There is no assurance any of the trends mentioned will continue or forecasts will occur. Asset allocation and diversification do not guarantee a profit nor protect against loss.
The performance mentioned does not include fees and charges which would reduce an investor’s return. The S&P 500 is an unmanaged index of 500 widely held securities and cannot be invested in directly. The companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Investing in technology companies is not suitable for all investors. International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging and frontier markets can be riskier than investing in well-established foreign markets.
There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. US government bonds and Treasury bills are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. US government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term obligations of the US government.
While interest on municipal bonds is generally exempt from federal income tax, they may be subject to the federal alternative minimum tax, or state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Municipal bonds may be subject to capital gains taxes if sold or redeemed at a profit.
If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency.
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